Primary sector
Extracts, grows or collects natural resources. Examples include farming, fishing, forestry, mining and oil extraction.
Cambridge International AS & A Level Business · 9609 · AS Level
1.2 Business Structure
This topic explains how businesses are classified by economic sector and ownership, why public and private sectors differ, and how legal structure affects control, risk, finance, decision-making and growth.
Exam-focusedOwnership comparisonsInstant-feedback questions
What you need to know
For high marks, learn the characteristics of each business structure, but also be able to explain why one form may be more suitable than another in a particular context. Ownership questions often require comparison rather than a simple list of advantages and disadvantages.
High-grade habit: link legal structure to the business situation. Consider the amount of finance required, desired control, willingness to share profits, liability, speed of decision-making, continuity, growth plans and the owners’ attitude to risk.
Subtopics
These follow the textbook table of contents. Select a subtopic to jump directly to it.
1.2.1
Economic sectors
Primary, secondary, tertiary and quaternary sectors
Businesses can be classified according to the type of activity they carry out. As an economy develops, employment and output often move away from extracting raw materials towards services and knowledge-based activities.
Secondary sector
Manufactures or constructs products using raw materials and components. Examples include car production, food processing and construction.
Tertiary sector
Provides services rather than physical goods. Examples include retailing, transport, banking, insurance, tourism and healthcare.
Quaternary sector
A knowledge-based part of the service sector relying heavily on specialist skills and information, such as research, software, consultancy and data services.
Example: cocoa farming is primary activity; turning cocoa into chocolate is secondary activity; selling the chocolate in a supermarket is tertiary activity; research into a new production process is quaternary activity.
Exam link: do not assume one sector is “better”. Sector importance depends on development, resources, technology, skills and demand. A resource-rich economy may still have a large primary sector while a highly developed economy may have a much larger service sector.
Private sector and public sector
Private sector
Businesses owned by private individuals or organisations. They commonly aim to earn profit, grow and satisfy customers, although objectives vary.
Public sector
Organisations owned or controlled by government. They may pursue social or strategic objectives as well as financial ones.
NationalisationThe transfer of a business from private ownership to government ownership.
PrivatisationThe transfer of a government-owned organisation into private ownership.
Merit goodsGoods or services, such as education or healthcare, whose wider benefits may be underestimated by individual consumers.
Why governments may provide goods and services
- Strategic importance: areas such as defence, energy or transport may be considered too important to leave entirely to private providers.
- Universal access: government may want essential services available even where provision is not profitable.
- Social benefits: services such as health and education can benefit society beyond the person consuming them.
- Employment or regional policy: governments may support activity in areas where private businesses would otherwise reduce operations.
Why the balance between public and private sectors changes
| Reason for a larger private sector | Reason for a larger public sector |
|---|---|
| Profit incentives may encourage efficiency, innovation and responsiveness to customer demand. | Government may prioritise social welfare and access rather than profitability. |
| Private owners may have a strong incentive to control costs and improve quality. | Some services may be unprofitable but still socially necessary. |
| Competition can increase choice and pressure businesses to improve. | Government ownership may be used to prevent exploitation or protect strategic services. |
| Privatisation can reduce direct government involvement in running businesses. | Nationalisation can increase government control over important industries. |
Evaluation point: whether private or public ownership is preferable depends on the objective. Private ownership may strengthen efficiency and customer responsiveness, while public ownership may be more suitable where universal access, national security or social welfare is the priority.
1.2.2
Business ownership
The legal form of a business affects who owns it, who controls decisions, how profits are distributed, how finance can be raised and how much personal risk the owners face.
Sole traders
A sole trader is a business owned by one person. The owner may employ workers, but the owner remains responsible for the business and usually makes the key decisions.
Advantages
- Easy and relatively inexpensive to establish.
- Owner keeps the profit.
- Fast decisions with no need to consult partners or shareholders.
- Direct contact with customers can support flexibility and personal service.
Disadvantages
- Finance can be limited.
- The owner carries the workload and responsibility.
- Long hours and limited holidays may create stress.
- The owner normally has unlimited liability.
Unlimited liabilityThe owner is personally responsible for business debts, so personal assets may be at risk if the business cannot pay what it owes.
Example: a self-employed graphic designer may value independence and quick decisions, but expansion could be difficult if the owner cannot raise enough finance or manage a larger workload alone.
Partnerships
A partnership is owned by two or more people who share responsibility for the business. Partnerships are common in professional services such as law, accountancy and medicine.
Advantages
- More people can contribute finance.
- Workload, ideas and responsibility can be shared.
- Partners can bring different specialist skills.
- Partners can cover for each other during illness or holidays.
Disadvantages
- Profits must be shared.
- Partners may disagree about priorities or strategy.
- One partner’s actions can affect the others.
- Many partnerships involve unlimited liability.
A deed of partnership can reduce uncertainty by setting rules about profit sharing, voting, dispute resolution and what happens when a partner leaves.
Worked example: five partners agree to share profit equally. Annual profit is $240,000.
$240,000 ÷ 5 = $48,000 per partner.
Companies and incorporation
A company has a legal identity separate from its owners. The process of formally creating the company is called incorporation. The owners are shareholders, and each share represents part-ownership of the business.
Limited liabilityShareholders can normally lose the money they invested in the company, but their personal possessions are protected from the company’s debts.
Limited liability makes investing more attractive because potential losses are capped. It also makes it easier for companies to raise finance by selling shares. In return, companies face more legal and reporting requirements than sole traders.
