Business structure (02)

Question 1

SUMMARY

Answer 1

In summary, the following is covered in this topic:
1. The three stages of business activity are primary sector, secondary sector and
tertiary sector business activity.
2. Businesses in the primary sector produce or extract natural resources, while
businesses in the secondary sector produce products from raw materials.
Businesses in the tertiary sector are mainly service providers.
3. The economic system is made up of public and private sectors.
4. The public sector consists of organisations controlled by the government, and
provides merit and public goods. The private sector is made up of private
businesses which provide goods and services for profit.
5. The three most common legal structures are sole proprietorship, partnership
and companies.
6. In a sole proprietorship, the business is owned by one person who contributes
all the required capital and makes all decisions.
7. A partnership is owned by between two and twenty owners who pool their
finances as capital and make shared decisions.
8. A company can be formed as a private limited or public limited company. In a
private limited company, shares can only be sold to family members and friends.
In a public limited company, shares can be sold to the general public, and are
listed and sold on the stock exchange.
9. There are advantages and disadvantages to the various legal structure, and it is
an important factor in the choice of legal structure when establishing a business.

Question 2

What are the three broad types or stages of business activities?

Answer 2

-Primary sector
-Secondary sector
-Tertiary sector

Question 3

What are business in the primary sector?

Answer 3

Business in the primary sector engage in the production or extraction of natural resources, so that they can be processed or used by other businesses.

E.g. Farming, fishing, mining, and oil extraction

Question 4

What are businesses in the secondary sector?

Answer 4

Businesses in the secondary sector manufacture and process products from raw materials or natural resources.

E.g. Manufacturing, brewing, baking, clothes-making, and construction

Question 5

What are the businesses in the tertiary sector?

Answer 5

Businesses in the tertiary sector provide services to customers and other businesses.

Examples of such business activities include retailing, transport, insurance services, banking, hospitality, tourism, and telecommunications.

Question 6

What is the Public Sector?

Answer 6

The public sector comprises of organisations accountable to and controlled by the government.

The public sector is funded using public money that come from taxes and fees paid by citizens for the common good of everyone

Question 7

What are the roles of the Public Sector?

Answer 7

-Provision of important goods and services

e.g. Healthcare, education, defence, public order.

-Provision of public goods

e.g. Street lighting

Question 8

What is the Private sector?

Answer 8

The private sector comprises of businesses owned and controlled by individuals, groups of individuals, or organisations

The private sector provides goods and services generally for those who are willing to pay for them

Question 9

What are the roles of the Private sector?

Answer 9

-Greater efficiency of processes
-Source of revenue for government

Question 10

How do Private sector have greater efficiency of processes?

Answer 10

Businesses in the private sector are profit oriented, hence are likely to operate in the most efficient manner to reduce cost.

E.g. Adopting innovations and having fewer bureaucracy

Question 11

How is the private sector a source of revenue for the government?

Answer 11

Profits made by private businesses are taxable and hence act as a source of revenue to the government.

Question 12

What are the different legal structures available?

Answer 12

1) Sole proprietorship
2) Partnership
3) Companies
4) Limited liabilities partnerships

Other forms of organisations:
-Public-private partnerships
-Non-profit organisations
-Non-governmental organisations
-Social enterprises
-Charities

Question 13

What are the factors influencing the choice of legal structure?

Answer 13

-Amount of capital
-Number of owners
-Degree of risk
-Advantages and disadvantages

(Detailed explanation on pg9)

Question 14

What are the features of a Sole proprietorship?

Answer 14

-Not a separate legal entity
-Unlimited liability
-Lack of continuity

Question 15

What is Unlimited liability?

Answer 15

In the event a sole proprietorship makes large losses and
becomes bankrupt, lenders and creditors could repossess the personal assets of the
owner if the assets of the business are insufficient to repay the debts.

Question 16

What is Lack of continuity?

Answer 16

As the business does not have a separate legal entity from the
owner, once the owner passes on, the business would also cease to exist.

The business will exist as long as the owner is alive and desires to continue the business.

Question 17

What are the advantages of being a Sole proprietor?

Answer 17

1) Ease of setting up

 In Singapore, a sole Proprietor is able to commence business relatively quickly and easily.
 Fewer legal requirement and administrative tasks required.
 Can start business with limited capital.

2)Complete control

 Sole proprietor has full control of the business and is not answerable to anybody else; able to
make all decisions pertaining to the business.

3)Interests as work

 A sole proprietor can choose to set up a business based on his or her interests, passions or skills possessed. Contrary to working as an
employee for another business, the owner will be able to derive pleasure in his or her work.

