EQ: What

are the
different
CH. 2 types of
business
BUSINESS STRUCTURE structures
and the
different
ways of
classifying
business
activity.
 LEARNING GOALS

Classify industries into levels of economic

activity – primary secondary, tertiary

Understand the difference between the private

and public sector

Identify the different forms of legal

organization of business and evaluate the
most appropriate one for different businesses
CLASSIFICATIONS OF BUSINESS ACTIVIT Y

• Extract natural recourse to be used

Primary sector and processed by other firms
business activity • EX: Farms, oil drilling, fishing…

• Manufacture and process products

Secondary sector from natural resources
business activity • EX: Computers, baking, clothing…

• Provide services to consumers &

Tertiary sector other businesses
business activity • EX: Retail, transportation, banking…
CLASSIFICATIONS OF BUSINESS ACTIVIT Y

Balance of the dif ferent sectors depends on a country’s level of

industrialization.
Employment data 2008
as % of total employment

Country Primary Secondary Tertiary

United Kingdom 2 20 78
China 44 24 32
Ghana 54 20 26

How would you explain the high level of Primary sector business activity in Ghana?
 CHANGES IN BUSINESS ACTIVIT Y

Industrialization in DEVELOPING countries….

(Africa & Asia)
Benefits of Industrialization
• Increases national output (GDP)
• Increases standard of living
• Increases exports
• Lowers imports
• Increases jobs
• More taxes generated for government
• Increased production adds value to
exports
Problems of Industrialization
• Mass movement of pop. to towns
(Housing & Social problems)
• Imports of raw material needed for
production (increases import costs)
• Growth of multinational companies
 CHANGES IN BUSINESS ACTIVIT Y

Deindustrialization in DEVELOPED countries….

(USA & UK)
Benefits of Deindustrialization Problems of Deindustrialization
• Rising incomes mean people spend • Spending on physical goods rises
more on services rather than goods slowly

• Growth in tourism, hotels, and • Manufacturing businesses in

restaurant services, financial services developed countries face more
competition from developing countries

• Rising imports of goods is taking away

from the domestic secondary-sector
firms
 THINK PAIR SHARE

Explain the difference between

industrialization and
deindustrialization.
 PUBLIC AND PRIVATE SECTORS

Public Sector Private Sector

 Government owns the  Individuals own the

business business
 Important services
(education, police,  Types & sizes vary
public transportation) greatly
 “Public Goods”
 Street lights
 T YPES OF ECONOMIES

Mixed •Economic resources are owned and

controlled by both private and public
Economy sectors

Free- market •Economic resources owned largely by

the private sector with very little state
Economy intervention

Command •Economic resources owned, planned

economy and controlled by the state
 LOCAL, NATIONAL, INTERNATIONAL
BUSINESSES

Local businesses
• Operate in a small & well-defined part of the country
• No attempt to expand to across the whole country
• Small construction businesses, Hair Salons, Family Businesses
National Businesses
• Branches & operations across the country
• No attempt to expand to other countries
• Large car dealerships, Retail shops, National banking firms
International businesses
• Operate in more than one country
• Multinational businesses
 LEGAL STRUCTURE OF BUSINESS
(PRIVATE SECTOR)

Private-sector
businesses

Limited
Sole trader Partnerships Cooperatives
Companies

Private Public
 SOLE TRADER
(ONE OWNER)

 Most common form

 Likely very small
 Unlimited liability
 People can sue the owner for business & personal assets
 Hard to raise money & additional capital

Advantages Disadvantages
• Easy to set up – no legal • Unlimited liability
• Owner has complete control • Competition from bigger businesses
• Owner keeps all profits • Owner responsible for all aspects of
• Choose working conditions management
• Establish close relationships with staff • Difficult to raise capital
& customers • Long hours
• Based on interests and skills of the • No continuity – owner dies, business
owner dies
 PARTNERSHIP
(MORE THAN ONE OWNER)

 Not a separate legal unit like a corporation

 Group of individuals
 Unlimited liability
 People can sue each partner for business & personal assets
 Partnership agreements – management roles, splitting $$$...

