1.

2 BUSINESS STRUCTURE
1.2.1 ECONOMIC SECTORS/ THE LEVELS OF BUSINESS
ACTIVITY
-There are millions of businesses around us. Business can be categorised in three broad categories
or stages.

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. Raw materials that are extracted are send to the secondary sector.

Secondary Sector
They convert raw materials into finished or semi-finished goods. All businesses which manufacture
and process the raw materials which can be used by the end consumers are known as Secondary
Sector businesses. These include building, construction, compute assembly, shoes factories, textile
factories etc.
 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.
A business may exist in all the three sectors also. For example. British Petroleum has its own Oil
wells and it extracts raw oil, this is primary sector activity, this oil is converted into petroleum and
other by products. This is secondary business activity. After processing the oil into useable product
BP sells it to end consumers through its network of Petrol pumps. This comes under the tertiary
sector.

1.2.2 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. However the owner may employ
other people. Examples are hair salons, bus operators, grocery stores etc.

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

Tax Issues: it does not pay corporate taxes, but rather the person who organized the business pays
personal income taxes on the profits made, making accounting much simpler

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
5 –difficulty in attracting qualified employees
6 –lack of continuity when the owner dies

2 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 - includes how long the partnership should last. It is automatically
assumed that the death of one of the contracting parties breaks the contract, unless otherwise
stated.
h) Business to be done - includes exactly what will be done in this partnership. This section
should be very particular to avoid confusion and loopholes.

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. As a result,
should the company experience financial distress because of normal business activity, the personal assets
of shareholders will not be at risk of being seized by creditors. Ownership in the limited company can be
easily transferred, and many of these companies have been passed down through generations.

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)

NB: 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

a) 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. The business should submit financial
statements and auditors reports to the Registrar of Companies

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 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 –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

b) 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. Can
only start business after complying with all the requirements of the Companies Act. Annual
accounting reports (financial statements) are supposed to be published in the press. Must keep a
register of investors and directors’ shareholding

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

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. The franchisee owns the outlet they run. But the franchisor keeps control over how products are
marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include: Pizza, Bata, McDonalds, Nandos etc

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 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. An example include Sonny and Ericson
formed Sonny Ericson to produce handsets.

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 specialised 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
 Strategic Alliances
A strategic alliance is an agreement between two companies that have decided to share resources
to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less
permanent than a joint venture. The main purpose is to allow two organisations, individuals or other
entities to work toward common or correlating goals. Unlike a joint venture, firms in a strategic
alliance do not form a new entity to further their aims but collaborate while remaining apart and
distinct.

Examples of Strategic Alliances

An agreement with a Local University- finance is provided by the business to allow new specialist
training courses that will increase the supply of suitable staff for the firm
An agreement with a supplier- to join forces in order to design and produce components and
materials that will be used in a new range of products.
An agreement with the competitor- to reduce the risk of entering a market that neither firm
currently operates in.

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 way for business to be owned.

Family Owned Businesses

Refers to businesses that are actively owned and managed by at-least two members of the same family.
Decision making is influenced by multiple generations of a family related by blood.

