Chapter 2
Business structure
1. Explain one difference between private-sector and public-sector organisations. [3]
Private-sector organisations are owned by individuals or shareholders and aim to make a profit.
In contrast, public-sector organisations are owned and controlled by the government and aim to
provide essential services rather than profit.
2. Explain one difference between a sole trader and a private limited company. [3]
A sole trader is owned and controlled by one person, with unlimited liability for debts. A private
limited company is owned by shareholders, has limited liability, and is a separate legal entity
from its owners.
3. Analyse one reason why there is usually a distinction between who owns and who
controls a public limited company. [5]
In a public limited company (PLC), shareholders own the company by purchasing shares, but
they do not manage daily operations. Instead, directors and managers are appointed to make
decisions and run the business. This separation allows shareholders to focus on investment
returns while experienced managers handle operations. However, conflicts of interest may arise
if managers prioritize personal gains over shareholder value, potentially reducing efficiency and
profitability. Clear governance structures help align managerial decisions with shareholder
interests.
4. Explain one benefit for a business of engaging in a joint venture. [3]
A joint venture allows businesses to share resources and expertise to reduce costs and risks.
For example, two companies forming a joint venture to develop new technology can share
research costs and benefit from combined knowledge.
5. Analyse one reason why the directors of a public limited company might decide to
convert the business back into a private limited company by buying back all of the shares.
[5]
Directors may convert to a private limited company to avoid public scrutiny and pressure from
shareholders. Public companies must disclose financial performance and strategic plans, which
competitors can exploit. By going private, directors can focus on long-term growth without
short-term profit pressures. Reduced compliance costs and increased decision-making flexibility
also enhance strategic responsiveness. However, raising capital becomes harder since shares are
no longer traded publicly.
6. Explain one way in which legal identity and continuity help companies to operate
effectively. [3]
A company’s legal identity allows it to own property and enter contracts in its own name.
Continuity ensures that the business continues to exist even if ownership changes, providing
stability and long-term planning.
7. Explain one way in which limited liability makes it easier for companies to raise finance.
[3]
Limited liability reduces investor risk since they can only lose their initial investment. This
encourages more investors to provide funding, increasing the company’s capital base.
8. Analyze one way in which the relationship between ownership and control differs in two
forms of business ownership. [5]
In a sole trader, the owner has full control and makes all decisions directly. In a private limited
company (Ltd), ownership is divided among shareholders, but professional managers handle
day-to-day operations. This separation can lead to conflicts if managers' decisions don’t align
with shareholder interests. However, shareholders can influence decisions through voting rights,
ensuring some control over strategic direction. In contrast, sole traders have direct accountability
but limited expertise.
9. Analyse one reason why the form of business ownership affects a business’s ability to
raise finance. [5]
Public limited companies (PLCs) can raise large amounts of capital by issuing shares on the
stock exchange, giving them access to a wide pool of investors. In contrast, sole traders and
private limited companies rely on personal savings, bank loans, or retained profits, limiting their
growth potential. However, PLCs face higher regulatory costs and shareholder pressure, which
can restrict flexibility in decision-making. Raising capital through shares also dilutes ownership,
potentially reducing managerial control.
10. Explain one reason why an entrepreneur might decide not to take out a franchise
agreement but to establish an independent business instead. [3]
Franchise agreements often require payment of royalties and limit creative freedom. An
independent business allows the entrepreneur to keep all profits and make decisions without
franchisor approval.
11. Analyse one difference between private limited companies and public limited
companies. [5]
Private limited companies (Ltd) restrict share sales to invited investors, allowing greater control
over ownership. Public limited companies (PLC) can sell shares on the stock exchange, raising
larger capital amounts but exposing the business to shareholder influence. While PLCs benefit
from increased funding for expansion, they face more regulation and public scrutiny, potentially
reducing operational flexibility.
12. Explain one key feature of social enterprises. [3]
Social enterprises aim to generate profits to support social or environmental causes. For
example, a recycling business may use profits to fund community cleanup projects.
13. Explain one reason why the owners of a business might decide to establish it as a social
enterprise. [3]
Owners may want to support a social cause while running a sustainable business. A social
enterprise can attract customers and investors who value ethical practices.
14. Define the term ‘cooperative’. [2]
A cooperative is a business owned and run by its members, who share profits and decision-
making equally.
