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Acknowledgements

pg. 4, Reproduced with the permission of Fatface (www.fatface.com); pg. 14, Department of Business, Innovation and Skills:© Crown Copyright; pg. 17, Reproduced with the permission of Honest Burgers (www.honestburgers.co.uk); pg. 27–28, Reproduced with the permission of Sport England (www.sportengland.org); pg. 61, Reproduced with the permission of eMarketer; pg.65, From ‘WhatsApp: the secret weapon for small businesses’, The Telegraph, 29/01/15 (Rebecca Burn-Callendar) © Telegraph Media Group Limited; pg. 88, ONS © Crown Copyright; pg. 89, Trading Economics data © Crown Copyright; pg. 93, Trading Economics data, Source U.S. Bureau of Economic Analysis; p95, World Bank, Global exports 1960-2015; p96, CIA World Factbook pg. 100, Reproduced with the permission of Merrythought Ltd; p120, Ofcom © Crown Copyright; pg. 147, Reproduced with the permission of Warwick Business School; pg. 155, Reproduced with the permission of Center Parcs UK; pg. 221, Reproduced with the permission of Sport England (www.sportengland.org).

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© Malcolm Surridge and Andrew Gillespie

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Introduction

Welcome to your AQA GCSE Business course.

1. What you will study

Your GCSE is divided into six parts which we have presented as separate chapters.

Chapter 1: Business in the real world. This part of the course is designed to introduce you to the subject. It considers the purpose of business activity, the role of business enterprise and entrepreneurship, and the dynamic nature of business. While studying this unit you will encounter the different legal forms a business can take, the goals they set themselves, how they decide where to locate and how they plan their activities. Both this chapter and Chapter 2 relate to the four functional areas of business (business operations, human resources, marketing and finance) that are covered within chapters 3 to 6.

Chapter 2: Influences on business. All businesses are influenced by external factors and this unit considers some of the most important of these, including technology, the economic climate, globalisation and the law.

Chapter 3: Business operations. Discover the different ways that businesses produce goods and services, how they manage their stock and their suppliers and how they attempt to produce high quality products and provide excellent customer service.

Chapter 4: Human resources. Topics within this chapter include how businesses structure their organisations, how they recruit and select new employees and how they motivate and train those employees once they start work.

Chapter 5: Marketing. This chapter encompasses the ways in which businesses identify, understand and target their customers with advertising and other methods of promoting their products. This chapter will help you to understand how businesses discover the needs of their customers using market research.

Chapter 6: Finance. This final chapter will help you to understand how businesses raise the finance they need to establish and expand their businesses. It will also show how businesses manage their cash, calculate their profits (or losses) and use financial data to judge their performance.

2. The benefits of using this book

Each chapter within this book is divided into a number of sections to give you a series of short topics to study. Included throughout are the following:

•  Key terms have been defined to help you to use business terminology to identify and explain business activity as required by the specification.

•  Regular ‘Business insight’ boxes link the theory that you study to examples of actual businesses. It is important that you can see how different businesses are affected by issues and topics from throughout the GCSE course.

•  ‘Maths moment’ features will help you to use numbers effectively. Using quantitative data effectively is an important skill within GCSE Business.

•  The book is illustrated with a large number of pictures and diagrams to help you to understand the subject. Many of these have questions which are intended to make you think more deeply about the issue.

•  ‘Study tips’ give you advice on a range of topics to enhance your understanding of this subject.

•  At the end of each section there are short answer and data response questions. These allow you to test your knowledge and understanding.

•  At the end of each chapter there are further practice questions and some sample answers showing you the ways to tackle (and sometimes how not to tackle) these types of questions.

3. What examinations will you have to take?

Your GCSE course is assessed through two examinations.

Paper 1: Influences of operations and HRM on business activity. This examination is worth a maximum of 90 marks and comprises 50% of your GCSE result. It lasts for one hour and 45 minutes and covers:

•  Business in the real world

•  Influences on business

•  Business operations

•  Human resources

Paper 2: Influences of marketing and finance on business activity. This examination is worth a maximum of 90 marks and comprises 50% of your GCSE result. It lasts for one hour and 45 minutes and covers:

•  Business in the real world

•  Influences on business

•  Marketing

•  Finance

Both examination papers have three sections:

•  Section A: multiple choice and short answer questions worth 10 marks.

•  Section B: a short case study with questions worth approximately 40 marks.

•  Section C: a short case study with questions worth approximately 40 marks.

Good luck with your GCSE Business course.

Malcolm Surridge & Andrew Gillespie

April 2017

1 Business in the real world

The purpose and nature of every business is different. In this chapter, we look at the very beginning of starting a business. We consider the reasons that you might choose to start one, the types of business that exist, setting aims and objectives to measure how successful the business is, and how a business can grow and expand. We also look at how location can affect a business, the different stakeholders that have an interest in the business and the kinds of activities that businesses carry out.