Question 18

What are the disadvantages of being a Sole proprietor?

Answer 18

1) Difficulty in raising capital
2) Risk of owner’s assets
3) Long working hours

Question 19

Why would it be difficult to raise capital as a sole proprietor?

Answer 19

1) Financing usually comes from owner, and there is limited capital they can contribute

2) If funds were to be borrowed, banks and financial institutions are less inclined to lend due to unlimited liability

3) Sole proprietors have usually have limited assets which can be used as collateral for loans

Question 20

What is a Partnership?

Answer 20

A partnership is a business set up by between two and twenty people, to carry out operations, with shared capital and usually shared responsibilities.

E.g. Law firms, accounting firms, and medical/dental clinics

Question 21

What are the features of a partnership?

Answer 21

1) Not a separate legal entity
2) Unlimited liability
3) Lack of continuity

Question 22

What are the advantages of a partnership?

Answer 22

1) Different specialisation

• Different partners might have different areas of expertise, and hence able to contribute to the
  business in different ways.

2) Additional capital
3) Fewer legal formalities

Question 23

What are the disadvantages of a partnership?

Answer 23

1) Share of profits

2) Inability to sell shares

 Capital contribution is restricted only to existing owners. A partnership is not able to raise capital by selling shares to outsiders such as family, friends or the general public.

3) No independence of decision making

Question 24

What are Companies?

Answer 24

A company is a business form which is a legal entity separate and distinct from its shareholders and directors.

Question 25

What are the two types of companies?

Answer 25

1) Private limited companies 2) Public limited (listed) companies

Question 26

What are Private limited companies and their features?

Answer 26

A private limited company is often a small to medium-sized business that is owned by shareholders who are usually members of the same family. Shares can only be sold to friends and family and not the general public

Question 27

What are the features of a private limited company?

Answer 27

1) Limited liability 2) Separate legal entity 3) Continuity

Question 28

What are the advantages of being a private limited company?

Answer 28

1) Retention of control by original owners 2) Ease of raising capital  Comparing to a sole proprietorship and partnership, the owners of a private limited company can raise capital by selling shares to family members and friends. The limited liability and separate legal entity feature will also make the buying of shares more appealing as there are lesser risks involved. 3) Greater status  There is general perception that a business incorporated as a private limited company has greater status than a sole proprietorship and partnership.  Banks will be more willing to approve loans as well as provide more favourable interest rates.  Suppliers may also be more willing to extend credit terms.

Question 29

What are the disadvantages of a private limited company?

Answer 29

1) Legal formalities 2) Limitation in sale of shares 3) Less secrecy over financial affairs  Comparing to a sole proprietorship and partnership, the owners of a private limited company can raise capital by selling shares to family members and friends. The limited liability and separate legal entity feature will also make the buying of shares more appealing as there are lesser risks involved.

Question 30

What are Public limited companies?

Answer 30

A public limited company, sometimes known as public listed companies, are often a large business with the legal right to sell shares to the general public.

Question 31

What are the features of a public limited company?

Answer 31

-Limited liability -Separate legal entity -Continuity -Ability to sell shares to the general public via stock exchange -A board of directors will be appointed to control the management and decision making of the business

Question 32

What are the advantages of a public limited company?

Answer 32

1) A public limited company enjoys the same advantages of private limited companies 2) Its ability to sell shares to the general public will allow it to gain access to a greater pool of capital sources -> less difficulties in raising substantial financing

Question 33

What are the disadvantages of a public limited company?

Answer 33

1) Higher cost  To establish a public limited company, high costs will be incurred compared to other forms of legal structure. E.g. Costs related to engaging consultants, financial advisors and underwriters to determine the valuation of the business, and to create and issue a prospectus to potential investors.  There are also more formalities and procedures to comply with. 2) Disclosure of information  In addition to the submission of Annual Returns to ACRA, public limited companies must publish an Annual Report, consisting of financial statements, current performance and future outlook, to shareholders and accessible by the public.  Anyone is thus able to gain access to information (at times secret) information regarding the business. 3) Risk of takeover  As the shares of public limited companies are listed and traded on the stock exchange, an individual or entity is able to take over the company by purchasing a large quantity of shares and becoming the majority shareholder. The majority shareholder would then have an option to make an offer to buy the remaining shares from the rest of the shareholders.

Question 34

What is a Limited Liability Partnership (LLP)?

Answer 34

A Limited Liability Partnership (LLP) is a hybrid of a partnership and a company. It must be owned by at least two owners, but there is no maximum limit in number of owners.

Question 35

What is the difference between an LLP and a company?

Answer 35

Partners are personally liable for debts and losses resulting from their own wrongful actions