Chapter 6 - Business structure

Business Structure Notes

The Public Sector

• Definition: Organizations owned and run by the government, crucial for providing essential services.

• Economic Role: Significant contributor to the UK economy with over £450 billion spent annually. The NHS is the largest entity, employing a vast workforce.

• Public Goods: Goods and services that would not be profitable for the private sector, ensuring certain necessities like street lighting and defense are provided.

  • Features:

    • Non-excludability: Benefits cannot be withheld from non-payers (e.g., street lighting).

    • Non-rivalry: One person's benefit does not reduce another's (e.g., justice in law courts).

• Merit Goods: Goods like education and healthcare, provided by both sectors. Governments ensure adequate provision to combat underconsumption.

  • Positive Externalities: Benefits extend beyond the individual to society (e.g., educated individuals contributing to the economy and reduced crime rates).

  • Funded by General Taxation: Consumers do not pay directly but fund these services through taxes.

• Primary Focus: Addressing societal needs rather than wants, ensuring fairness and economical efficiency.

The Private Sector

• Definition: Comprises businesses operated by individuals or shareholders aimed primarily at profit.

• Objectives of Private Businesses:

  • Profit Maximization: Central goal, measuring success by returns on investments.

  • Ethical Considerations: Some businesses prioritize sustainability and ethical practices, which may reduce profits.

  • Increasing Shareholder Value: Focus on raising dividends and share prices, often tied to management bonuses.

  • Survival: Critical during startup and economic downturns; many businesses face early failure rates.

  • Gaining Market Share: Businesses invest in marketing to establish stronger brand recognition.

Different Business Structures

Sole Traders

• Features:

  • Owned by one individual, straightforward to establish with minimal legal setup.

  • Limited capital access, as funding often relies on personal savings.

  • Unlimited liability: Business debt can impact personal assets (e.g., home).

• Advantages:

  • Simplicity and control over decisions.

• Disadvantages:

  • Heavy reliance on personal ability, higher risk due to potential debts.

Partnerships

• Definition: Joint ownership typically among 2 to 20 partners, governed by a Partnership Agreement.

• Advantages:

  • Shared skills and capital, reducing individual pressure.

• Disadvantages:

  • Unlimited liability for debts, potential for disputes, dissolution upon partner's death.

Limited Companies

• Types: Private Limited (Ltd) and Public Limited (PLC).

• Features:

  • Incorporation: Legal entity separate from owners, offering limited liability.

  • Private Limited Companies: Shares cannot be sold publicly, retains control among existing shareholders.

  • Public Limited Companies: Shares traded publicly, allows for substantial capital generation.

• Advantages:

  • Limited liability, continuity, easier access to funding.

• Disadvantages:

  • Increased operational costs, public financial reporting requirements.

Not-for-Profit Organizations

• Definition: Focused on social, environmental, or ethical goals rather than profit maximization.

• Types Include:

  • Charities: Raise funds for specific causes; may operate retail shops for additional funding.

  • Cooperatives: Owned by members, profits shared as dividends, democratic decision-making.

  • Social Enterprises: Business models focused on solving social issues with profits reinvested into social aims (e.g., Jamie Oliver's '15' restaurants).

Discussion Themes

• Evaluate the necessity of a public sector in a competitive private market.

• Consider the primary motivations behind prioritizing profits in business.

• Discuss the feasibility and competitiveness of co-operatives in the current economy.

• Analyze the implications of unlimited liability for sole traders' financial risk.