Topic 1.1

The purpose and nature of businesses

There are many different forms of business and many different reasons why businesses exist. In this topic, we will consider why people set up in business and the typical objectives that organisations have. We will also examine the environment in which businesses operate and how this can affect their behaviour.

By the end of this topic, you should know:

•  the purpose of business

•  the reasons for starting a business

•  the basic functions and types of business

•  business enterprise and entrepreneurship

•  the dynamic nature of business.

The purpose of business

A business is an organisation that produces a good or supplies a service. A good is a physical product, such as a car. A service is an intangible item (that is, it is something that you cannot physically touch), such as financial advice or a yoga lesson. A business involves people – sometimes one and sometimes thousands – and aims to provide something that is demanded by others. Businesses provide a range of products for customers. A customer is someone who buys a product. Products are used by consumers. For example, if you buy a mobile phone for yourself, you are the customer and the consumer. If your parents buy it for you, they are the customer and you are the consumer.

Key terms

A good is a physical product, such as a car.

A service is an intangible product (that is, you cannot touch it), such as financial advice or a bus journey.

A customer is someone who buys a product from a business.

A consumer is someone who uses goods and services produced by businesses.

A business is successful if it can meet the needs and wants of customers effectively. A need is a basic human requirement – we need to eat and drink, for example. A want is the desire for a particular product. We need to drink, but we want Coca-Cola. We need to get from A to B, but we want to do so in a Ferrari.

Reasons for starting a business

People who start up their own business are called entrepreneurs. Entrepreneurs are willing to take risks to set up on their own. They see an opportunity and have the determination, motivation and focus to start their own businesses rather than working for someone else. The ability to be an entrepreneur – to take risks to develop a business idea – is known as entrepreneurship.

What are the objectives of entrepreneurs?

There are many reasons why people might want to be entrepreneurs. For example:

•  They want to be their own boss and make their own decisions (rather than being employed by, and reporting to, someone else).

•  They want to keep all the profits of a business for themselves (rather than working for owners who keep the profits) so they earn more money than if they were employed by someone else.

•  They need a job and starting their own business is one way of making sure that they are employed and, hopefully, that they earn money.

•  They have an interest or hobby and this grows into a business.

•  They want to prove something to themselves (and possibly others) by showing they can start a business for themselves. This may give them a sense of satisfaction.

•  They are unhappy with their present job and want to do something different.

•  They want more flexible working hours. They want to be able to work when they want to, rather than having to work the hours that an employer wants them to work.

•  They have spotted a business opportunity and believe they can make profits from providing this good or service.

•  They want to provide a service for others. Some businesses are set up to help other people, for example, a shop set up for and run by the local community or a local centre set up to help the homeless. These are known as social enterprises and are not necessarily profit-making.

Key terms

An entrepreneur is someone who is willing to take the risks involved in starting a new business.

Entrepreneurship refers to the ability to be an entrepreneur – to take risks to develop a business idea.

A social enterprise is a business that is set up to help society rather than to make a profit.

Setting up in business creates many exciting opportunities for people – they can make their own decisions and create something new. If the business is successful, there is likely to be a sense of personal achievement. Establishing a business gives people an opportunity to show their skills and possibly make more money than they could by working for someone else.

Factors of production – land, labour, capital, enterprise

Factors of production are the resources (or materials) that businesses use to provide their goods or services. These include:

•  land – the physical land and the site on which the business is located, and other natural resources a business might use

•  labour – the skills and numbers of employees employed by a business

•  capital – the equipment used to provide the goods or services, such as machinery and equipment

•  enterprise – the skills of the people involved in the business to identify business opportunities and bring together resources to meet these opportunities.

What a business is able to produce will depend on the quantity and quality of its resources and the way in which these resources are combined and managed.

Opportunity cost

The opportunity cost is the sacrifice we make whenever we decide to do anything. If we decide to go out tonight, we sacrifice the work we could have done. If we stay in, we sacrifice the enjoyment of going out. There is always a trade-off when we do anything. Whenever you make a decision, it is important to consider the opportunity cost – what are you giving up? For example, if you decide to set up a business, you may be giving up a more secure income in your existing job. If you decide to invest your savings in a business, then you are not using these savings to earn money, which is known as interest, in the bank.

Key terms

Resources are the inputs that businesses use to provide their goods or services.

An enterprise is another word for a business. It also refers to the skills of the people involved in the business to identify business opportunities and bring together resources to meet these opportunities.

Interest is the money paid by banks as a reward to attract people to save with them.

