Chapter 2
Business Structure
Business Activity
Business activities can be classified based on the
type of product or service produced.
The classification is divided into four broad
economic sectors, based on the stages of turning
natural resources into finished goods and services.
Four Economic Sectors
Primary Sector – extraction of natural resources.
Example: Farming, mining, fishing.
E.g., Dairy farm in New Zealand.
Secondary Sector – manufacturing and processing.
Example: Factories producing goods from raw materials.
E.g., Clothing factory in China.
Tertiary Sector – providing services to consumers and businesses.
Example: Tourism, retail, transport.
E.g., Burj Al Arab hotel in Dubai.
Quaternary Sector – knowledge-based services, research, and
innovation.
Example: IT, scientific research, consultancy.
E.g., Research laboratory in India.
Changes in the Relative Importance of Economic Sectors
Two main features:
1. Changes over time
2. Variations between economies
Changes Over Time
Industrialisation – shift from primary to secondary sector in
developing countries.
Example: Ghana’s primary sector share fell, secondary sector increased
from 2008–2019.
Measured by employment or output as a proportion of the whole
economy.
Benefits of Industrialisation
Increases GDP → raises living standards.
Reduces imports, increases exports.
Creates jobs in manufacturing.
More tax revenue for government.
Adds value to raw materials before export.
Problems of Industrialisation
Rural-to-urban migration → housing and social issues.
Need for imported raw materials increases costs.
Expansion of multinational companies may harm local economy.
Deindustrialisation (in developed economies)
Decline in secondary sector, growth in tertiary and quaternary
sectors.
Example: UK secondary industry share of output fell from 38% to
20% in 25 years.
Causes:
Higher incomes → more spending on services (tourism, finance)
than goods.
Global competition from low-cost manufacturing countries.
Consequences:
Job losses in agriculture, mining, manufacturing.
Urban migration.
Job creation in service industries.
Need for retraining workers for service sector jobs.
Variation Between Economies
Developed economies: tertiary/quaternary dominant.
Developing economies: primary and secondary more significant.
Public Sector vs Private Sector
Definitions
Private Sector – owned by individuals or companies for profit.
Public Sector – owned/controlled by government to provide
essential goods and services.
Examples of Public Sector Activities:
Health, education, defence, police, utilities, transport.
Provision of public goods (e.g., street lighting) – cannot charge
users directly, funded by taxes.
Public Corporations
State-owned enterprises with social objectives.
May prioritise service over profit.
Advantages
Operate with social objectives.
Maintain loss-making but socially beneficial services.
Funded mainly by government.
Disadvantages
Possible inefficiency (lack of profit targets).
Government subsidies may encourage waste.
Political interference in decisions.
Business Ownership
Private sector businesses can be owned by one person or many
thousands. There are several forms of ownership, each with
different legal structures, rights, and obligations.
Sole Trader
Definition: Business owned by one person (may employ others but
ownership remains single).
Prevalence: Most common form of ownership but small proportion
of national turnover.
Liability: Unlimited liability – owner’s personal assets can be used
to pay debts.
Finance: Limited to owner’s savings, profits, and loans; cannot sell
shares.
Common Sectors: Construction, retailing, hairdressing, car
servicing, catering.
Advantages:
Easy to set up – no legal formalities.
Full control over business decisions.
Keeps all profits.
Flexible working hours and patterns.
Close relationship with staff/customers.
Can use personal skills/interests.
Disadvantages:
Unlimited liability.
Strong competition from larger firms.
Must manage all aspects (no specialisation).
Hard to raise capital.
Long working hours.
No continuity – business ends when owner dies.
Partnership
Definition: Two or more people jointly own and run the
business.
Legal Agreement: Often a Deed of Partnership covering voting
rights, profit share, roles, and contract authority.
Liability: Usually unlimited liability for all partners.
Risks: All partners bound by decisions and debts of any partner.
Common in: Professions (law, accountancy) and small building
firms.
Advantages:
Partners can specialise in different areas.
Shared decision-making.
More capital from multiple partners.
Losses shared.
Greater privacy and fewer legal formalities than companies.
Disadvantages:
Unlimited liability (except in special cases).
Profits are shared.
No continuity – ends if a partner dies (must be reformed).
Bound by decisions of any partner.
Cannot sell shares to raise capital.
