Cambridge IGCSE0450

Classification of businesses

Business Studies 0450 Chapter Notes

What this chapter covers

Classification of businesses - Economic sectors in terms of primary, secondary and tertiary sectorsClassification of businesses - Private sector and public sector
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In this chapter

  1. 1The Three Sectors of Industry
  2. 2Public Sector vs. Private Sector
  3. 3Unincorporated Businesses: Sole Traders & Partnerships
  4. 4Incorporated Businesses: Limited Companies
  5. 5Other Business Models: Franchises & Joint Ventures

1. The Three Sectors of Industry

Businesses can be grouped into three main categories, or sectors, based on the type of activity they are involved in. This is known as the chain of production. The Primary Sector involves extracting raw materials from the earth or sea. The Secondary Sector takes these raw materials and manufactures them into finished goods. The Tertiary Sector provides services to consumers and other businesses. For example, a wooden chair starts with forestry (primary), is built in a factory (secondary), and is sold in a furniture shop (tertiary). In developed economies like the UK or USA, the tertiary sector is the largest, while manufacturing has declined (de-industrialisation). In developing economies, the secondary sector is often growing rapidly as the country industrialises.

Key term

Tertiary Sector: The part of a country's economy concerned with providing services to consumers and other businesses, such as retail, banking, and education.

Examiner insight

Examiners reward answers that use data to support explanations of sectoral change, for example, by calculating the percentage change in employment.

Common pitfall

Confusing the secondary and tertiary sectors. Remember: secondary MAKES a physical product, while tertiary DOES a service.

Fun fact

In the UK, the tertiary sector now accounts for over 80% of total economic output, a massive shift from 100 years ago when agriculture and manufacturing were dominant.

Worked example 16 marks

The table shows employment data for Country X.

Sector% of labour force in 2010% of labour force in 2020
Primary25%15%
Secondary35%30%
Tertiary40%55%

(a) Describe the main changes in the pattern of employment in Country X between 2010 and 2020. [2](b) Explain two possible reasons for the change in the importance of the tertiary sector. [4]

  1. 1

    Part (a): The main changes are a significant decrease in employment in the primary sector (from 25% to 15%) and the secondary sector (from 35% to 30%). There has been a large corresponding increase in the tertiary sector, which grew from 40% to become the largest sector at 55%.

  2. 2

    Part(b) Reason 1: As a country's population becomes wealthier on average, people have more disposable income to spend on services like tourism, restaurants, and financial advice. This increased demand for services creates more jobs in the tertiary sector.

  3. 3

    Part(b) Reason 2: There has been a decline in the manufacturing (secondary) sector, possibly due to competition from overseas where production costs are lower. This leads to job losses in the secondary sector, and displaced workers may move into service sector jobs instead.

Recap

  • The primary sector extracts raw materials (e.g., farming, mining, fishing).
  • The secondary sector manufactures goods and constructs buildings (e.g., car factories, house builders).
  • The tertiary sector provides services (e.g., banking, hairdressing, transport).
  • The Quaternary sector, a sub-group of tertiary, involves knowledge-based services like IT and R&D.
  • Developed economies tend to have a dominant tertiary sector.
  • Developing economies often see growth in their secondary sector as they industrialise.

Quick check

  1. Classify the following businesses into primary, secondary, or tertiary: a coffee farm, a car assembly plant, a supermarket.3 marks
  2. What is the term for the decline in the importance of the secondary sector in a country's economy?1 mark

2. Public Sector vs. Private Sector

Another way to classify businesses is by who owns them. The Private Sector consists of businesses owned and controlled by private individuals or groups. Their main objective is usually to make a profit. Examples include your local newsagent, a large company like Apple, or a partnership of lawyers. In contrast, the Public Sector consists of organisations owned and controlled by the government (at local or national level). Their main objective is to provide essential services to the public, rather than to make a profit. Examples include state schools, the National Health Service (NHS) in the UK, and the police force. Sometimes, governments sell public sector organisations to the private sector, a process known as privatisation.

Key term

Public Sector: The part of the economy controlled by the government, including organisations that provide public services such as healthcare and education.

Examiner insight

When comparing the sectors, clearly link ownership (government vs. individual) to the main objective (service vs. profit) to demonstrate strong understanding.

Common pitfall

Confusing a 'public limited company' (plc) with a 'public sector' organisation. A plc is in the PRIVATE sector; 'public' just means its shares are sold to the public.

Worked example 15 marks

(a) Explain what is meant by a 'private sector' business. [2](b) Give an example of a business you would expect to find in the public sector and explain why its objectives are different from a private sector business. [3]

  1. 1

    Part (a): A private sector business is one that is owned and controlled by private individuals, not by the government. Its primary aim is usually to make a profit for its owners.

  2. 2

    Part(b) Example: A state-funded hospital or a public library.

  3. 3

    Part(b) Explanation: The hospital's main objective is to provide healthcare to all citizens, regardless of their ability to pay. It aims to improve public health and social welfare. This is different from a private hospital (in the private sector), whose primary objective would be to generate a profit for its owners by charging patients for treatment.