Business insight

FatFace

Here is a description from the FatFace website of the company’s approach and how it was founded:

‘It was 1988. Two young British guys were skiing in the French Alps, had an idea, and started to talk. What if they started selling tees and sweats, and made enough money to carry on skiing? And what if it was possible to live their dreams by setting up a small business with a big heart?

Their favourite ski run was ‘La Face’ in Val D’Isere, a ‘black-run’ which inspired our company name FatFace. Over 25 years later we still love adventure, love life and have the same strong values. We still make clothes that reflect the happy, healthy and active lifestyles of our customers.’

Source: www.fatface.com

The founders of FatFace set up a business because it was a hobby that they loved and wanted to pursue. Analyse two other reasons why people might set up a business.

(6 marks)

What are the characteristics of entrepreneurs?

There are thousands if not millions of entrepreneurs in any country and so, not surprisingly, the characteristics of these people differ in many ways. However, most entrepreneurs are:

•  Innovative. This means an entrepreneur is good at spotting an opportunity. They can see a problem with the way things are done and can imagine a better way of doing things. They have a vision of how things could be.

•  Risk takers. An entrepreneur takes a risk that their idea is going to work. In reality, many new ideas fail. Setting up a business involves time, money and emotional effort. If you get it wrong, you may have lost your savings and you may feel as if you have failed. So you need to be prepared for this.

•  Hard working and determined. If you are setting up a business, you need to be prepared for it to be a struggle. As a new business, you will not be well known and will probably have to bargain hard to get a good deal with suppliers. You need to work hard to get your business known and, in many cases, it will just be you at the start and so it can be quite exhausting.

•  Organised. Running your own business involves many skills and many decisions. You will often have lots to do and will usually have to be good at meeting deadlines. You will have to organise materials, people, production, orders, deliveries and finances. So you need to be good at managing things.

Study tip

In order to decide whether or not a business is successful, it is always important to know why someone started up the business in the first place. If the original aim of the organisation was to help others, then even if it does not make a profit it may still be a success.

Business insight

Richard Branson

Richard Branson, the founder of Virgin, set up his first business – a magazine called Student – in the 1960s when he was still at school. He used to run it from the school phone box. Since then, he has gone on to create hundreds of businesses under the Virgin name, involving music, nightclubs, trains, planes, taxis, bridal wear, cola, insurance and pensions.

Analyse the characteristics that might explain Branson’s success.

(6 marks)

Types of business and their basic functions

What sectors do businesses operate in?

Whatever you can think of, some business somewhere is probably providing it. There are many different types of business and they can be classified in different ways. For example, some businesses offer physical goods, such as furniture. Others provide a service, such as education. Many businesses provide a combination of the two: we may choose to go to a restaurant because of the atmosphere and environment (a service) as well as the food (a good).

Businesses can also be classified in terms of their stage in the production process:

•  The primary sector is made up of organisations that are at the first stage of production and use raw materials. Farms, oil exploration companies and fishing fleets are primary businesses.

•  The secondary sector is made up of organisations that are at the second stage of the production process. They are involved in using primary resources and converting these into products. Examples of secondary businesses are manufacturers and printers.

•  The tertiary sector is the final stage and is made up of organisations that provide services, for example, fast food stores, estate agents and delivery companies.

Maths moment

About 2 per cent of workers in the UK are employed in the primary sector. About 22 per cent are employed in the secondary sector.

1  What percentage of employees are employed in the tertiary sector?

2  What are the biggest businesses in your area? Are they primary, secondary or tertiary?

The functions of a business

A business transforms resources into outputs. To be successful, it must understand its customers effectively and make sure it provides products that are in demand. It needs to think about the nature of the product, how to promote the benefits of the product to potential customers, what price to set and how and where customers will want to buy it. These activities are all part of the marketing function (see Chapter 5).

The business must produce the good or service. For example, running a hotel involves activities such as taking bookings, cleaning rooms, managing the restaurant, organising check outs. The activities involved in the production of the product are part of the operations function (see Chapter 3).

To provide the product will involve people. In many cases, there may only be one person in the business, but some organisations have hundreds or thousands of people working for them. Managing people (for example, recruiting and training staff and deciding how to reward them) is known as the human resource function (see Chapter 4).

A business will also have to manage money. It may need to raise finance, it will need to monitor what is spent in different parts of the business and it will need to calculate whether the business has enough money. These activities are part of the finance function (see Chapter 6).

Whether the business is small or large and whatever products it provides, it will have marketing, finance, human resource and operations functions.

The dynamic nature of business

The business environment

A business will be affected by changes in the ‘business environment’. This refers to all the factors outside a business that can affect it.

