Chapter No 2
Business Structure
Economics Sectors:
There are many types of businesses and it is useful to be able to categories them to
analyze their performance and the different issues they face
1. Primary sector
2. Secondary sector
3. Tertiary sector
The Public and Private Sector
1. Public Sector
The Public Sector is usually comprised of organizations that are owned and
operated by the government and exist to provide services for its citizens.
Similar to the voluntary sector, organizations in the public sector do not
seek to generate a profit.
2. Private sector
The Private Sector is usually comprised of organizations run by individuals
and groups who seek to generate and return a profit back to its owners.
Legal Structures
When setting up in business, the founders must consider the most appropriate
legal from their enterprise. There are several types of business organization.
1. Sole traders
2. Partnerships
a. Sole traders
A person who is the exclusive owner of a business, entitled to keep all
profits after tax has been paid but liable for all losses.
Sole traders and their responsibilities
A sole trader is one of the easiest and most common structures for entrepreneurs
and new businesses. If you’re thinking about joining the other 3.3 million sole
traders in the UK, you will become responsible for:
Keeping records of your business’s sales and expenses
Sending a Self Assessment tax return every year
Paying Income Tax on your profits and National Insurance.
Advantages of a sole trader
Sole traders benefit from the following advantages:
Control – Sole traders maintain full control of their business. Running it
how they please without the interference of others.
Profit retention – Sole traders retain all the profits of their business.
Private data – Information about sole traders is kept private, unlike that of
limited companies which is necessarily made public after registration with
Companies House.
Specialist – Often a small business, sole traders can offer a more personal
service with local roots and ties. This can be more appealing to potential
customers in the local community.
Personal – Because there is no need to confer with other decision makers,
sole traders can make decisions quickly and act on them swiftly, providing
for the needs of their customers.
Disadvantages of a sole trader
Just like any other form of business, being a sole trader can also have its
disadvantages.
Liability – sole traders are not seen as a separate entity by the law.
Therefore, they are subject to unlimited liability. This means if the business
gets into debt, the business owner is liable. In the worst case, this may mean
a person risks their home, personal savings and any other assets they have
both in and outside of the business.
Finance – sole traders often find it difficult to raise finance to fund their
business. They may struggle with expansion in the future.
Reverse economies of scale – sole traders will be unable to take advantage
of economies of scale in the same way as limited companies and larger
corporations, who can afford to buy in bulk. This might mean that they have
to charge higher prices for their products or services in order to cover the
costs.
Decision making – all decisions must be made by the sole trader. There is no
room for help by others. So the success or failure of the business rests on
one person.
Partnership
A type of business organization in which two or more individuals pool money,
skills, and other resources, and share profit and loss in accordance with terms of
the partnership agreement..
Advantages of Partnership
Capital – Due to the nature of the business, the partners will fund the
business with start up capital. This means that the more partners there are,
the more money they can put into the business, which will allow better
flexibility and more potential for growth.
Flexibility – A partnership is generally easier to form, manage and run.
They are less strictly regulated than companies, in terms of the laws
governing the formation.
Shared Responsibility – Partners can share the responsibility of the running
of the business. This will allow them to make the most of their abilities.
Rather than splitting the management and taking an equal share of each
business task
Decision Making – Partners share the decision making and can help each
other out when they need to. More partners means more brains that can be
picked for business ideas and for the solving of problems that the business
encounters.
Disadvantages of Partnership
Disagreements – One of the most obvious disadvantages of partnership is
the danger of disagreements between the partners. Obviously people are
likely to have different ideas on how the business should be run, who should
be doing what and what the best interests of the business are..
Agreement – Because the partnership is jointly run, it is necessary that all
the partners agree with things that are being done. This means that in some
circumstances there are less freedoms with regards to the management of
the business
Liability – Ordinary Partnerships are subject to unlimited liability, which
means that each of the partners shares the liability and financial risks of the
business. Which can be off putting for some people.
Taxation – One of the major disadvantages of partnership, taxation laws
mean that partners must pay tax in the same way as sole traders, each
submitting a Self Assessment tax return each year. They are also required to
register as self employed with HM Revenue & Customs.
