BUSINESS STRUCTURE

ECONOMIC SECTORS/ THE LEVELS OF BUSINESS

Primary Sector
It is the first stage of production. All those businesses which are related with extraction of raw
material from Mother Nature such as mining, fishing, farming, and quarrying are known as
Primary Sector businesses.

Secondary Sector
They convert raw materials into finished or semi-finished goods.
Tertiary sector
Whereas all the businesses which provide services and assist both the primary and
secondary sector businesses can be classified as Tertiary sector businesses. These
include transportation, insurance, hospitals, educational institutes, showrooms etc.

BUSINESS STRUCTURE
Differences between Private and Public Sector

Private Sector
This sector comprises businesses owned and controlled by individuals or groups of
individuals. Such businesses are commonly found in the free market economy. Their main
aim is to make profit through the sale of private goods. Examples of business found in the
private sector include:
i) Sole trader
ii) Partnership
iii) Private Limited Companies
iv) Public Limited Companies
v) Co-operatives
SOLE TRADER
Refers to a business in which one person provides permanent finance and, in return, has full
control of the business and is able to keep all of the profits. It is owned by one person.
Formation: No legal formalities are required
Ownership: owned by one person
Legal status: The business is not a recognised as a legal person. It is referred to as an unincorporated
business
Liability: The owner of the business suffer from unlimited liability. If the business fails the owner may
loose personal possessions (personal property)
Continuity: The business come to an end when the owner dies

Advantages
1 –easy to form (less capital and legal requirements)
2 –owner has direct control of the business (makes decisions that best suit his/her conditions
3 –all profits go to the owner
4 –enjoys major exemptions from Government legislation
5 –no double taxation
6 –has personal contact with both customers and employees
7 –easy to terminate
Disadvantages
1 –unlimited liability
2 –can raise little capital
3 –limited management expertise
4 –poor quality decision making
4 –difficulty in attracting qualified employees 6 –lack of continuity when the owner dies

Partnerships
A business owned by at least two but not more than twenty people. The partners agree to carry on
business together, with shared capital investment and , usually, shared responsibilities. To enter into a
partnership, partners can have a verbal agreement or otherwise write a Partnership Deed/Agreement
Which is a document setting out the following details:

a) amount of capital contributed by each member

b) salaries/wages to be paid to each member
c) rights and obligations of the partners
d) procedure for partnership dissolution) profit/loss sharing ratio
e) Name of firm - includes the name of the business entity.
f) Date of writing - includes simply the date that the contract was written.
g) Duration of partnership
h) Business to be done - includes exactly what will be done in this partnership.

Formation: fewer legal formalities are involved

Ownership: owned by at least two to a maximum of twenty partners
Legal status: The business is not a recognised as a legal person. It is referred to as an unincorporated
business
Liability : The partners suffer from unlimited liability. If the business fails the owner may lose personal
possessions (personal property)
Continuity : The business come to an end when the key partner dies
Tax Issues: it does not pay corporate taxes, but rather the partners who organized the
business pays personal income taxes on the profits made, making accounting much simpler
Advantages
1 –easy to form (same as sole proprietor)
2 –more capital available
3 –diversity of skills and expertise
4 –quality decisions are made
5 –personal contact with employees and clients
6 –risk is spread over a number of people
7 –relative freedom from government control
Disadvantages
1 –unlimited liability i.e all of the owner’s assets are potentially at risk
2 –disagreements may easily lead to winding of the business
3 –all partners responsible for the acts of each other
4 –lack of continuity when the key partner dies or become insane
5 –profit/loss sharing ratio not necessarily equal
6- the partnership often face intense competition from large firms
7- the owner , by taking on a partner, will lose control of the business

Limited companies
Also known as Joint stock companies. These are businesses where a number of owner
(shareholder) pool in their resources to do a common business and to share the profits and
losses proportionally. In a limited company, the debts of the company are separate from those
of the shareholders. the personal assets of shareholders will not be at risk of being seized by
creditors. Ownership in the limited company can be easily transferred.
General features of Joint Stock Companies / limited Companies
1 –separate legal entity
2 –shareholders have limited liability
3 –owners are called shareholders (buy shares)
4 –shareholders receive dividends as payments
5 –the Board of Directors manages the affairs of the company
6 –the company is governed by Memorandum and Articles of Association
7 –shareholders hold Annual General Meetings (AGMs)
7 A share is defined as a certificate confirming part ownership of a company. This certificate also
entitles the shareholder the right to dividends. Shareholder- a person or institution owning shares in a
limited company.

8 Private Limited Companies

Refers to a small to medium-sized business that is owned by shareholders who are often member of
the same family. This company cannot sell shares to the general public. They have two but not more
than fifty shareholders. The right to transfer shares is limited.

