Lesson 2 of 28
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Types of Businesses

Overview

  • 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
  • Factors influencing choice of legal structure
    • Size, ownership, finance

Size of Business

CharacteristicsSmallMediumLarge
No. Employees> 2020 – 199200 +
OwnershipOwned and operated by few peopleOwned and operated by few people and private shareholdersOwned (usually) by thousands of public shareholders
Legal StructureSole Trader, PartnershipPrivate Company, PartnershipPublic Company
Decision MakingOwner; quick implication of decisionOwner; complex decisions influenced by directorsSlow implication of decision due to layers of management
Finance SourcesOwner savings or loanOwner or shareholder savings or loan; easy access to large loansRetained profit, share sales, and domestic/overseas loans
Marketing ShareSmall local areasMedium; some market dominanceLarge; can dominate market in multiple countries

Geographic Spread

Businesses can act on behalf of the government to provide essential community services. Some organisations that were government enterprises have now been privatised, becoming public companies (Commonwealth Bank of Australia, QANTAS, Telstra).

Industry Sector

Sectors are used to collectively classify businesses involved in similar types of production.

  • Primary: Collection of natural resources and raw materials (coal, wheat, timber)
  • Secondary: Use of raw materials, labour and equipment to create products (furniture, cars)
  • Tertiary: Performing a service for other people
  • Quaternary: Transfer and processing of knowledge and information (education, computing, finance)
  • Quinary: Services that are traditionally performed in the home (hospitality, childcare, cleaning)

Legal Structure

Classification by Legal Structure

UnincorporatedIncorporated
Sole trader, PartnershipPrivate company, Public company

Sole Trader

The owner is regarded to be the same as the business. In the event of the business being sued, that owner will be personally liable for any responsibility and debt resulting.

AdvantagesDisadvantages
– Owner makes all decisions
– Flexibility
– Simple and cheap
– Requires own savings
– Long hours
– Unlimited liability

Partnership

The business is owned by 2-20 partners and is established verbally or by written agreement. Similarly to a Sole Trader structure, liability falls directly on the owners.

AdvantagesDisadvantages
– Business continues with the death of one partner
– Funds and skills can be pooled
– Responsibility is shared
– Possible disputes
– Unlimited liability
– Partners liable for each other’s debts

Private and Public Companies

A Private Company is owned by 1-50 people, known as shareholders. It is an entirely separate entity from its owners, which limits liability.

Similarly, a Public Company is separate from its owners but has shares listed publicly for trading.

AdvantagesDisadvantages
– Easier to attract public finance
– Limited liability
– Experienced management (board of directors)
– Company tax often lower than personal tax
– Long life (lives on after initial owner dies)
– Cost of formation
– Finance report open to the public
– Excessive expansion can create inefficiencies
– Personal liability of owner is aware of inability to pay loans

Choosing a Legal Structure

SizeOwnershipFinance
A growing business may want to choose a different legal structure to gain finance, skills and expertise.The owner may not want to share ownership.Gaining investors from switching legal structures could help the success of the business.