Profit Sharing – Partners share the profits equally. This can lead to
inconsistency where one or more partners aren’t putting a fair share of
effort into the running or management of the business, but still reaping the
rewards.
Companies:
To avoid some of the problems of being a sole trader or a
partnership. You may decide to establish a company instead.
To set up a company, the owners have to complete various
documents and register the business at Companies House. This process is known
as incorporation.
A company is owned by share holders. Each share in the business represents a
part of the company. The more shares someone owns. The more of the company
belongs to them.
A company has its own legal identity, separate from that of
its owners. The company can own property. equipment and
other goods in its own right and is responsible for its own debts
lf the company fails, the shareholders can lose the money that
they invested in the business when they bought shares, but they
cannot lose more than this. This is because shareholders have
limited liability.
A shareholder is an investor in and one of the owners of a company.
Limited liability means that investors can lose the money they have invested in to
the business but the their personal possessions ,are safe There is a limit to their
risk.
A company is a business organization which has its own legal identity and which
has limited liability
Limited liability and its importance:
Limited liability means that a company is responsible for the
money it owes but that the personal possessions of its owners
are safe. This is different from a sole trader. who has unlimited
liability and could lose every thing if the business had financial
problems.
Having limited liability is essential for company to be able
to raise money by selling shares. Without it, investors would be
far less likely to buy shares because of the risk to their personal
possessions.
How do franchises work?
There are many different forms of franchise, but the basic elements of a franchise
agreement are:
The franchisor sells the right to the product in return for an initial fee and a
percentage of the franchisee's turnover.
The franchisee receives the right to the name and the systems used by the
franchisor. This may include access to materials and training methods.
A franchise occurs when a franchisor sells the rights to use or sell his or her
products to a franchisee.
Advantages of Buying a Franchise
1) Lower Failure Rate - When you buy a franchise, you are buying an established
concept that has been successful. Statistics show that franchisees stand a much
better chance of success than people who start independent businesses
2) 2) Help with Start Up and Beyond - You get a lot of help starting your business
and running it afterward. Many franchises are, in fact, turnkey operations.
When you buy a franchise, you get all the equipment, supplies, and instruction
or training needed to start the business.
3) 3) Buying Power - Your franchise will benefit from the collective buying power
of the parent company as the franchisor can afford to buy in bulk and pass the
savings along to franchisees.
4) 4) Star Power – Many well-known franchises have national brand-name
recognition. Buying a franchise can be like buying a business with built-in
customers.
5) Profits - A franchise business can be immensely profitable. (Think of
MacDonald’s and Tim Hortons, for instance.)
The problems of buying a franchise
The most obvious problem with buying a franchise is that it costs you money! This
reduces the profits you make. However, you hope that by buying a franchise you
will do better than you would have done on your own. Whether you are better off
with a franchise therefore depends on its success and the terms and conditions of
the contract.
Although one of the main benefits of buying a franchise is that you are linked to
other franchisees, this can also be a problem. If, for example, the quality of service
in other franchisees falls, it may damage the overall brand and hit your sales as
well. You become dependent on others and vulnerable if there are problems
elsewhere.
Selling a franchise
One benefit of being a franchisor is that you benefit from the income generated
from the franchisees. They will pay a fee to buy the franchise and a percentage of
turnover. This generates earnings for the franchisor.
Franchising is also a way of growing fast. If you were trying to grow a business on
your own, you would have to fund it all yourself. For example, you would have to
find the funds to buy more premises and refurbish more shops. If you sell
franchises, then the costs of opening a particular outlet falls to the franchisee.
How much should you pay for a franchise?
Usually, there are several different types of payments involved in buying a
franchise. For example, there may be an initial purchase fee plus a percentage of
turnover each year. On top of this there may be money you have to invest each
year to cover marketing and management expenses. The amount you pay will
depend on:
⚫ the likely turnover of the business
⚫ the typical profits
whether you have the exclusive rights to a particular geographical area and if so
how big and attractive this area is
⚫ the amount of training and support provided.