Types of Business

Preliminary Business Studies - Topic 1 Nature of Business

Syllabus: Types of businesses

o Classification of business• Size – small to medium enterprises

(SMEs) large• Local, national, global• Industry – primary, secondary, tertiary,

quaternary, quinary• Legal structure – sole trader,

partnership, private company, public company, government enterprise

o Factors influencing choice of legal structure• size, ownership, finance

Lingo List

• Classification Of Business

• SOHO

• Medium Enterprises

• SMEs

• Large business

• Local

• National,

• Global

• Primary Industry

• Secondary Industry

• Tertiary industry

• Quaternary

• Quinary

• Legal Structure

• Sole Trader,

• Partnership,

• Private Company,

• Public Company,

• Government Enterprise

• Size,

• Ownership,

• Finance

• Quantative

• Qualitative

2.1 Types of businesses - Introduction

• The four common methods used to classify businesses are:

1. Size

2. Geographical spread – local, national, global

3. Industry sector

4. Legal structure

2.2 Classification by size

• Businesses come in three different sizes – small, medium and large.

• Measurements used to determine the size of a business:• The number of employees • The number of owners• Market share• Legal structure

• Qualitative descriptions to classify a business as small to medium sized: • The owner makes most management decisions for example who to hire• The owner provides most capital (finance)• The business has little control within the market (a small share of total

market shares)• It is independently owned and operated• The business is locally based

Copy table 2.1 Quantitatitive measures and qualitative descriptions of small, medium and large businesses.

Busin

ess b

y

Size

Micro Businesses

• Micro businesses employ fewer than five people including the owner.

• SOHO (small office home office) businesses represent 90% of the small business population.

• Characteristics of micro businesses:• 82% of non-manufacturing small businesses• 58% are sole traders and partnerships• Employ 31% of people employed in the private sector• Dominated by women, young people seeking self-

employment and people retrenched• 54% have no employees

2.3 Classificatio

n by geographica

l spread

Geographical spread

• The presence of a business and the range of its products across a:• suburb,• city, • state or • country or • the globe.

Local

• A local business has a restricted geographical spread, it serves the surrounding area. • For example a newsagent, hairdresser

or mechanic.

National

• A national business is one that operates within just one country. • For example Coles, Sportsgirl or David

Jones.• Expansion leads to increased sales and

means the domestic market becomes saturated.

• To expand, the business can export and sell its products in other countries.

Global

• Commonly called a transnational corporation (TNC)

• is a large business with a home base in one country that operates partially owned or wholly owned businesses in other countries.• Conducts a large % of their business outside

their home country• E.g. Coca-Cola, LG and McDonalds

• Finance, assets, technology, information, employees and goods and services all flow freely from one country to another

Why Expand a Business?

The Four Main Reasons Businesses Expand

• to serve national and global markets are:

1. Increase in sales – products more known – consumer demand increases – new stores open

2. Desire to increase profits – serve a wider market – further sales – further growth – increased profit

3. Increase in market share – competition as new competitors enter market – small weak firms do not survive – remaining businesses reap rewards

4. Global consumers – increasing uniformity of consumers around the world – ecommerce, online shopping via the internet is the most common method of purchasing products from overseas.

2.4 Classificatio

n By Industry Sector

What is an Industry?

• An industry consists of businesses that are involved in similar types of production.• For example the Australian car industry

is made up of three major car firms: GMH, Ford and Toyota.

How are they divided?

• The three main types of industry groupings or sectors are: • Primary • Secondary • Tertiary

• The tertiary industry is subdivided into:• Quaternary sector• Quinary sectors

Primary Industry

• Primary industry includes all businesses in which production is directly associated with natural resources.• Examples include farming, mining and

fishing.

• Employs 4% of the labour force.

• Provides all our food requirements and 60% of all exports.

Secondary Industry

• Secondary industry involves taking a raw material and making it into a finished or semi-finished product.• For example iron ore, coal and

limestone are turned into steel and used to manufacture cars.