Formation: There are complex legal formalities. Two documents should be drafted by the founders
of the company and these documents include the memorandum and articles of association
Ownership: owned by at least two to a maximum of fifty shareholder
Management and Control: it managed and control by the board of directors
Legal status : The business is recognized at law as a legal person. It is referred to as an incorporated
business
Liability: The shareholders enjoy limited liability. If the business fails the shareholders’ personal assets
cannot be taken. They only lose the capital they have invested in the business.
Continuity: There is continuity
Tax Issues: there is double taxation. The shareholders pay tax on their incomes and the
business also pay corporate tax

Advantages
1 –shareholders have limited liabilities
2 –more capital can be raised
3 –greater status than an unincorporated businesses
4 –easy to transform into public limited companies
5 –do not have to publish annual accounts in the press

Disadvantages
1–not easy to form (up to six months)
2–has to fill complex tax forms
3–cannot raise capital through the stock exchange
4- quite difficult for the shareholders to sell shares

a) Public limited companies

-a large business, with the right to sell shares to the general public. The share prices are quoted on the
national stock exchange. They have at least two shareholders to no maximum limit. Shares are freely
transferable. The public can be invited to subscribe to shares and debentures through a prospectus.

Formation: There are more complex legal formalities. Three documents should be drafted by the
founders of the company and these documents include the memorandum of association, articles of
association and the prospectus

Ownership: owned by at least two to no maximum limit of shareholder

Management and Control: it managed and control by the board of directors
Legal status : The business is recognised at law as a legal person. It is referred to as an incorporated
business
 Liability: The shareholders enjoy limited liability. If the business fails the shareholders’ personal assets
cannot be taken. They only lose the capital they have invested in the business.
Continuity: There is continuity
Tax Issues: there is double taxation. The shareholders pay tax on their incomes and the
business also pay corporate tax

Advantages
1 –easy to raise capital through floating shares on ZSE
2 –can operate on a large scale
3 –unlimited life
4 –employees can become shareholders-increases loyalty
5 –managers and directors have room to work independently therefore prove their expertise in their
areas of specialization
6-shareholders enjoy limited liability
Disadvantages
1 –difficult to form
2 –files always open for inspection by members of the pubic
3 –decisions take time to make due to large size of the company
4 –no personal touch between employees and customers
5 –conflict of interest-shareholders are usually interested in expanding the business

5 Co-operatives
-Is an association of persons united voluntarily to meet common economic, social and cultural needs.
Usually members join together to purchase or sell goods that they cannot afford individually.

Main features
1 –formed by people who want to work together
2 –is voluntary
2 –members make equitable contributions
4 –risks and benefits are shared equally
5 –are democratically controlled
6-the name ends with Co-op

Formation
Members should have a common goal. These members will then draft the constitution and the
management committee is elected usually at an annual general Meeting

Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 5
 There are different types of co-operatives:
Housing
cooperative
Retailers'
cooperative Worker
cooperative
Consumers'
cooperative
Agricultural
cooperative

Advantages
• It is easy to form e.g any ten adults form a co-operative
• No legal formalities are involved
• Membership is open to everyone
• Members enjoy limited liability
• Members get goods and services at reasonable prices
• There is continuity
• Surplus is shared amoung members
• State patronage ( government provides special assistance to the co-operatives to
enable them to achieve their objectives successfully
• They are usually tax exempted

Disadvantages
• unable to raise large amount of financial resources
• It is managed by members who may be lacking the required management skills
• Can be affected by conflict since it is an association of people from different social,
economic and academic background
• Absence of rewards discourage the members to put maximum effort in the society

Franchising
Refers to an agreement where one party (the franchisor) grants another party (the
franchisee) the right to use its trade mark or trade name as well as certain business systems.
The franchisee sells the franchisor's product or services, trades under the franchisor's trade
mark or trade name and benefits from the franchisor's help and support.
In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of
the sales revenue.
Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 6
 Contractual Obligation
• A franchise agreement should be drafted and signed by both parties. This is a legal
contract in which the franchisor gives the franchisee the right to use the business’s
trade mark.
• The franchisor is not allowed to open a similar business nearby
• It must specify the franchise fee as well as monthly royalty payment
• The agreement lays out details of what duties each party needs to perform
• It also state the duration of the franchise contract

Advantages to the franchisee

• Franchisee benefit from pre-opening support e.g site selection, design, financing
• Franchisor assist in training staff
• Franchisor advertise goods on behalf of the franchisee ( saves money)
• Franchisee enters into an existing market which increases the chances of business
success.
• Risk is reduced and is shared by the franchisor.
• Relationships with suppliers have already been established.

Disadvantages to the franchisee

• The franchisor might go out of business, or change the way they do things.
• The franchise agreement usually includes restrictions on how you run the business. You
might not be able to make changes to suit your local market.
• The franchisee must pay initial fee and continuing fees to continue to use the trade mark
• The franchisee cannot sell goods from other suppliers
• Breach of contract can result in a penalty charge

Advantages to the franchisor

• It’s a source of income to the franchisor (royalties received)

• Risk of the business is spread amoung different franchisees
• A network of outlets gives the business a far better chance of success
Disadvantages to the franchisor

• Other franchisees could give the brand a bad reputation.

