Welcome to Business Structure (1.2)!
Hello! This chapter is super important because it lays the foundation for understanding how the global economy works and, crucially, who actually owns and runs the businesses we study. Think of business structure as the blueprint of a company – it defines who takes the risks, how money is raised, and what the business’s main job is.
Don't worry if the names (like "quaternary sector" or "public limited company") sound intimidating; we'll break them down into simple, understandable parts. Let's get started!
1.2.1 Economic Sectors: Where Businesses Fit In
The first way we categorise businesses is based on what they actually *do*. The entire economy can be split into four main sectors based on the production chain.
The Four Sectors of Economic Activity
1. The Primary Sector
This sector involves the extraction and harvesting of natural resources.
Key Activity: Getting raw materials directly from the earth or sea.
Examples: Farming, fishing, mining, forestry, oil extraction.
Did you know? In very developing economies, the primary sector usually employs the most people.
2. The Secondary Sector
This sector involves taking the raw materials (from the primary sector) and transforming them into finished goods or usable components.
Key Activity: Manufacturing and construction.
Examples: Car production, clothing factories, building houses, food processing.
3. The Tertiary Sector
This sector provides services to both consumers and other businesses.
Key Activity: Selling or providing intangible help/support.
Examples: Retailing (shops), banking, transport, education, hairdressing, tourism.
4. The Quaternary Sector
This is a specialised part of the tertiary sector focusing on knowledge and information. While sometimes grouped into tertiary, the syllabus requires specific recognition of this sector.
Key Activity: Research and development (R&D), IT, information handling.
Examples: Software development firms, advanced scientific research labs, business consulting, media.
Quick Review: The Chain of Production
A tree (Primary) is cut down and turned into a wooden table (Secondary). A furniture shop sells the table to a customer (Tertiary). A design firm researches new, sustainable ways to manufacture the table (Quaternary).
Public Sector vs. Private Sector
The second major way to structure businesses is by ownership.
The Private Sector
Ownership: Run by individuals or groups, usually with the main objective of making a profit.
Examples: Every sole trader, partnership, and limited company (like Apple or your local bakery).
The Public Sector
Ownership: Owned and controlled by the government or state/local authorities.
Objective: To provide essential goods and services and meet social/public needs, not primarily profit.
Examples: State schools, national healthcare services, police force, government defence agencies.
Changing Relative Importance of Economic Sectors
Over time, the size and importance of these sectors change within a country, usually as it develops economically.
Reasons for the Shift (The Trend)
- Industrialisation: As a country moves from a developing to a developed economy, the Secondary sector grows rapidly (e.g., China in the late 20th century).
- Increased Wealth: As people get richer, they demand more services (Tertiary) like entertainment, insurance, and travel. This causes the Tertiary sector to expand significantly.
- Technological Advancements: Automation reduces the need for human labour in Primary and Secondary sectors. This frees up labour for the Tertiary and Quaternary sectors (knowledge work).
- Globalisation: Manufacturing (Secondary) often moves to countries with lower labour costs, decreasing its importance in the original country (deindustrialisation).
Consequences of Sectoral Change
- Employment: Mass movement of jobs from farming/mining (Primary) and manufacturing (Secondary) to services (Tertiary). This can lead to regional unemployment if workers lack the new skills needed for services.
- GDP Contribution: The Tertiary sector typically becomes the largest contributor to the country's GDP.
- Infrastructure: Increased demand for high-quality communication and IT infrastructure (Quaternary growth).
Key Takeaway (1.2.1): Economies evolve. Businesses shift from producing raw goods (Primary) to services and knowledge (Tertiary/Quaternary) as countries develop and automate.
1.2.2 Business Ownership: Who Takes the Risk?
The single most critical difference between types of business ownership is the legal concept of liability. This determines how much personal risk the owner faces if the business runs into debt.
Understanding Liability: Limited vs. Unlimited
1. Unlimited Liability
Definition: The owners are personally responsible for all the debts of the business.
Impact: If the business fails and owes money, creditors (people the business owes) can claim the owners' personal assets, such as their house, car, or personal savings.
Applies to: Sole Traders and Partnerships.
Analogy: Imagine the business debt is a massive bill. If the business piggy bank runs out, they raid your personal wallet!
2. Limited Liability
Definition: The financial responsibility of the owners (shareholders) is limited only to the amount of money they invested in the company (the value of their shares).
Impact: The business is seen as a separate legal entity from the owners. If the company fails, the owners lose their investment, but their personal assets are safe.
Applies to: Limited Companies (Private Limited Company and Public Limited Company).