15. Explain one difference between the primary sector and the tertiary sector. [3]
The primary sector involves extracting natural resources (e.g., farming, fishing), while the
tertiary sector provides services (e.g., retail, healthcare).
16. Analyse one reason why an entrepreneur opening a hairdressing business might have a
greater chance of success if they bought a franchise license than if they attempted to
establish an independent business. [5]
A franchise provides a proven business model and brand recognition, reducing the risk of
failure. Franchisees benefit from established customer loyalty, marketing support, and training
programs. The franchisor also provides operational guidance, helping the business to avoid
common mistakes. In contrast, independent businesses face higher risks due to a lack of market
knowledge and support. While franchises involve royalty fees and less creative control, the
reduced startup risk increases the likelihood of long-term success.
ESSAY QUESTIONS
1(a) Analyse two differences between sole traders and limited companies. [8]
One key difference between sole traders and limited companies lies in legal identity. A sole
trader has unlimited liability, meaning the owner and the business are legally the same entity.
This makes the owner personally responsible for business debts. In contrast, a limited company
has a separate legal identity, and the owners (shareholders) have limited liability, protecting
personal assets.
Another major difference is the access to finance. Sole traders often rely on personal savings
or small loans due to their unincorporated status and perceived risk. Limited companies,
however, can raise capital by issuing shares, making it easier to fund growth. This allows them
to attract investors, especially in the case of private or public limited companies.
These differences impact decision-making and business growth. While sole traders have full
control and privacy, limited companies must comply with more regulations, like filing accounts
and appointing directors. The choice depends on the owner's willingness to trade control for
financial backing.
1(b) Evaluate the factors that the owners of a rapidly expanding private limited
company should consider before deciding whether to convert it into a public
limited company. [12]
Converting into a public limited company (PLC) can offer significant advantages, particularly
for a fast-growing business. However, several key factors must be evaluated before making this
decision.
One factor is access to finance (AO1). Becoming a PLC allows a company to sell shares on the
stock exchange, raising large amounts of capital to support expansion (AO2). This could help
fund new operations, enter international markets, or invest in advanced technology.
Another factor is ownership dilution (AO1). Going public means the original owners will lose
some control over the business, as shareholders can influence company decisions and vote at
AGMs. This could change the direction of the company, especially if major shareholders push
different agendas (AO2).
Public scrutiny and costs (AO1) are also important. PLCs face stricter regulations,
transparency, and reporting requirements. There are also significant costs for flotation, legal fees,
and ongoing compliance (AO2). These could outweigh the benefits if the company is not yet
mature enough.
In evaluation (AO3), while the ability to raise substantial finance is attractive, the business
should assess whether it’s operationally and culturally prepared for the loss of privacy and
increased pressure from shareholders. If the company’s growth is sustainable without public
investment, remaining private may offer more control and flexibility. A gradual approach—such
as becoming a larger private limited company first—could balance growth with ownership
retention.
2(a) Analyse two potential benefits to an entrepreneur of setting up a franchised
business. [8]
One benefit is reduced risk. Franchises typically operate under established brand names with
proven business models. This allows the entrepreneur to attract customers more easily compared
to starting a new brand from scratch. It also increases the likelihood of business success due to
access to support and guidance from the franchisor.
Another benefit is training and support. Franchisors often provide training in areas like
operations, marketing, and finance. For entrepreneurs with little experience, this lowers the
learning curve and ensures standardised quality across outlets. It allows the entrepreneur to focus
on managing the business rather than creating systems from the ground up.
These benefits make franchising an appealing option for entrepreneurs looking for a structured,
lower-risk entry into business, especially in competitive sectors like food and retail.
2(b) Evaluate the use of joint ventures by a food manufacturing business
planning to expand sales in other countries. [12]
Joint ventures (JVs) can be a strategic way for a food manufacturer to expand internationally by
sharing resources and market knowledge with a local partner.
One benefit is market access and local expertise (AO1). A JV allows the company to partner
with a local business that understands the legal, cultural, and consumer landscape. This reduces
the risks of market entry and helps tailor products to local tastes (AO2).
Another benefit is risk and cost sharing (AO1). Entering new markets can be expensive and
risky. By forming a JV, both partners share investment costs, operational responsibilities, and
potential losses, making expansion more manageable (AO2).