Tertiary Industry

• Tertiary industry involves performing a service for other people.

• Example include retailers, dentists and solicitors.• Three out of four employees and two

out of three businesses are classified as tertiary hence it is subdivided into quaternary and quinary.

Quaternary Industry

• Quaternary industry includes services that involve the transfer and processing of information and knowledge. • Examples include telecommunication,

finance and education.

• Expansion in e-commerce and internet-based activities will mean increases in those employed in this sector.

Quinary Sector

• Quinary industry includes all services that have traditionally been performed in the home.• Examples include hospitality, tourism

and childcare.

• Paid and unpaid work is included.

• Social and lifestyle changes and the increase in two income households will see this sector expand.

2.5 Classification by legal structure

• The four main legal structure of privately owned businesses are:1. Sole Trader2. Partnership3. Private Company4. Public Company

• Privately owned businesses are further divided into unincorporated and incorporated businesses.

• Incorporated refers to the process companies go through to become a separate legal entity from the owners. This applies to privately and publically owned companies.

• Unincorporated businesses are sole traders or partnerships where the business entity and owner are one and the same. When the owner dies so does the business entity.

• Unincorporated business entities are the most common small business in Australia as they are easiest and cheapest to establish.

Sole Trader

• A sole trader is a business that is owned and operated by only one person.

• The business and owner are the same. They provide all finance, make all decisions and take all responsibility for the operation of the business.

• The only legal requirement is that the name of the business be registered if the name is different from that of the owner. (P. Jones or Paul Jones does not need to be registered but ‘Paul’s Lawn and Garden Service’ does).

• Not a separate legal entity so if the business is sued the owner is sued and if the business enters a legal contract the owner enters into the contract.

• The business/owner pays income tax.• The owner has unlimited liability meaning they are personally

responsible for the debts of the business even if they have to sell their personal property like their home.

Copy advantages and disadvantages of being a sole trader

Sole Trader•A sole trader is a business that is owned and operated by one person.•A sole trader is not regarded as a separate legal entity; that is, the owner and the business are regarded as the same. •This means that if the business is sued then the owner is sued, this is called unlimited liability

Partnerships• A partnership is a legal business structure that is owned and operated by between

two and 20 people with the aim of making a profit.

• There is no legal entity.

• Partners have unlimited liability.

• All partners are responsible for the debts of the business even if contracted by other partners.

• There may or may not be a written agreement.

• Limited partnerships

• A partnership agreement contains:• Names and address of partners• How long the partnership exists• The amount of money each partner contributes• How the profit and losses will be shared• The duties of each partner• Limitations on the authority of the partners• How the partnership may be dissolved• Arrangements regarding a partner wanting to leave and start up a business in competition

• Limited partnerships allow one or more partners to contribute financially to the business but take no part in running the partnership.

Copy advantages and disadvantages of a partnership

Partnership

A partnership is a legal business structure that is owned and operated by between two and 20 people with the aim of making a profit.

2.6 Types of companies

• Incorporation is the process that companies go through to become incorporated, i.e to become a registered company and a separate legal entity.

• Separate legal entity means the company can sue or be sued, it can lease, sell or own property and it has perpetual succession, will continue to exist even when the owners change.

• The incorporation process is governed by the Commonwealth Corporations Act 2001 and administered by the Australian Securities and Investments Commission (ASIC).

Limited Liability

• Limited liability is a feature of corporate ownership that limits each owner’s financial liability to the amount he or she has paid for the business’s shares.

• Recently this advantage has been reduced through laws penalising directors of companies who make false and misleading statements.

• Financial institutions ask directors to give personal guarantees for business loans. This can mean they are forced to sell personal assets to cover debts. Although companies can insure against such an event.

• The letters ‘Ltd’ signify the company offers limited liability.

Copy the advantages and disadvantages of a company

Limited Liability Company

•Limited liability is a feature of corporate ownership that limits each owner’s financial liability to the amount of money he or she has paid for the business’s shares.•Is the most common type of company structure in Australia, • Usually has between two and 50 private shareholders.• Private companies often tend to be small to medium-sized, family-owned businesses.