Sole trader loses independence when taking partners.
Private Limited Company (Ltd / Pte)
Ownership: Shares sold privately (often to family, friends,
employees).
Control: Often retains control with original owner.
Share Transfer: Only with agreement of existing shareholders.
Raising Capital: Cannot sell shares to the public; must rely on
private investment.
Advantages:
Limited liability for shareholders.
Separate legal identity.
Continuity of business after owner’s death.
Retains control if shares held by close circle.
Can raise capital by selling shares privately.
Greater status than sole trader or partnership.
Disadvantages:
Legal formalities to set up.
Cannot sell shares to public.
Hard to sell shares (requires approval).
Publicly available end-of-year accounts (less privacy).
Public Limited Company (plc / inc.)
Ownership: Shares sold to general public and traded on stock
exchange.
Control: Shareholders appoint board of directors to manage
company; separation of ownership and control may lead to
conflicts.
Capital Raising: Can raise large amounts via Initial Public
Offering (IPO).
Advantages:
Limited liability.
Separate legal identity.
Continuity after owner’s death.
Easy buying/selling of shares encourages investment.
Can raise substantial capital from public share sales.
Disadvantages:
Legal formalities to set up.
High costs for consultants/advisors.
Share price fluctuations (may be beyond company’s control).
Legal disclosure requirements (annual reports, accounts).
Risk of takeover via stock exchange.
Directors may prioritise short-term investor demands over long-
term goals.
Legal Formalities in Setting up a Company
Governments require certain steps to protect investors and creditors
before a company can be established.
Key Documents:
[Link] of Association
Contains the company’s aims and maximum share capital.
Important for shareholders to understand company objectives
and avoid unwanted sectors (e.g., weapons).
[Link] of Association
Sets out the internal rules, management structure, and
shareholder rights.
After Approval:
Registrar of Companies issues a Certificate of Incorporation.
A private limited company can begin trading.
B. Cooperatives
Definition: A business owned and operated by members for mutual
benefit.
Types:
Producer/Worker Cooperatives – involved in production of goods.
Consumer/Retail Cooperatives – sell goods/services to members.
Common Features:
All members can participate in management and decision-making.
One member = one vote (equal voting rights).
Profits shared equally among members.
Agricultural Example:
Bulk purchase of seeds/materials to gain economies of scale.
Collective selling to secure better prices.
Advantages:
Buying in bulk reduces costs.
Shared problem-solving and decision-making.
High motivation due to shared profits.
Disadvantages:
Risk of poor management without professionals.
Capital shortages (cannot sell shares to non-members).
Slow decision-making if all members must be consulted.
Franchises
Definition: A legal contract where the franchisee buys rights from the
franchiser to use brand name, logo, and business model.
Examples: McDonald’s, Ben & Jerry’s.
Key Features:
Franchisee chooses own legal structure but must follow franchiser
rules.
Franchiser provides brand reputation, training, advertising.
Advantages:
Lower risk of failure (established brand).
Advice and training from franchiser.
National advertising covered by franchiser.
Quality-controlled supply chain.
Exclusive local area rights.
Disadvantages:
Must share profits/revenue with franchiser.
High initial licence fees.
Local advertising costs may apply.
Must use approved suppliers only.
Limited control over pricing, layout, and operations.
Joint Ventures
Definition: Two or more businesses collaborate on a specific project
without merging.
Reasons for Joint Ventures:
Share costs and risks (especially for expensive product
development).
Combine strengths and expertise.
Access to each other’s markets (especially internationally).
Risks:
Clashing management styles/cultures.
Blame over mistakes.
Failure of one partner endangers the project.
Social Enterprises
Definition: Businesses with social objectives that operate for profit but
reinvest most profits into social or environmental goals.
Not charities (can retain some profits).
Compete in the same markets as traditional businesses.
Common Features:
Directly produce goods or provide services.
Operate ethically to achieve social aims.
Must make profit to survive (no reliance on donations).
Changing the Form of Business Ownership
Businesses may switch ownership forms (e.g., sole trader → private
limited company).
Advantages of Changing:
Greater access to finance.
Gains legal identity.
Limited liability protects owners’ personal assets.
Disadvantages of Changing:
Legal costs and procedures.
Some loss of control for original owner.
Profits shared among more owners.