Changes in the business environment can be described under the following headings:

•  Technological change. Technology is changing at a rapid rate. This creates new markets and products. Snapchat is relatively new, for example. Technology also changes the way we shop and how and what we buy. Think of the challenge to hotels provided by AirBnB, which now allows people to search online to find somewhere to stay in someone else’s house or flat so they do not need a hotel. See Topic 2.1 for more on the influence of technology.

•  Economic change. This involves a range of economic factors outside a business, such as the cost of borrowing money from banks (the interest rate), the rate at which prices are increasing (which is called inflation) and the income in the economy (which is called Gross Domestic Product or GDP). The term ‘economic environment’ is sometimes used to refer to these economic factors outside a business (see Topic 2.3).

•  Legal change. These are new laws and regulations (legislation). These may affect costs (for example, by insisting businesses pay a minimum wage to their employees) or demand for a product (for example, by preventing tobacco companies advertising their products). See Topic 2.5 for more about the influence of legislation on business.

•  Environmental expectations. Customers and consumers are increasingly interested in the impact of a business on the environment. What resources is it using? How is it producing the product? How does it transport its product? The impact of the actions of a business can influence whether a customer uses that business or not. Even if demand was not affected, some business people would still be concerned about the environmental impact because it affects what the world will be like for future generations. See Topic 2.2 for more about environmental considerations.

Key terms

Interest rates refer to the cost of borrowing money or the reward for saving money, expressed as a percentage.

Inflation refers to the rate at which prices are increasing. For example, if inflation is 2 per cent, prices are generally growing by 2 per cent that year.

Gross Domestic Product (GDP) measures all the income earned in a country’s economy in a year.

The business environment is constantly changing (that is, it is dynamic). Just look at any newspaper or news site and you will appreciate how much change there is – changes in incomes, changes in the number of people working, new laws, new competitors, and so on. A business has to keep adapting. You may once have made money from selling typewriters, but you would struggle to do so these days. You are unlikely to experience increased demand for cigarettes in the UK and so you would need to look for other opportunities. Businesses cannot stay still. They need to be nimble.

Study tip

Try not to confuse the business environment, which includes legal change, economic change, social and technological change, with environmental issues, which refer to factors such as pollution and global warming.

Business insight

Coca-Cola Zero Sugar

In 2016, Coca-Cola spent around £10 million advertising its Coca-Cola Zero Sugar. The message of its advertising was ‘Tastes more like Coke, looks more like Coke’. Over 4 million samples of the new product were also given away to help launch it.

Zero Sugar has been developed to make the taste even closer to classic Coke than Coke Zero, which it replaced. It is part of a campaign to encourage more classic Coke drinkers to switch to a low- or no-calorie version.

Coca-Cola, along with its soft drink rivals, has now been given an economic incentive to move its consumers over, after Chancellor George Osborne announced the so-called ‘sugar tax’ in the 2016 budget.

The tax charges soft drinks manufacturers a levy (tax) per litre of sugary drink packaged for sale, at two rates. The higher rate includes drinks with more than 8 g of sugar per 100 ml, such as classic Coke. The lower rate covers those with 5–8 g, including mid-calorie version Coke Life. Those under 5 g are exempt.

A growing number of people in society want to reduce their sugar intake but have been reluctant to try a no-sugar option because they do not think it tastes as good as the original.

Analyse the factors in the external environment that have led to the launch of Coca-Cola Zero Sugar.

(6 marks)

Business insight

Analysing trends in society

Recent trends in society that might create market opportunities include:

•  greater interest in the environment

•  greater interest in healthy eating

•  greater interest in personalised services, such as tailor-made holidays or advice on what books you might like

•  more families where both partners go out to work

•  an ageing population.

Analyse how any one of these trends might affect a business.

(6 marks)

Summary

There are many different reasons why people start up in business. Some do it for money, some because they want to achieve something for themselves and some because they want to help society. Ideas come from their own experiences, from things they have seen elsewhere and from problems they want to solve.

Quick questions

  1  State two possible sources of new ideas for a business.

(2 marks)

  2  What is meant by an ‘entrepreneur’?

(2 marks)

  3  Explain one reason why someone might start their own business.

(3 marks)

  4  What is meant by ‘opportunity cost’?

(2 marks)

  5  What is meant by the ‘primary sector’?

(2 marks)

  6  State two possible characteristics of an entrepreneur.

(2 marks)

  7  State two examples of businesses in the tertiary sector.

(2 marks)

  8  State two changes in technology that can affect a business.

(2 marks)

  9  State two changes in the economic situation that can affect a business.

(2 marks)

10  State two factors of production.

(2 marks)

Case study

Elon Musk

Born in 1971, Elon Musk is known as a serial entrepreneur – he just keeps setting up businesses! He began at school selling a computer program he had produced. He went on to set up technology businesses such as Zip2 and X.Com. In 1999, he established PayPal and built this into a very successful business – when it was sold, he earned around $180 million at the age of 32.

