Post on 05-Apr-2020
Business EnvironmentLO 1: CLASSIFICATION OF BUSINESS OWNERSHIP
SESSION 02: 13/10/2016
Classification of business
Three main ways:
By activity
By size
By legal structure
01. Business classification basedon the ACTIVITY
Based on the industry in which the business is operating there are 3 main
classifications.
Primary sector, Secondary sector and Tertiary sector
Primary sector: Industries or businesses which deal with natural resources. These
businesses engages in acquiring raw materials
Example: Metals and coals – mined, oil drilled from the ground, food –farmed, fish-
trawled
01. Business classification basedon the activity
Secondary sector: Secondary sector businesses are those that take the raw materialsproduced by the primary sector and process them into manufactured goods and products.
Example: Food processing, Oil refining, Textile conversion into clothes, Wood beingtransformed to furniture
Tertiary sector: Supply of services to consumers and businesses. Hence, selling ofservices and skills. Further, may include selling of goods and productions from primary andsecondary industries
Retails, Restaurants, Transportation, Education, Healthcare
The chain of production
The chain of production indicates the interdependence of different sectors.
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02. Business classification basedon the SIZE
Size of business can be measured in 5 ways:
Turnover : Measures the total value of sales over a given time.
Employees : Classifies business according to the number of workers.
Capital employed : Compares the amount of money invested within the business
Profit : Compares the profit levels of the firm.
Stock market value : Compares the value of companies whose shares are traded.
Examples
Classification based on turnover
Small : Turnover < £1.4 million
Medium : £1.4 million < Turnover < £5.75 million
Large : £5.7 million < Turnover
Classification based on employee numbers
Small : Less than 50 workers eChannelling PLC, Kinza
Medium : Between 50-250 workers BMS , STAX Inc.
Large : Over 250 workers HSBC, Millennium IT
Is size everything??
During year 2011, Vodafone had a market capitalization of £ 154,683.6 Millionwith a turnover of £ 7,873 Million.
Meanwhile, Tesco had a market capitalization of £ 17,771.2 Million with aturnover of £20,988 Million.
WHICH IS THE BIGGEST COMPANY?OR
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03. Business classification basedon the LEGAL STRUCTURE
There are two broad categories of privately owned business
organizations.
The distinction rests upon on the status of the organization in
the eyes of the law (the legal status).
What is a person or a legal entity?
In business a person (or a legal entity) may be a biological person or it can be a collection of people.
A legal party has certain rights:
To make contracts
To carry out business transactions
To own property
To employ people
To sue and be sued for breach of contract
3.1 Non incorporated organizations
These are businesses which do not possess a separate legal entity
from its owners.
The owner(s) bear full liability for any action of the business: they may
sue and be sued for business activity or inactivity (Owner = Business).
Unincorporated enterprises include Sole Proprietorships and
Partnerships.
3.1.1 Sole Proprietorship
A business that is owned by a single owner.
Owner of the sole proprietorship is declared as the sole trader/ proprietor.
There is a simple formal setting up procedure (Registration for VAT, Name registry and obtaining
licenses for certain industries). Yet, will be subject to a variety of legal requirements such as contract
law, consumer law and employee law.
Examples : small independent retailers, beauticians, farmers, window cleaners, electricians etc.
3.1.1 Sole Proprietorship
Advantages Minimum initial capital requirement
All earnings/profits belonged by the owner
Swift decision making
Autonomy in decision making
No formal documentation required except the
tax returns
Confidentiality of information
Disadvantages All tasks of the business must be performed by
the owner him/herself
Skills and abilities are concentrated to the
owner
High labour intensity
Poor economies of scale
Unlimited liability
3.1.2 Partnerships
The relation which exists between persons carrying on a business in common with a view to profit.
A partnership comes into being when two or more people establish a business which they own, finance and runjointly for personal gain.
This form of business does not have its own distinct legal personality.
Hence, partners have unlimited liability.
Partnerships involve minimum 2 -20 partners.
Partnerships which are more than 20 members are required to establish as a registered company if they do notcomply with the Companies Act rules for exceptions.
Examples : Accountants, consultants, lawyers
Partnership agreements
Partnerships are established by all partners signing a legally binding partnership
agreement.
A legally binding agreement aims to;
Ensure that the profits arising from conducting a business under a partnership agreement is
equally divisible unless otherwise stated.
Ensure that in the event of a loss, it is equally divided amongst all the partners.