• Franchisor must provide the franchisee with on-going support which then requires

Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 7
 constant research
• Setting up a franchise requires a lot of money

Joint Ventures
It occurs when two or more businesses agree to work closely together on a particular project
and create a separate business division to do so. Joint Venture is not a long term business
relationship but a short term relationship based on a single business project. The business is
not a separate legal entity. Once the joint venture has met it’s goals, the entity ceases to
exist.
Joint Venture Agreement Should cover:

▪ The parties involved

▪ The objectives of the joint venture
▪ Contributions made by each party
▪ Dispute resolution procedure
▪ How the joint venture is terminated
▪ Non-disclosure agreements
▪ Day to day management
Advantages
▪ Provide companies with the opportunity to gain new capacity and expertise
▪ Allow companies to have access to new technology
▪ Access to greater resources, including specialized staff and technology
▪ Sharing of risk with a venture partner
▪
Disadvantages
▪ The business failure of the partner would put the whole project at risk
▪ Styles of management and culture might be so different that the two teams do not
blend well together
▪ The parties don’t provide enough leadership and support in the early stages
▪ Errors and mistakes might lead to one blaming the other for mistakes

Holding Companies
Refers to a business organisation that owns and controls a number of separate
businesses, but does not unite them into one unified company. They are not a
different legal form of business organisation, but they are an increasingly common

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Roots International
GSIS, Imperial International Islamabad Page
Page 8
 way for business to be owned.

Public Sector
Refers to all the businesses that are owned by the government on behalf of the public.
Advantages

• They provide important goods and services at reasonable prices

• Provide employment to the majority
• Implement government policies e.g charge low prices to reduce inflation
• They are a source of income to the government
Disadvantages

• They are inefficient and very wasteful due to the lack of profit motive
• They tend to provide poor quality goods and services due to the absence of stiff
competition
• Lack of motivation amoung workers leads to inefficiency
• They suffer from excessing political interference
Privatisation

involves selling state-owned assets to the private sector

Financial Resources

The main advantage of privatization is to generate financial resources for the government in
order to generate resources disinvestment of public sector enterprises.

Optimum Utilisation of Resources

It has been observed that the public sector has failed in the optimal use of national
resources.
1. Fostering Competition
Most of the public Enterprises enjoy the status of monopoly. It results in inefficiency and
losses. Privatization creates a situation of competition for public Enterprises and they are
forced to improve their efficiency.

2. Reduce Fiscal Burden

Privatization reduces the fiscal burden of the state by relieving it of the losses of the public
enterprise and reducing the size of the bureaucracy.

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Roots International
GSIS, Imperial International Islamabad Page
Page 9
3. Economic Democracy
Privatization helps to control government Monopoly. It helps to attract more resources from
the private sector. It emerges economic democracy by private participation in Economics
sphere.

4. Better Industrial Relations

Privatization may increase the number of workers and the common man who are
shareholders. This could make the Enterprises subject to more public vigilance.

5. Reduction in Political Interferences

The process of privatization reduces political interferences in the public sector enterprises by
giving more representation to the private sector in the management of Public Enterprises.

6. Reduction in Bureaucracy
Public Enterprises become synonyms bureaucracy. They can be made from bureaucracy by
the process of privatization.

7. More Productivity
The private sector can improve productivity by maintaining efficiency in its operations.
Advantages and Disadvantages of Privatization

Disadvantages of Privatisation
1. Problem of Price
The government usually want to sell the least profitable Enterprises, those that the private
sector is not willing to buy at a price acceptable to the government.

2. Opposition from Employees

Disinvestment tends to arise political opposition from employees who may lose their jobs,
3. Problem of Finance
In the developing countries under the developed capital market sometimes makes it difficult
for the government to float shares and for individual buyers to finance the large purchase.
4. Improper Working
The main disadvantage of the private sector is that it has fallen much short of what this
sector is capable of or what it has achieved in some other countries. The private sector is not
interested in cost reduction and quality production.

5. Independence on Government
There has been an excessive Regulation and control of the private sector by the government.
Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 10
 This has prevented and competition from becoming a generalized phenomenon of the
economy.
6. High-Cost Economy
7. Another problem with the private sector is that its cost, in general, are large and the price of
products are unduly high. Concentration of Economic Power

The private sector emerges Monopoly and the concentration of economic power in the hands
of few.The private sector operates on the principle of maximization of the Monopoly profits. It
is harmful to consumers and society as a whole.

8. Bad Industrial Relations

Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 11
Sir Hassan
Roots International
GSIS, Imperial International Islamabad Page
Page 12