In 2002, Musk set up SpaceX aimed at developing space travel to colonise Mars. In 2003, he established Tesla Motors, a producer of electric cars. Both of these projects were initially thought to be uncommercial but are now attracting a lot of interest. Tesla cars are becoming more familiar on the roads and winning many awards for their technology. Meanwhile, the US space agency is using SpaceX to carry space cargo.

Musk keeps looking for new ideas. He is chairman of the solar energy developers Solar City and has published design studies of a solar power ‘hyperloop’ transport system that will provide extremely fast travel. Musk has been named business person of the year by Fortune magazine and, as of 2017, is said to be personally worth over $13.9 billion.

Musk has been described as a disrupter – he likes to challenge things and change them. He says he is simply trying to make things better. Along the way, he has invested all of his money into SpaceX and Tesla – at times, it looked like he would lose it all because the technology was not working. Many thought he was foolish to risk all his wealth, but Musk says that he felt someone had to try it!

1  Identify two reasons for someone setting up their own business.

(2 marks)

2  Explain two possible characteristics of a successful entrepreneur such as Musk.

(4 marks)

3  Analyse the possible reasons why Musk wants to be an entrepreneur.

(6 marks)

4  Evaluate the reasons why a government should help entrepreneurs set up in business.

(12 marks)

Topic 1.2

Business ownership

There are many different types of business in the UK, including sole traders, partnerships and private limited companies. This topic looks at the different forms of business ownership and considers the advantages and disadvantages of each.

By the end of this topic, you should know:

•  what a sole trader is

•  what a partnership is

•  what a private limited company (ltd) is

•  what a public limited company (plc) is

•  what a not-for-profit organisation is

•  the advantages and disadvantages of the different types of business ownership.

Business ownership

Anyone starting up in business needs to think about what type of business they will have in the eyes of the law (that is, what form of business ownership it will have). There are various options, as shown in Figure 1.3.

Sole trader

A sole trader is a form of business that is owned and managed by one person. For example, if you set up your own business fixing people’s computers, you are a sole trader. Setting up as a sole trader is easy. You do not need to register with the government or fill in lots of forms. All you have to do is start trading. This is why it is such a popular form of business and why this method is the one that many famous business people first experienced. Sole traders are owned and managed by the same person, although they may employ other staff.

Key term

A sole trader is someone who sets up in business on his or her own.

Advantages of being a sole trader

•  It is quick and easy to set up as a sole trader. Other forms of business, in comparison, involve registering with the government.

•  You make all the decisions for yourself so you do not need to consult lots of other people. This can mean that decision-making is fast and you can get things done the way you want them.

•  You keep all the profits yourself, so if your business is successful you do not have to share the rewards with other people.

Disadvantages of being a sole trader

•  It can be quite stressful making all the decisions yourself. Some people will find it difficult to cope with this amount of pressure.

•  A sole trader needs to handle all aspects of the business: the finances, the marketing and the running of the business itself. Some people may not be good at all of these things.

•  If the business goes wrong, you have unlimited liability. This means that you can lose everything you own.

•  There is usually a tremendous amount of work to do as a sole trader. For example, when you are working hard to build the business up, it can be difficult to take a proper holiday. If you are ill, the whole business may come to a standstill.

•  If the sole trader dies, the business ends as well, even if he or she has been running the business for many years.

•  As a sole trader, you may find it difficult to raise as much money as you would like in order to get the business going. Sole traders often have to rely mainly on their own finances, or those of friends and family, to set up their business. It may be possible to borrow from a bank but, because so many new businesses fail, banks tend to charge a lot of money in the form of high interest rates on loans.

•  A sole trader business is likely to be small and will not have the power of a large business over other businesses such as those that it buys its supplies from. This may mean higher costs and lower profits.

Key terms

Profit measures the difference between the values of a business’s revenue (sales) and its total costs.

Unlimited liability means that the personal possessions of the owners of a business are at risk if there are any problems. There is no limit to the amount of money the owners may have to pay out.

Partnership

Under the 1890 Partnership Act, a partnership is created when two or more people set up in business to pursue a common purpose, such as profit. For example, a group of designers may set up a studio together, or a group of doctors might set up a practice. Partnerships are usually allowed to have a maximum of 20 partners, although exceptions include solicitors, accountants, auctioneers and estate agents.

Deed of Partnership

When setting up a partnership, the people involved (the partners) are advised to write a legal document called a Deed of Partnership. This sets out the rules of the partnership. The Deed of Partnership will usually include details of:

•  how to divide up profits – for example, this may be related to how much money each partner puts in at the start or how much work they do in comparison to the others

•  how decisions are to be made (voting rights)

•  how to value the business if someone wants to leave

•  how to decide on whether someone else can join the partnership.

