Economic sectors and Legal structures

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Session 3: Economic sectors and Legal structures
(P1- part 2)
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P1: Explain different types and purposes of organisations; public,
private and voluntary sectors and legal structures.
Prepared by: Dr Gilbert Zvobgo
Dr Reza Aboutalebi
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Three Sectors of the Economy
The Economy

Economy of any country has three main sectors. These
three sectors are Private Sector, Public Sector, and Voluntary
(Not-for-profit) Sector. Each of these sectors has its own
sub-sectors or industries.
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 The Private Sector includes businesses owned and
controlled by individuals or groups of individuals. In
most countries, the majority of business activity is in
the private sector.
 The Public Sector includes organisations
accountable to and controlled by central or local
government. These usually include:
 Health and education services
 Defense
 Law and order
 Welfare and social services.
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 The Voluntary Sector includes organisations that are
shaped by group of people who work for free to make
positive and humanitarian changes in local, national or
international communities. Some forms of voluntary
organisations are:
 Charities
 Doctors without Borders
 Local voluntary to help homeless people or animals
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Private
LTD
Public
PLC
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This is one of the common forms of business
organisation. One person provides the
finances and in return, has full control of
the business and is able to keep all the
profits.
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 Easy to set up
 Owner has complete control –not answerable to
anybody else.
 Owner keeps all profits.
 Able to choose times and patterns of working.
 Able to establish close personal relationships
with staff (if any are employed) and customers.
 The business can be based on the interest and
skills of the owner
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 Unlimited liability – all of the owner’s assets are
potentially at risk.
 Often faces intense competition from bigger
firms, for example, food retailing.
 Difficult to raise additional capital.
 Long hours often necessary to make business
profitable.
 Lack of continuity- as the business does not have
separate legal status, when the owner dies, the
business ends too
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Partnerships are agreements between two or
more people to run a business together.
The Deed of partnership establishes the rights
and privileges of the partners. This document
includes issues such as voting rights,
distribution of profits, the management
function of each partner and who has the
authority to sign contracts.
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Advantages of Partnership
 Partners may specialise in different areas of
business management.
 Shared decision making.
 Additional capital injected by each partner.
 Business losses shared between the
partners.
 Greater privacy and fewer legal formalities
than corporate organisations (limited or
cooperative companies)
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 Unlimited Liability for all partners.
 Profits are shared.
 There is, as with sole traders, no continuity and
the partnership will have to be reformed in the
event of the death of one partner.
 All partners are bound by the decision of any
one of them.
 Not possible to raise capital from selling
shares.
 A sole trader, taking on partners will lose
independence of decision-making
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Characteristics of Limited Companies
 Limited Liability
 Legal personality
 Continuity
 Capital is divided into shares
 Companies are run by directors
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 Tend to be relatively small companies.
 Their business name ends in Limited or Ltd.
 Shares can only be transferred privately and all
shareholders must agree to the transfer.
 Private Limited Companies are often family businesses
owned by members of the family or close friends.
 The directors of these companies tend to be
shareholders and are involved in the running of the
business.
 Many manufacturing firms are Private Limited
Companies rather than Sole Traders or Partnerships
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 Shareholders have limited liability.
 More capital can be raised as there are no limits on the
number of shareholders.
 Control of companies cannot be lost to outsiders.
 Business will continue even if one of the owners dies.
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Disadvantages of LTDs
• Profits have to be shared out amongst a much larger
number of members.
• There is a legal procedure to set up the business. This
takes time and costs money.
• Firms are not allowed to sell shares to the public. This
restricts amount of capital that can be raised.
• Financial information filed with the Registrar can be
inspected by any member of the public. Competitors
could use this to their advantage.
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 A plc first must get permission to start its Initial
Public Offering. Then should publicly sale its
shares on the Stock Exchange.
 A plc cannot begin trading until it has completed
these tasks and has received at least 25% payment
for the value of shares.
 It will then receive a Trading Certificate and can
begin operating.
 The shares will be quoted on the Stock Exchange
 The Stock Exchange is a market where shares are
bought and sold.
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Advantages of PLCs
Huge amounts of money can be raised from
the sale of shares to the public.
Production costs may be lower as firms gain
‘economies of scale’.
Because of their size, a PLC can sometimes
dominate the market.
It becomes easier to raise finance as
financial institutions are more willing to
lend to PLCs.
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Disadvantages of PLCs
•Setting up costs can be very expensive.
•Since anyone can buy shares, it is possible for an
outside interest to take control of the company.
•All company accounts can be inspected by member
of the public.
•Because of their size they cannot always deal with
customers at a personal level.
•The way they operate is controlled by various
company acts which aims to protect shareholders.
•There is separation of ownership and control which
might lead to the interest of owners being ignored to
some extent.
•PLCs can be inflexible due to their size.
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An organization which is owned and run jointly
by its members, who share the profits or
benefits.
Features
 All members can contribute to the running of
the business, sharing the responsibilities, work
load and decision making.
 All members have one vote at important
meetings.
 Profits are shared equally among members.
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Disadvantages
 Poor management skills
unless professionals are
employed.
 Capital shortages because
no sale of shares to the
non-member general public
is allowed.
 Slow decision making if all
members are to be
consulted
Advantages
 Lower cost for buying in bulk
 Working together to solve
problems and make
decisions.
 Good motivation of all
members to work hard as
they will benefit from shared
profits.
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The Public Sector is made up of organisations which
are owned and controlled by central or local
government or public corporations. They are funded
by government and in some cases from their own
trading ‘incomes’ such as NHS, BBC, TFL
Attention: Public Limited Companies (PLC) is one form
of Private Sector organisation. So, a PLC has nothing
to do with Public Sector.
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