EQ: What are the different types of business structures and the different ways of classifying business activity. Ch. 2 Business Structure

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 activity Extract natural recourse to be used and processed by other firms EX: Farms, oil drilling, fishing… Primary sector business activity Manufacture and process products from natural resources EX: Computers, baking, clothing… Secondary sector business activity Provide services to consumers & other businesses EX: Retail, transportation, banking… Tertiary sector business activity

Classifications of business activity Balance of the different 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 26 How would you explain the high level of Primary sector business activity in Ghana?

Changes in Business Activity Industrialization in DEVELOPING countries…. (Africa & Asia) Benefits of Industrialization Problems 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 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 Activity Deindustrialization in DEVELOPED countries…. (USA & UK) Benefits of Deindustrialization Problems of Deindustrialization Rising incomes mean people spend more on services rather than goods Growth in tourism, hotels, and restaurant services, financial services Spending on physical goods rises slowly Manufacturing businesses in 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 business Important services (education, police, public transportation) “Public Goods” Street lights Individuals own the business Types & sizes vary greatly

Types of economies Mixed Economy Economic resources are owned and controlled by both private and public sectors Free- market Economy Economic resources owned largely by the private sector with very little state intervention Command economy Economic resources owned, planned 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) businesses Sole trader Partnerships Cooperatives Limited 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 Owner has complete control Owner keeps all profits Choose working conditions Establish close relationships with staff & customers Based on interests and skills of the owner Unlimited liability Competition from bigger businesses Owner responsible for all aspects of management Difficult to raise capital Long hours No continuity – owner dies, business 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 Disadvantages 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 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 Limited Companies Private Limited Company 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 Disadvantages 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 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 Separate legal identity Continuity Ease of buying and selling of shares for shareholders – encourages investment Large capital sources from publically selling shares Legal formalities in formation Cost of business consultants and financial advisers when creating the company Share prices subject to change – sometimes for reasons beyond the company’s control 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… Memorandum of Association Name of Company Address of head office Maximum share capital Aims of business Articles of Association Explains internal workings (business procedures) 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 staff.

Public-sector enterprises public corporations Public limited companies (Plcs) are in the private sector of industry – but public corporations are not!!! 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.