Key terms

A partnership occurs when two or more people join together in a business enterprise to pursue profit.

A Deed of Partnership is an agreement between partners that sets out the rules of the partnership, such as how profits will be divided and how the partnership will be valued if someone wants to leave.

The purpose of the Deed of Partnership is to avoid disputes. If there is no Deed of Partnership, the profits must be paid out equally, regardless of how much input each person has had.

Advantages of partnership

•  Several people are involved in a partnership so each one can contribute money. This should mean more funds are available compared with sole traders who may have to rely on their own funds.

•  In a partnership, there are more people involved as owners than there are with a sole trader. Therefore, there can be more people involved with discussing problems and deciding on strategies. This may lead to better decisions being made. The partners can benefit from each other’s experience and insight into problems.

•  Each of the partners can specialise in a particular aspect of the business, which can mean a better and broader service is provided. For example, in a legal partnership someone may focus on company law, someone may deal with consumer law and someone may deal with property law. This can provide specialist knowledge in more areas than a sole trader may be capable of.

•  Partners can cover for each other, for example, if someone is ill or wants a holiday. This can mean that being in a partnership is less stressful than running a business on your own.

Disadvantages of partnership

•  The partners may have different ideas about how to solve a problem. This can lead to disputes. By bringing in partners, the owners are bringing in stakeholders who have a direct role in the business and who will want to express their views.

•  Decisions may be slower than for a sole trader because all the partners are consulted, rather than just making a decision for yourself.

•  The rewards are divided between partners rather than being kept by one person.

•  The partners normally have unlimited liability. Even if a mistake is made by one partner, all the partners must pay the price.

Key term

Stakeholders are individuals and organisations that are affected by, and affect, the activities of a business.

Companies

A company is owned by its investors, who are called shareholders. There are different types of shares, but the most common ones are called ‘ordinary shares’. Owners of ordinary shares have one vote for every share they have. If you have 51 per cent of the shares, for example, you have 51 per cent of the total votes.

Key terms

A company is a business that has its own legal identity. It can own items, owe money, sue and be sued.

A shareholder is a person or an organisation that owns part of a company. Each shareholder owns a ‘share’ of the business.

A company has its own existence in law. This means that it can own things such as land and equipment. It also means that when you, as a member of the public, buy products, you buy them from the company rather than the individuals who own it. By creating a company, the shareholders are showing the difference between what they own as private individuals and what the company owns. This means that they have limited liability. This is very important because it means that people can invest in companies and be fully aware of the most that they can lose if it all goes wrong. Without this, it would be more difficult to attract investors because they would be worried about losing everything they owned if there were problems.

The owners of a company are the shareholders. The people who control the company and make the decisions every day are called managers. In many private limited companies (see below), the shareholders are the managers. However, in public limited companies, the shareholders and managers are often different groups of people and this creates a separation between ownership and control. It is possible that the owners and the managers have different objectives. The managers, for example, may want to invest in long-term projects, such as developing a new product, whereas the owners may prefer to take money out of the business now. This can cause conflict.

Company types

Under the 1980 Companies Act, there are two types of company in the UK: private limited companies (which put ‘ltd’ after their names) and public limited companies (which put ‘plc’ after their names). Both types of company are owned by shareholders and both have limited liability. However, there are differences:

•  A private limited company (ltd) cannot publicly advertise its shares for sale and is often owned by family members. In a private company, it is possible to place restrictions on whom shares can be sold to, for example, in order to keep a business owned by family members.

•  A public limited company (plc) can advertise its shares and can be listed (also called ‘quoted’) on the Stock Exchange. It must have a share capital of over £50,000. In a plc, it is not possible to place restrictions on whom the shares are sold to. This means that, if you own some of the shares of a plc, you can sell them to whoever you want and other people can buy them easily via the Stock Exchange.

A flotation occurs when a private limited company decides to become a public limited company. To do this, shares must be sold to the general public and the firm must meet the regulations of the Stock Exchange.

Key terms

The Stock Exchange is a market for buying and selling shares of public limited companies. Large numbers of shares are being bought and sold all the time.

A flotation occurs when a private limited company (ltd) becomes a public limited company (plc) and has its shares listed on the Stock Exchange.