Strengths of family business

 Stability- family positions typically determines who leads the business and as a result, there is
longevity in leadership. Family leaders stay usually stay in the positions for many years until a
life event such as illness, retirement or death results in change
 Commitment- since the needs of the family are at stake, there is a greater sense of commitment
and accountability. The family owners often show dedication in seeing the business grow,
prosper and get passed on to future generations. This level of dedication is almost impossible
to generate in non-family firms
 Flexibility- you won’t hear “Sorry but that’s not my job description”. In a family business, family
members are willing to wear several different hats and to take on tasks outside of their formal
job on order to ensure the success of their company.
 Long term outlook- non family firms think about hitting goals this quarter, while family firms
think years, and sometimes decades, ahead. This ‘patience’ and long term perspective allows
for good strategy and decision making
 Decreased costs- family members working at family businesses are willing to contribute their
own finance to ensure the long term success of the organisation. This could mean contributing
capital or taking a pay cut. This advantage comes in handy during economic down turns, where
it is necessary to personally suffer in order for the firm to survive.
 Weakness of family businesses
 Family conflicts- deep seated, long lasting bitter fights and quarrels can affect every single
person within the firm and can draw divisive lines. These conflicts are usually difficult to solve
and result in a premature ending of the business.
 Unstructured governance- governance issues such as internal hierarchies and rules, as well
as the ability to follow and adhere to corporate laws, tend to be taken less seriously at family
businesses. There is little interest in setting clear and formal business practices and procedures
and this situation can lead to inefficiencies
 Tunnel vision- there lack of outside opinions and diversity on how to operate the business.
Family members are given jobs for which they lack the required skills, education and experience.
This has got far- reaching effects on the success of the business.
 Issues of fair remunerations can be ‘a can of worms’- the issue of wages and salaries can
be a highly sensitive subject. The question is how the pie is going to be divided. Paying family
members and dividing the profits amoung them can be a difficult affair. Many people usually
feel that they are underpaid and family members too. We have family members who comments
like this, ‘uncle Jack sits around and gets more than I do’

Public Sector
Refers to all the businesses that are owned by the government on behalf of the public. They can be
district councils or public corporations. They are established by an Act of Parliament. They are corporate
bodies with a separate legal entity -they are managed by a Board appointed by the Minister -the Minister
can be questioned by parliament over activities of the corporation
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

Public Sector and Private Sector contrasted

Usually the aim of public sector business is to provide services to the community. For example if the transport
system is owned by the government and it is running a bus service to an interior village and it is not getting
enough customers, the government might still continue it as its main objective is to provide service and not
to maximise profits. Whereas private sectors business give priority to profits and may end the service if it
does not find it profitable to run the service.
Secondly Public sector strives to create employment whereas Private sectors main aim is to become efficient
and cut cost and in this process they might cut jobs.
Public sector business usually locates in regions where there is underdevelopment so as to create jobs and
income for local population. Private sectors might not keep these things in consideration and will look for
external economies of scale.

Privatisation involves selling state-owned assets to the private sector

Advantages of Privatisation

1. 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.

2. Optimum Utilisation of Resources

It has been observed that the public sector has failed in the optimal use of national
resources. The private sector may success in the optimum use of resources by maintaining
efficiency.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.
8. Reduction in Bureaucracy

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

9. 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,
from politicians who fear short-term unemployment consequence of liquidation of cost
reduction by private owners, from bureaucrats who stand to lose patronage and from those
sections of the public who fear that national assets are being concerned by foreigners, the
rich or a particular ethnic group.

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.
This has prevented and competition from becoming a generalized phenomenon of the
economy.

6. High-Cost Economy

Another problem with the private sector is that its cost, in general, are large and the price of
products are unduly high.
7. 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

An unfortunate aspect of the private sector is the recurrence of industrial disputes which

9. Widespread Sickness

The private sector Industries such as Textiles, engineering, Chemicals, iron, and steel and
people are suffering from the problems of industrial sickness.

1.3 Size of business

The businesses are classified as small, medium and large businesses. Thus the businesses are compared
using their sizes..

Importance of Business Size

Stakeholder Importance
Government -the government may want to give assistance to small firms

-The government may want to charge different tax rates to different firms

Investors -they may want to compare with its close competitors

-they want to know how safe it is to invest in a given business

Customers -customers may prefer to deal with large forms since they are the most
reputable and are less likely to cease production in the near future

Workers -workers also want to be employed in large firms since they are concerned
about job security

Banks They use business size to determine the maximum loan they can give to the
business

1.3.1 Measurements of business size

In the world around us there are some businesses which are small and some are big. But how do we
categorize these businesses as big or small. We can consider the following factors:

 The number of employees: Small business employ fewer workers than large businesses since
they operate on a small scale. European Classifications of business into small , medium and large
firms is shown in the table below