Share ownership example: a company has 250,000 shares and an investor owns 400.
(400 ÷ 250,000) × 100 = 0.16% ownership.
Private limited companies and public limited companies
| Feature | Private limited company | Public limited company |
|---|---|---|
| Name | Often shown with Ltd. | Often shown with plc. |
| Share ownership | Shares are privately owned and transfer can be restricted. | Shares can be offered more widely and are easier to buy and sell. |
| Raising finance | Can sell shares privately, but access to investors is more limited. | Can access a much larger pool of potential investors. |
| Control | Owners can usually retain closer control over who becomes a shareholder. | Ownership can become more dispersed and takeover risk can be higher. |
| Disclosure and regulation | More formal reporting than a sole trader, but generally less public scrutiny than a plc. | Greater disclosure, regulation and public scrutiny. |
Exam judgement: becoming a plc may make sense when a company needs substantial finance for expansion, but it can bring extra reporting costs and a loss of control. A family-owned business may prefer to remain private even if this limits access to capital.
Franchises
A franchise is an arrangement in which a franchisor allows a franchisee to use its brand, products and business system in return for fees and usually ongoing payments.
For the franchisee
- Established brand and proven business model.
- Training, systems and continuing support.
- Collective purchasing and marketing power.
- Usually lower risk than creating an unknown brand from scratch.
- Initial and continuing fees reduce profit.
- Less independence because operating rules must be followed.
- Poor performance by other franchisees can damage the shared brand.
For the franchisor
- Receives franchise fees and ongoing income.
- Can expand rapidly using franchisees’ capital.
- Franchisees may be highly motivated because they own their outlets.
- Harder to maintain consistent quality across many outlets.
- A weak franchisee can damage the brand.
- Support, monitoring and training create costs.
Worked franchise example: revenue is $650,000 and normal operating costs are $420,000. The franchise agreement charges a $12,000 annual fee plus 2% of profit after the fee.
Profit before percentage charge = $650,000 − $420,000 − $12,000 = $218,000
2% charge = $4,360
Final profit = $213,640.
Co-operatives
A co-operative is owned and run for the benefit of its members. Members normally have democratic control, often using one-member-one-vote rather than voting power based on capital invested.
Employee co-operative
Workers own the business and share in decision-making and rewards. This can increase commitment but can make decisions slower when views differ.
Community co-operative
Local members organise a business or service for community benefit, such as preserving a shop or service that might otherwise close.
Retail co-operative
Independent retailers collaborate to improve buying power, branding or marketing while retaining a degree of independence.
Joint ventures
A joint venture occurs when businesses collaborate on a particular project or activity while remaining separate organisations. It can be especially useful when entering a foreign market or sharing the cost and expertise of research.
Potential benefits
- Share skills, finance, technology and market knowledge.
- Spread risk and cost.
- Gain local knowledge and contacts in an overseas market.
- Collaborate without fully merging the businesses.
Potential problems
- Disagreement over control or priorities.
- Conflict over profit sharing and each partner’s contribution.
- Different organisational cultures may make cooperation difficult.
- Ending the venture can be complicated.
Social enterprises
A social enterprise trades like a business but has a social or environmental purpose at the centre of its objectives. It may aim to create jobs, support disadvantaged groups, improve a community or address an environmental problem. Profit can still matter because surplus may be needed to finance the organisation’s mission and future growth.
Example: a recycling enterprise might charge customers for collection services, employ people who face barriers to work and reinvest much of its surplus into training and environmental projects.
Evaluation point: success for a social enterprise should not be judged only by profit. Financial sustainability matters, but social impact, reach, employment created or environmental improvement may be equally important.
Changing legal structure as a business grows
A business may change its legal form as its needs change. A sole trader might become a private limited company to gain limited liability and access additional share capital. A private company might later become public to access a wider investor base and make its shares more easily traded.
Sole traderSimple, full control, unlimited liability
→Private companyLimited liability, private share ownership
→Public companyWider access to investors, greater scrutiny
Changing structure is not automatically an improvement. Owners must compare the benefits of finance and limited liability with additional regulation, reporting costs and possible loss of control.
Choosing the most suitable ownership structure
| Factor | Why it matters |
|---|---|
| Finance required | Larger projects may need access to investors beyond one owner or a small partnership. |
| Control | An entrepreneur may prefer sole ownership if retaining control is more important than raising large amounts of finance. |
| Liability | High-risk activities may make limited liability particularly valuable. |
| Skills and workload | Partners or co-owners can bring expertise and share responsibilities. |
| Growth objectives | Rapid expansion may favour structures that make external finance easier. |
| Social purpose | A co-operative or social enterprise may suit organisations whose objectives go beyond owner profit. |
| Need for an established model | A franchise may suit an owner who values support and a recognised brand more than complete independence. |
1.2 revision checklist
Distinguish primary, secondary, tertiary and quaternary activities.
Explain why sector importance changes as economies develop.
Distinguish public and private sector organisations.
Explain nationalisation, privatisation and merit goods.
Assess advantages and disadvantages of sole traders.
Assess advantages and disadvantages of partnerships.
Explain unlimited and limited liability.
Distinguish private limited and public limited companies.
Explain how franchises work for both franchisee and franchisor.
Explain features of co-operatives, joint ventures and social enterprises.
Explain why a business might change legal structure as it grows.
Choose and justify a suitable ownership structure in context.
Questions open in a pop-up. Each answer is marked immediately, with an explanation so you know why it is correct or incorrect.