Transcript 11_bus_1_types_of_businesses_2011

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
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Classification Of Business
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Quaternary
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SOHO
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Quinary
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Medium Enterprises
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Legal Structure
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SMEs
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Sole Trader,
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Large business
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Partnership,
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Local
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Private Company,
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National,
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Public Company,
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Global
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Government Enterprise
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Primary Industry
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Size,
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Secondary Industry
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Ownership,
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Tertiary industry
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Finance
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Quantative
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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
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Businesses come in three different sizes – small, medium and large.
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Measurements used to determine the size of a business:
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The number of employees
The number of owners
Market share
Legal structure
Qualitative descriptions to classify a business as small to medium sized:
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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.
Business by 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:
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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 selfemployment and people retrenched
• 54% have no employees
2.3 Classification
by geographical
spread
Geographical spread
• The presence of a business and the range of its
products across a:
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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
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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 Classification
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 semifinished 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
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The four main legal structure of privately owned businesses are:
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4.
Sole Trader
Partnership
Private Company
Public Company
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Privately owned businesses are further divided into unincorporated and incorporated
businesses.
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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.
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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.
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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
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
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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.
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There is no legal entity.
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Partners have unlimited liability.
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All partners are responsible for the debts of the business even if contracted by other partners.
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There may or may not be a written agreement.
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Limited partnerships
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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
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
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Government enterprises are government owned and operated businesses.
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Examples include Railcorp (formerly State Rail Authority) and Australia Post.
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Referred to as public sector businesses and provide essential community services like
health and education.
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Privatisation is the process of transferring the ownership of a government business to
the private sector.
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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 governmentowned and operated businesses.
• Privatisation is the process of transferring the
ownership of a government business to the
private sector.
Franchising
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A franchise means buying the rights from another business to distribute its product
under its name.
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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.
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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.
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The success rate is nearly three times that of independent businesses.
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It is the area of fastest business growth in Australia.
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Examples Bakers Delight, McDonalds, Angus and Robertson.
Copy advantages and disadvantages of a franchise agreement
Franchise
A franchise means
buying the rights
to use the business
name and
distribute the
goods or services
of an existing
business.
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The
franchisor grants
the rights and
provides the
business structure.
• The franchisee
supplies the startup money, labour
and operates the
franchise
business.
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 business
2. Ownership structure
3. 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.