3.1.2 Partnership
Advantages More capital can be raised
No need to submit accounts
Partners are entitled to distribute the profitsamong themselves
Likely to be a breadth of skills and abilities
Divide up tasks between individuals
Losses can be shared equally
Disadvantages Unlimited liability
Legal partnership agreement – nominal fee
Decision making should be conducted uponconsultation
Independence is lost
If a partner leaves the partnership isdissolved
Task : Written Individual Work
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3.2 Incorporated business organizations
A business that is legally declared as a corporate entity which is separate from its owners.
An incorporate business means that the business owners are not held personally liable for the businessobligations.
Two forms : Public limited companies & Private limited companies
English law recognises three ways in which new corporates can be originated:
Royal Charter
Statue
Registration : Memorandum of Association, Memorandum of Articles Certificate of Incorporation
(p.65) (p.66)
3.2.1 Public Limited Companies (PLC)
PLC’s are the biggest form of private businesses
Shares are sold at the stock exchange.
Shareholders have a limited liability (p.57)
Shareholders vote for the board of directors whom will run the business
The company must have the words/letters ‘Public Limited Companies or PLC’ in its name.
Accounts must be disclosed to the public
PLC’s in Sri Lanka
3.2.1 Public Listed Companies
Advantages Access to more capital
Higher bargaining power
Limited liability
Death/illness of an owner does not influence
the company continuity
Disadvantages Firms can be taken over : LOLC purchased
Browns
Accounts are not private
Expensive to set up
Have to share profits by means of dividends
Lack of independence in decision making
3.2.2 Private Limited Companies
Company owned by a single shareholder or more
Shares are not traded publicly : shares are traded through business contacts
Limited liability
Shareholders vote for the board of directors
Business name should consist the world/ letters ‘Limited or LTD’ in its name
LTD companies in Sri Lanka
3.2.2 Private Limited Companies
Advantages Access to capital through selling shares
Limited liability
Death/illness does not impact the
continuity
Accounts are private
Disadvantages Shares cannot be sold in the stock
exchange
Expensive to setup
Profits are shared by means of dividends
Decision making is not independent
Sole Proprietor to Public LimitedCompany
Individual settinga small business
as a soleproprietorship
People whowant to co-own
start apartnership
When they wantto limit liability,
they establish aprivately owned
corporation
If the corporationgrows
sustainably overtime, it can beconverted to apublicly heldcorporation
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Other forms of businessorganizations
These are considered as developments of the legal structure:
Licensing
Franchising
Joint ventures
Case illustration : BIG MAC GETSBIGGER
01. Franchising
This is an arrangement where one party (the franchisor) sells the right to another party (thefranchisee) to market its products or service.
In terms of the legal status the parties involved could be possessing any of the legal statusdiscussed.
However, practically, franchisor is a company whilst the franchisee is a sole trader or apartnership.
Both parties, franchisor and franchisee, have a separate legal entity.
Nature of the contract between both the parties make them interdependent
01. Forms of Franchising
Business format franchise or trade name franchise Franchisor agrees to allow the franchisee to sell the product or service with the help of a franchise package which contains
all the elements needed to set up and run a business at a profit. These include the brand name, any associated supplies, promotional materials and other forms of support and assistance.
In return franchisee pays an initial sum or fee for the use of service and remits royalties based on sales and profits and
agrees to make contribution for consultancy, training and promotion to maintain standards.
McDonalds vs Abans, KFC vs. Cargills, Burger King vs. Softlogic
Manufacturer/ retailer franchise : Car dealers
Manufacturer/ wholesaler franchise : Coca Cola, Pepsi
Wholesaler/retailer franchise : Spar and Mace
01. Franchising advantages anddisadvantages
Advantages Vehicle for companies seeking rapid
overseas expansion
Entrepreneurs perceive as a secureoption to start up a business
Research supports the survival ofbusiness
Disadvantages Franchisor risks the company reputation
Franchisee has a financial risk
02. Licensing
Licensing is another form of non-equity agreement under which a firm in one
country (the licensor) authorizes a firm in another country (the licensee) to use
its intellectual property (e.g. patents, copyrights, tradenames) in returns for
certain considerations such as royalty payments
Licenses may be granted to individuals, independent companies, subsidiaries of
a multinational etc.
02. Licensing advantages
Advantages Reducing competition by sharing
knowledge Seeking overseas profits without direct
investments Avoiding restrictions on foreign investment
or imports imposed by other countries Recouping some research and
development costs Gaining a share of an overseas market
Disadvantages Owner loss a degree of control over the
asset including the quality of production
Quality may impact the brand name andsales elsewhere
Domination of the licensee may excludethe licensor from the market placeresulting competition where licenseedevelop a compatible product
03. Joint Venture
This is a contractual agreement involving two parties
Or
Jointly owned and independently incorporated business organization
involving more than one organization
Thank You!