However, conflict and loss of control (AO1) are possible limitations. Differences in objectives
or management styles between partners may lead to disputes. This could delay decision-making
or damage the brand image if not well managed (AO2).
In evaluation (AO3), joint ventures can be highly effective if both parties have aligned goals
and clear agreements. For a food manufacturer, it's particularly useful in navigating complex
regulations, like food safety standards and import laws. But to succeed, the business must choose
a reliable partner and maintain clear communication. Alternatively, wholly owned subsidiaries
offer more control but involve higher risk and cost.
DATA RESPONSE
a i) Identify one benefit to an entrepreneur of being a sole trader. [1]
A sole trader keeps all the profits made by the business.
a ii) Explain the term ‘partnership’. [3]
A partnership is a type of business ownership where two or more individuals share ownership,
responsibility, and profits. Each partner contributes capital and expertise, and decisions are made
jointly. This structure allows for shared risks and increased access to finance compared to a sole
trader.
b i) In which sector of industry is Joe’s business currently operating? Explain
your answer. [3]
Joe is operating in the secondary sector. This is because he is involved in processing raw
materials (tea leaves and coffee beans) into finished products like packaged tea and coffee for
sale. The secondary sector involves manufacturing and production.
b ii) In which sector of industry is Joe planning to set up his new business?
Explain your answer. [3]
Joe is planning to enter the tertiary sector, as he wants to open cafés and tea shops. This sector
involves providing services directly to consumers, such as food and drink in hospitality settings.
c) Analyse two problems Joe might face in switching from making tea and coffee
products to entering the café and tea shop market. [8]
One problem Joe might face is a lack of experience in hospitality. Although he has experience
in processing and packaging products, running cafés involves customer service, managing staff,
and complying with food safety regulations. This gap in knowledge may lead to operational
inefficiencies and customer dissatisfaction, especially early on.
Another issue could be the financial risk and capital requirements of entering a new market.
Selling the factory may not raise enough capital for purchasing and renovating café locations,
hiring staff, and marketing the new brand. Without sufficient funding, Joe may struggle to offer
competitive services or open in high-traffic locations.
Analysis (AO3): These challenges could delay profitability and increase the chance of business
failure if not properly managed. A lack of knowledge and insufficient capital could erode his
competitive advantage in a new sector.
d) Advise Joe on the most suitable form of business ownership, given that extra
capital will be required. Justify your answer.
[12 marks]
Introduction (AO1 - Knowledge)
Joe is currently a sole trader but needs more capital to shift from manufacturing tea and coffee to
owning cafés and tea shops. He is considering forming either a private limited company (Ltd) or
entering a partnership. This decision must be based on factors such as capital needs, control, risk, and
long-term business goals.
Option 1: Private Limited Company (AO2 - Application)
By becoming a private limited company, Joe can raise capital by selling shares to friends, family, or
investors. This structure gives the business limited liability, which protects Joe's personal assets —
especially important when entering a riskier market like food and beverage retail.
He can still retain control if he holds a majority of shares.
It will enhance the business's credibility when applying for bank loans.
It might be easier to attract new investors or partners in the future if expansion continues.
However, forming an Ltd. involves more legal obligations, including filing accounts with the government
and adhering to company law. Joe would also have to split ownership, which may reduce his autonomy
in decision-making.
Option 2: Partnership (AO2 - Application)
Entering a partnership with a friend who previously owned a shop brings in not only capital but also
relevant experience in the retail sector. This could reduce the risk of failure in a new market.
Workload and decision-making can be shared.
No need for formal incorporation like a limited company.
It can be quicker and less costly to establish than an Ltd.
However, partnerships carry unlimited liability — Joe would be personally liable for debts, which is risky
in a competitive, capital-intensive retail market. Conflicts in decision-making or profit-sharing could also
arise.
Conclusion and Recommendation (AO3 - Evaluation)
Considering Joe’s need for significant extra capital, his lack of experience in the café and tea shop
sector, and the higher financial risk of the new venture, forming a private limited company is the most
suitable option.
This would allow him to raise funds through share capital, limit personal financial risk through limited
liability, and enhance long-term growth potential. He could still bring in his friend as a shareholder or
director to benefit from their experience without exposing himself to the legal and financial risks of a
partnership.
➡️Overall, a private limited company offers the best balance between capital access, control, and
protection.