Maths moment

1  Estimate the total number of businesses in the UK at the start of 2015.

2  Calculate the proportion of businesses in the UK that were companies at the start of 2015. Comment on your findings.

Private limited companies

A private limited company:

•  is owned by shareholders – when a business is starting up, its shareholders tend to be the business founders, although they may bring in outside investors if they need more funding. The shareholders of many private limited companies are family members

•  has ‘ltd’ after its name

•  cannot advertise its shares to the general public – if shares are sold, this will be done privately

•  can include certain restrictions in its Articles of Association to limit who the shares are sold to (for example, only family members). This helps to make sure that one owner of the business does not sell shares to someone the others do not want.

Advantages of setting up as a private limited company

•  Liability is limited. This means that the shareholders’ personal possessions are safe, and can help businesses to gain access to funding from investors. Investors would be unlikely to take the risk of putting their money into a start-up if there was unlimited liability. But with limited liability, they are guaranteed a limit to their losses if things go wrong.

•  For many customers, a company seems to have more status than a sole trader. People assume that a company is better in some way. Setting up as a company may, therefore, be a good marketing move.

•  If the business founders die, the company still exists and whoever owns the shares now continues with the business.

•  Managers can be employed to run the day-to-day business while the owners retain control and the profits are distributed among the shareholders.

Study tip

You might be asked to compare the advantages of one business legal structure with another. Think about:

•  the liability of the business (Is it limited or unlimited?)

•  the control of the business (Do the owners want to keep complete control or are they willing to bring in other people?)

•  the skills and experience required (Do the owners have enough skills or would they benefit from other people’s experience?)

•  whether or not the owners want to work with others.

Disadvantages of setting up as a private limited company

•  Various legal procedures need to be completed, such as registering the company, which take a little time and some money.

•  A summary of the business’s financial accounts must be produced and these have to be available to the general public. In making information available to other people, including competitors, the business will lose some privacy.

•  Accounts must be checked by an independent accountant (called an auditor), which will create additional cost.

•  The business must pay corporation tax (individuals pay income tax) and this may be more than an individual would pay personally.

•  Any additional investors in the business become important stakeholders. For every share they own they will have a vote, and so they have a direct influence on the business. They may not necessarily have the same values and objectives as the original owners. Some entrepreneurs find it difficult to work with other investors in a company as their styles clash.

Public limited companies

A public limited company is one that has shares that are sold to the general public. These shares can be bought and sold easily on the Stock Exchange. The share price changes when there is more or less demand for them.

Advantages of becoming a public limited company

•  A public limited company can advertise its shares to the general public. This means it has access to a greater number of potential investors than a private limited company and therefore it may be possible to raise very large sums of money by selling shares. These could be used to finance expansion.

•  Public companies attract more media coverage because they usually have more shareholders. By becoming a plc, a business is likely to attract more interest from television and newspapers, which provides a good form of cheap publicity.

•  Public limited companies are usually thought of as having more status than private companies (and are often bigger). This can impress customers.

•  Investors may be willing to buy shares because they should be able to sell them later on relatively easily. There are usually many shares in public limited companies and these are traded regularly. So if as an investor you decide you want to sell your shares, you should be able to find someone who wants to buy them.

Disadvantages of becoming a public limited company

•  Although more media coverage can be good, it can also be bad. If a plc makes a mistake or does something wrong, the media are more likely to cover the story than if the business was a private limited company.

•  A plc cannot control who buys its shares, so managers may find that a competitor buys control of the company and takes it over.

•  A plc is more regulated than a limited company – it has more things it must do according to the law. For example, it must produce more detailed information on its finances each year and send it to shareholders. This can be expensive as well as giving information away to potential competitors and the media.

•  When a private company becomes a public limited company, it brings in more outside investors. The original owners may not agree with the views and objectives of the new owners – they may clash when trying to agree what the business should be doing.

Study tip

Private limited companies do not have to become public companies unless they want more investment from outside investors. During the process of flotation, companies have to be sure that there will be demand for their shares at the price they set. This cannot be guaranteed – it depends on what investors think the business will earn in the future.

Business insight

Fitbit

The Fitbit company produces wearable technology. For example, it produces a wristband that monitors how many steps you have taken during the day, how many calories you have burned and how far you have travelled. In 2015, Fitbit sold its shares to the general public to become a public company in the USA.

Fitbit had imagined its shares would sell for between $14 and $16, but when they were put on sale the price went up to $20. Having sold these shares, the company was valued at over $4.1 billion. The funds the company raised from the sale will be used for research into new products. Fitbit made losses for many years, but in 2014 made profits of $131.8 million. In 2015, it sold over 10 million devices.

Analyse two factors that might have determined the price of the shares Fitbit put on sale.

(6 marks)

Share ownership

Many of the shares of public limited companies are owned by financial institutions, such as insurance companies and banks. Only around 14 per cent of plc shares in the UK are owned by individuals. The financial institutions often put pressure on the managers of plcs to pay out a lot of their profits in the short term; this is so that the financial institutions can reward their own owners, but this does mean that the plcs have less funds to invest.