Don't worry if this seems tricky at first! The rule is simple: If you don't have "Ltd" or "PLC" after your name, you probably have unlimited liability.
Main Types of Business Ownership (Features and Appropriateness)
Sole Trader
Features: One person owns and controls the business.
Liability: Unlimited Liability.
Appropriateness: Perfect for small-scale, start-up operations, or service providers (e.g., freelance photographer, independent plumber).
- Advantage: Keeps all profits, simple setup, complete control.
- Disadvantage: Unlimited liability, difficult to raise large capital, all responsibility falls on one person.
Partnership
Features: Between 2 and 20 owners (partners) who share ownership, responsibilities, and profits (according to a Deed of Partnership).
Liability: Unlimited Liability (though some jurisdictions allow Limited Liability Partnerships, the general rule for AS is Unlimited).
Appropriateness: Often used by professional services like lawyers, accountants, and doctors, where pooling expertise and capital is beneficial.
- Advantage: More capital available than a sole trader, shared workload and expertise.
- Disadvantage: Unlimited liability, potential for partner conflict, profits must be shared.
Private Limited Company (Ltd)
Features: Owned by shareholders (usually friends or family). Shares cannot be sold to the general public on a stock exchange.
Liability: Limited Liability.
Appropriateness: Suitable for growing small and medium-sized enterprises (SMEs) that want the protection of limited liability while retaining control within a small group.
- Advantage: Limited liability protects personal assets, easier to raise capital than a partnership (by selling shares privately).
- Disadvantage: More legal paperwork and administrative requirements, financial accounts must be made public (less secrecy).
Public Limited Company (PLC)
Features: Shares can be bought and sold by the general public on a stock exchange (e.g., the London Stock Exchange).
Liability: Limited Liability.
Appropriateness: Necessary for very large businesses that need huge amounts of capital for expansion, international growth, or major projects.
- Advantage: Massive capacity to raise capital, limited liability.
- Disadvantage: High setup costs and complexity, loss of control (original owners may be voted out), subject to intense public scrutiny and strict regulations.
Don't confuse the term "Public" in PLC (Public Limited Company) with "Public Sector" (government owned).
A PLC is owned by the general public who buy shares, but it is still a Private Sector, profit-seeking business.
Other Forms of Ownership
Franchise
Features: A business (the franchisee) buys the right to use the name, branding, and proven business model of an existing, successful company (the franchisor).
Examples: McDonald's, Subway.
Appropriateness: Allows individuals to start a business with lower risk and built-in brand recognition.
- Advantage for Franchisee: Reduced risk, established marketing/training support.
- Disadvantage for Franchisee: Must pay fees/royalties, lack of operational control/creativity.
Co-operatives
Features: A business jointly owned and democratically controlled by its members, who all benefit from the output or services.
Objective: To meet the needs of its members, not necessarily to maximise profit for external shareholders.
Examples: Farmer co-ops, credit unions.
Joint Ventures (JVs) and Strategic Alliances
Features: Two or more businesses agree to work together on a specific project or for a set period, sharing costs, risks, and profits.
Appropriateness: Excellent way for businesses to enter new markets or share expensive research/technology without merging or losing independent control.
Example: Two pharmaceutical companies collaborating to develop a new vaccine.
Social Enterprises
Features: Businesses that have clear social or environmental objectives alongside their financial ones (the Triple Bottom Line: Profit, People, Planet).
Objective: Profit is essential for survival, but the primary goal is often reinvesting profits to achieve a social mission.
Example: A fair trade coffee company that guarantees above-market prices to farmers.
Changing from one Type of Business Ownership to Another
Often, businesses start small (Sole Trader or Partnership) and move towards Ltd or PLC status as they grow. This process is called incorporation.
Advantages of Changing (Incorporation)
- Limited Liability: This is the biggest draw, protecting the owners’ personal assets.
- Continuity: The business continues to exist even if the owner dies (a Sole Trader's business legally ends if they pass away).
- Capital Raising: Easier to sell shares and attract external investment.
Disadvantages of Changing (Incorporation)
- Legal Complexity: More documentation, regulations, and administrative burden (especially for PLCs).
- Loss of Control: Selling shares (even privately) means the original owners dilute their control.
- Public Scrutiny: Limited companies must publish their accounts, losing financial privacy.
Key Takeaway (1.2.2): Sole traders and partnerships are cheap and simple but face unlimited liability. Limited companies (Ltd and PLC) offer limited liability, making it safer to raise capital, but they involve more compliance and less privacy.