Proprietary (private) companies

• A proprietary (private) company is an incorporated business and usually has between two and 50 private shareholders.

• Only people who are invited to can buy shares.

• Has the words ‘proprietary limited’ or Pty Ltd after its name.

• Must be registered with ASIC. The minimum number of share is two.

• The main advantage is limited liability.

Public Companies

• Registered with ASIC. Shares can be bought and sold on the Australian Securities Exchange.

• A public company has:• At least one shareholder, with no maximum• No restriction on the transfer of shares or raising money

from the public by offering shares• To issue a prospectus when selling its shares for the first

time• A minimum requirement of three directors (two must

live in Australia)• The word ‘Limited’ or Ltd in its name• To publish its audited financial accounts each year, its

annual report

Government enterprises or GBEs

• Government enterprises are government owned and operated businesses.

• Examples include Railcorp (formerly State Rail Authority) and Australia Post.

• Referred to as public sector businesses and provide essential community services like health and education.

• Privatisation is the process of transferring the ownership of a government business to the private sector. • This began in the 1980s.• The federal government privatised a number of public sector

businesses in the 1990s including Qantas and Telstra.• The rationale for this practice is that economic efficiency is increased

by transferring enterprises from the public sector to the private sector.• Many argue privately owned and organised practices are more

efficient and more profitable.

Government Enterprise

• Government enterprises are government-owned and operated businesses.

• Privatisation is the process of transferring the ownership of a government business to the private sector.

Franchising

• A franchise means buying the rights from another business to distribute its product under its name.

• A franchisor is an individual or business that grants a franchise. They supply a known and advertised business name, the required training and staff development, a method of doing business, management skills and materials.

• A franchisee is an individual that purchases a franchise. They supply the start-up money and labour, operate the franchise business and agree to abide by the terms and conditions of the franchise agreement.

• The success rate is nearly three times that of independent businesses.

• It is the area of fastest business growth in Australia.

• Examples Bakers Delight, McDonalds, Angus and Robertson.

Copy advantages and disadvantages of a franchise agreement

FranchiseA franchise means buying the rights to use the business name and distribute the goods or services of an existing business.• The franchisor grants the rights and provides the business structure. • The franchisee supplies the start-up money, labour and operates the franchisebusiness.

2.7 Factors influencing choice of legal structure• The three most important factors

influencing the business owner when deciding on an appropriate legal structure are:1. Size of the business2. Ownership structure3. Finances needed

Size of the business

• Increased sales and higher customer demand may require selection of a more appropriate legal structure.• Small or micro business enterprises would be a sole trader or

partnership.• Increased sales leads to further expansion and leads to medium

sized businesses. Injections of money allow the purchase of new plant and equipment resulting in partnerships or private companies being formed. New partners and shareholders bring extra finance, skills and expertise.

• Further rapid expansion leads to more private companies as owners seek the protection of limited liability.

• Continued expansion leads to the formation of public companies. These businesses raise money from a share market float that is the sale of shares to the public. A prospectus is issued, a document giving details of a company and inviting the public to buy shares in it.

• There is no rigid formula as to the best legal structure for a business.

Ownership Structure

• A sole trader has complete control and ownership of the business.

• In a partnership the owner shares ownership with other people.

• A private company allows owners to decide who can become a shareholder generally up to a maximum of 50. The protection of limited liability is also provided.

• Public companies give ownership to thousands of small, individual shareholders and a few institutional share holders. Those with more shares have more ownership and control of the business.

Finance

• Sole traders and partnerships have unlimited liability hence find obtaining for finance particularly for research and development difficult.• One option is venture capital, money that is invested

in small and sometimes struggling businesses that have the potential to become very successful.

• Incorporated businesses, either proprietary or public companies raise finance from selling shares. • Some floats however, fail to generate interest and are

undersubscribed, not all the shares are sold.