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
| Characteristics | Small | Medium | Large |
|---|---|---|---|
| No. Employees | > 20 | 20 – 199 | 200 + |
| Ownership | Owned and operated by few people | Owned and operated by few people and private shareholders | Owned (usually) by thousands of public shareholders |
| Legal Structure | Sole Trader, Partnership | Private Company, Partnership | Public Company |
| Decision Making | Owner; quick implication of decision | Owner; complex decisions influenced by directors | Slow implication of decision due to layers of management |
| Finance Sources | Owner savings or loan | Owner or shareholder savings or loan; easy access to large loans | Retained profit, share sales, and domestic/overseas loans |
| Marketing Share | Small local areas | Medium; some market dominance | Large; 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
| Unincorporated | Incorporated |
| Sole trader, Partnership | Private 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.
| Advantages | Disadvantages |
| – 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.
| Advantages | Disadvantages |
| – 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.
| Advantages | Disadvantages |
| – 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
| Size | Ownership | Finance |
| 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. |