Advantages
• Partners work in diff. areas of
management
• Shared decision making
• Additional capital from partners
• Business losses shared btw partners
• Greater privacy
• Fewer legal formalities than
corporations
Disadvantages
• Unlimited liability for all partners
• Profits are shared
• No continuity – a partner dies,
business needs to be reorganized
• Bound by partner decisions
• Can’t sell shares to raise capital
• A sole trader, taking on partners, will
lose independence of decision making
 LIMITED COMPANIES
(INCORPORATED/CORPORATIONS)

 Limited liability
 If business fails, the shareholders personal assets are protected
 Legal personality
 Has a legal identity separate from owners
 Continuity
 The death of an owner or director does not impact the business

Private
Limited
Limited Company
Companies Public
Limited
Company
 PRIVATE LIMITED COMPANY (LTD)
(SHARES SOLD PRIVATELY)

 An incorporated privately owned business

 Small businesses
 Shares usually sold to family, friends, and employees
 A corporation not listed on the stock exchange

Advantages
• Shareholders have limited liability
• Separate legal personality
• Continuity – Business lives forever
• Original owner may retain control
• Raises capital by selling shares to
family, friends, & employees
• Greater status than an unincorporated
business
Disadvantages
• A lot of legal work in forming the
corporation
• Can’t raise capital by selling shares to
the general public
• Difficult for shareholders to sell shares
• Less secrecy over financial affairs than
sole trader or partnership
 PUBLIC LIMITED COMPANY (PLC)
(SHARES SOLD ON STOCK EXCHANGE)

 Sale shares (ownership pieces) on stock exchange

 Most common form for large businesses
 Can raise VERY LARGE amounts of capital ($$$) for expansion
 Separation between ownership & control
 Large amounts of shareholders, Who runs the company?
 Shareholders appoint a board of directors to run the business
 Many Public Limited Companies convert back to Private status to
keep control in the hands of the original owner.
 Plc., Inc.
EXAMPLES OF PUBLIC LIMITED COMPANY
 PUBLIC LIMITED COMPANY (PLC)
(SHARES SOLD ON STOCK EXCHANGE)

Advantages Disadvantages
• Limited liability • Legal formalities in formation
• Separate legal identity • Cost of business consultants and
• Continuity financial advisers when creating the
• Ease of buying and selling of shares company
for shareholders – encourages • Share prices subject to change –
investment sometimes for reasons beyond the
• Large capital sources from publically company’s control
selling shares • Legal requirements to share financial
info with shareholders & public
• Risk of takeover due to the availability
of the shares on the stock exchange
 LEGAL FORMALITIES IN SETTING UP A
COMPANY
All governments require legal steps to starting a company.
In the UK…
1. Memorandum of Association
a. Name of Company
b. Address of head office
c. Maximum share capital
d. Aims of business

2. Articles of Association
a. Explains internal workings (business procedures)
b. Control of the business (names of directors)
 OTHER FORMS OF BUSINESS
ORGANIZATION
 Cooperative
 All members contribute to the running of the business
 All members have one vote
 Profits shared equally among member
 Franchises
 Allows an owner to use the logo, marketing, product, & style of the
parent company (McDonalds, Subway, Monkey Joe’s)
 Joint ventures
 Two or more businesses agree to work closely together on a
particular project and create a separate business division to do so
 Holding companies
 A business that owns and controls a number of separate businesses,
but DOES NOT unite them into on unified company
EXAMPLE OF A COOPERATIVE

Today, 54 grower-members make up the

Cooperative. Since its inception, each
member, no matter how large or small
his farm, is treated equally with each
member having one vote. Equal voice in
Cooperative business has helped to
sustain progress and keep alive the
pioneering spirit that originally brought
the Cooperative into being. The Board of
Directors is responsible for determining
policy and providing direction for the
management team. Day -to-day business
operations are handled by the
professionals that make up the
Cooperative staf f.
 PUBLIC-SECTOR ENTERPRISES
PUBLIC CORPORATIONS

We us “Public” in two ways!

Public corporations ≠ Public limited companies
Public corporations are owned by government
Public corporations are in the Public Sector
Profit is not a major objective
Check Pros & Cons on p. 28
EXAMPLE OF PUBLIC CORPORATION

Citizens is a not-for-profit, tax-

exempt government corporation
whose public purpose is to
provide insurance protection to
Florida property owners
throughout the state. The
corporation insures hundreds of
thousands of homes, businesses
and condominiums whose
owners otherwise might not be
able to find coverage.