Business insight

Honest Burgers

In 2011, Tom Barton, 29, and Philip Eeles, 32, who were friends from university, joined up with an experienced restauranteur, Dorian Waite, 48, to start a business together. The three of them wanted to create an upmarket burger chain. They spotted that there was a growing demand for ‘premium burgers’, using high-quality ingredients, and decided to target this market segment with their restaurants. The three of them set up Honest Burgers Ltd and within four years had grown their business to ten sites. Sales had grown to £6.9 million by 2015, making it one of the fastest growing companies in the UK. The company’s objective is to continue to grow quickly over the next few years.

Analyse the possible reasons why Tom, Philip and Dorian created a company rather than forming a partnership.

(6 marks)

Maths moment

Look at the data for Honest Burgers in Table 1.4. What is the amount of sales per employee? Use this formula:

Not-for-profit organisations

Not-for-profit organisations are set up to achieve objectives other than profit. For example, a charity may be set up to help the homeless or people abroad after an earthquake or someone might set up a youth club to provide facilities for young people in their area. Not-for-profit organisations will still have to raise funds and invest just like companies. However, the purpose of the business is not to make profit for investors. A not-for-profit organisation often has social objectives – it is set up to help society rather than focusing on profits; any profits made are invested into the business to help society further.

Key term

A not-for-profit organisation is set up to achieve objectives other than profit; for example, a charity.

Which is the right form of business?

The right form of business will depend on the situation of the organisation. For example, when first setting up a business, many individuals will operate as a sole trader. This is because this form of business does not need to be registered and you can simply start trading. At this stage, the entrepreneur probably does not have many assets at risk and protecting these through limited liability is not essential. As the business grows, the owner has more personal assets that could be lost and he or she may want to attract outside investors. At this point, the entrepreneur may want to sell shares to raise finance to help the business grow. To attract investors, limited liability is likely to be important so that those buying shares know there is a limit to their risk.

If the people have social objectives (that is, they want to help society) rather than to make profits, it would make sense to set up as a not-for-profit organisation.

Summary

There are many different legal structures of a business. Each has advantages and disadvantages. For example, a sole trader is easy to set up, but has unlimited liability. A partnership has the benefit of the input of several different people, but there is a danger that they will not agree. A company has limited liability, but has to make information more public. Choosing the right legal structure is an important business decision when starting up.

When a business wants to grow, it may change its status from a private limited company to a public limited company. This has advantages (for example, shares can be sold to the general public) and disadvantages (for example, the business is more vulnerable to takeover). Owners will have to decide whether the benefits of plc status outweigh the disadvantages.

Quick questions

  1  State two reasons why an entrepreneur might want to be a sole trader.

(2 marks)

  2  State two possible problems of being a sole trader.

(2 marks)

  3  What is meant by ‘limited liability’?

(2 marks)

  4  What is a ‘shareholder’?

(2 marks)

  5  State two differences between a private limited company and a public limited company.

(2 marks)

  6  State two advantages of a partnership compared to being a sole trader.

(2 marks)

  7  What is a ‘partnership’?

(2 marks)

  8  State two possible problems of a partnership.

(2 marks)

  9  What is meant by a ‘Deed of Partnership’?

(2 marks)

10  Why might someone buy shares in a company?

(2 marks)

Case study

Snapchat

Snap is the company that owns Snapchat, the picture- and video-sharing app. It is planning to sell its shares to the general public. It is estimated that the company will be worth $25 billion, depending on the price people are willing to pay for the shares.

The founder and Chief Executive Officer Evan Spiegel, 26, is said to be worth $2.1 billion. The company was founded in 2011 and was expected to generate $366.7 million in worldwide revenue from advertising in 2016. In 2015, the company’s total revenue was a fraction of that number at $60 million.

The service, notably popular with younger people, allows users to send pictures and videos of them looking like dogs, zombies or with other strange effects. It has around 58 million users. The Snapchat app is designed so messages delete once they are read or expire. With 10 billion videos being watched every day, the site has seen a 350 per cent increase in use between 2015 and 2016.

In September 2016, the company announced that it was going to expand and launch Spectacles, glasses that can record ten-second clips that can be sent to smartphones. Its first hardware product became available at the end of 2016.

1  What is meant by a ‘private limited company’?

(2 marks)

2  Explain two benefits to Snap of launching products that are not apps.

(4 marks)

3  Analyse the factors that might affect the price of the shares if Snapchat decided to float.

(6 marks)

4  Imagine the managers of Snapchat are considering how to raise funds for investment. Should they:

    •  float the company on the Stock Exchange, or

    •  borrow from a bank?

    Evaluate which option you would choose.

(12 marks)