Unit 1:

• Business

  An organisation that exists to provide goods and services on a commercial basis to customers
• Goods

  • Physical or tangible products (e.g. consumer electronics, industrial components, cars)
• Services

  • Intangible products (e.g. insurance, dental services, cleaning)
• Customers

  Individuals (buying on their own behalf or for households), businesses or other organisations
• Why businesses exist

  They are formed by entrepreneurs and are subsequently developed if they manage to get beyond the survival stage
• Reasons businesses exist

  • To earn a return for the business owners, with the potential for profit being a key motive for entrepreneurial activity
  • Other potential business objectives
• Transformation process

  1. Taking resource inputs and transforming them into goods and services

  2. Where value is added to inputs to create outputs
• Transformation process examples

  • Accountancy: People, Knowledge turned into professional advice
  • Restaurants: People, Ingredients, Buildings, Value added during cooking and through customer service
  • House-building: Land, People, Capital, Building process (design, implementation)
• Role of entrepreneurs

  • Spot business opportunities
  • Take (calculated) risks in order to gain possible future returns
  • Act as a catalyst for the creation & growth of new business enterprises
• Adding value

  The process of creating value by transforming the inputs into business activity so that the value of what is created is greater than the costs involved
• Enterprise

  A process whereby business opportunities are identified and exploited for commercial gain
• Unincorporated businesses

  The owner is the business - no legal difference, Owner has unlimited liability for business actions (including debts)
• Unlimited liability

  Business owner/s is personally responsible for the debts and liability of the business, If the unincorporated business fails, the owners are liable for the amounts owed
• Sole traders

  Unincorporated businesses where the owner is the business
• Owner

  The business
• Unlimited liability

  The owner is personally responsible for the business actions (including debts)
• Most unincorporated businesses operate as sole traders
• Incorporated

  There is a legal difference between the business (company) and the owners
• Company

  Has a separate legal identity
• Owners (shareholders)

  Have limited liability
• Most incorporated businesses operate as private limited companies
• Unlimited liability

  A crucially important characteristic of unincorporated businesses
• If the unincorporated business fails, the owners are liable for the amounts owed
• Sole trader

  An individual owning the business on their own
• A sole trader can also employ people, but those employees don't share in the ownership of the business
• A sole trader has unlimited liability
• Disadvantages of operating as a sole trader

  • Full personal liability - "unlimited liability"
  • Harder to raise finance - sole traders often have limited funds of their own and security against which to raise loans
  • The business is the owner - the business suffers if the owner becomes ill, loses interest etc.
  • Can pay a higher tax rate than a company
• Limited liability

  An important protection for shareholders in a company - shareholders can only lose the value of their investment in the share capital of the company
• Limited liability does not protect against wrongful or fraudulent trading or when directors give personal guarantees
• Separate legal identity

  The reason why limited liability arises for shareholders - the shareholders are not the same as the business
• Advantages of operating as a limited company

  • Limited liability - protects the shareholders
  • Easier to raise finance - both through the sale of shares and also easier to raise debt
  • Stable form of structure - business continues to exist even when shareholders change
• Disadvantages of operating as a limited company

  • Greater administration costs
  • Public disclosure of company information
  • Directors' legal duties
• Public company

  A more specialist type of limited company where shares may be quoted and traded on a public stock market
• Public companies are subject to significantly greater regulation in terms of public disclosure of financial and other information
• A relatively small number of companies are owned or controlled by the Government
• There are many more organisations that provide goods and services that are owned and operated by public bodies
• Shares

  May be quoted and traded on a public stock market (but don't have to be)
• Public companies

  • Have substantially more shareholders when traded on a stock market
  • Are subject to significantly greater regulation in terms of public disclosure of financial and other information
• Examples of companies owned or controlled by the Government

  • RBS (nationalised during the banking crisis)
  • Network Rail
• Not-for-profit organisations

  Businesses that trade in order to benefit the community, with social aims as well as trying to make money