Recap

  • The private sector is owned by private individuals and aims for profit.
  • The public sector is owned by the government and aims to provide services.
  • Sole traders, partnerships, and limited companies are all in the private sector.
  • State schools, public hospitals, and the army are in the public sector.
  • Privatisation is the process of moving a business from the public sector to the private sector.

Quick check

  1. Is a company like Coca-Cola in the public or private sector? Explain your answer.2 marks

3. Unincorporated Businesses: Sole Traders & Partnerships

An unincorporated business does not have a separate legal identity from its owner(s). This means the owner and the business are seen as the same thing in the eyes of the law. The two main types are Sole Traders and Partnerships.

A Sole Trader is a business owned and controlled by just one person. They get to keep all the profits but are also responsible for all the decisions and any debts.

A Partnership is owned by 2 to 20 partners, who share the work, the profits, and the decision-making.

The most important feature of both is unlimited liability. This means that if the business fails and has debts, the owners are personally responsible for paying them. They could be forced to sell their personal possessions, like their house or car, to clear the debt. This is a major risk.

Key term

Unlimited Liability: The owner of a business is personally responsible for all of its debts, meaning their personal assets are at risk.

Examiner insight

When asked to advise on business structure, always provide a balanced argument considering both pros and cons before giving a justified recommendation.

Common pitfall

Stating that 'unlimited liability' is a disadvantage without explaining what it means. Always explain that it puts the owner's personal assets (house, car) at risk.

Worked example 16 marks

Aisha is a talented baker who wants to start her own cake business. She is unsure whether to operate as a sole trader or to form a partnership with her friend, Ben, who is good at finance. Advise Aisha on the best option for her. Justify your answer. [6]

  1. 1

    Option 1: Sole Trader. An advantage is that Aisha would be her own boss, make all decisions, and keep 100% of the profits. This gives her full control. However, a disadvantage is that she would have unlimited liability, risking her personal assets. She would also have to manage all aspects of the business herself, which could be stressful.

  2. 2

    Option 2: Partnership with Ben. An advantage is that she could share the workload and benefit from Ben's financial skills. They could also pool their capital to invest more in the business. A disadvantage is that profits would have to be shared. They would also both have unlimited liability for any debts, including debts created by the other partner.

  3. 3

    Advice & Justification: Aisha should consider a partnership. While she has to share profits, Ben's financial skills complement her baking skills, creating a stronger team. They can share the workload and stress. Although unlimited liability is a risk for both, the shared expertise and capital make the business more likely to succeed than if Aisha went it alone. They should create a 'Deed of Partnership' to formalise their arrangement.

Recap

  • A sole trader is a business with a single owner.
  • A partnership is a business owned by 2-20 partners.
  • Both are unincorporated, meaning the business and owner are not separate legal entities.
  • The key feature is unlimited liability, which is a major financial risk for the owners.
  • Sole traders are easy to set up and the owner keeps all profits.
  • Partnerships benefit from shared skills, workload, and capital, but profits must be shared.

Quick check

  1. State two advantages and two disadvantages of being a sole trader.4 marks
  2. What is the legal document that sets out the rules for a partnership called?1 mark

4. Incorporated Businesses: Limited Companies

An incorporated business has a separate legal identity from its owners (the shareholders). This means the business can own assets, make contracts, and be sued in its own name. The most significant advantage of this is limited liability. This means the owners' financial responsibility for the company's debts is limited to the value of their investment (the shares they own). Their personal assets are safe.

There are two main types:

  1. Private Limited Company (Ltd): Shares can only be sold privately to friends, family, and employees. They cannot be advertised for sale to the general public. This is a common structure for medium-sized family businesses.
  2. Public Limited Company (plc): Shares can be advertised and sold to the general public on a stock exchange. This allows them to raise huge amounts of capital for growth and expansion, but they face more regulations and public scrutiny.

Key term

Limited Liability: A legal status where a person's financial liability is limited to a fixed sum, most commonly the value of their investment in a company.

Examiner insight

To get top marks, explain the *implications* of business features. For example, don't just say 'an Ltd can't sell shares to the public', but explain that this 'limits its ability to raise large amounts of capital for expansion compared to a plc'.

Common pitfall

Again, the most common error is confusing a public limited company (private sector) with a public sector organisation (government-owned).

Worked example 15 marks

Hussain Ltd is a private limited company.(a) Explain the term 'limited liability'. [2](b) Identify and explain one feature of private limited companies that makes them different from public limited companies. [3]

  1. 1

    Part (a): Limited liability means that the owners (shareholders) of the company are only liable for the company's debts up to the amount of money they have invested. Their personal assets, such as their house, are legally protected and cannot be used to pay off business debts.

  2. 2

    Part(b) Feature: A key difference is how they sell shares.

  3. 3

    Part(b) Explanation: A private limited company (Ltd) cannot offer its shares for sale to the general public. Shares are sold privately, often to family, friends, or existing owners, and require the agreement of other shareholders. In contrast, a public limited company (plc) can sell its shares on a public stock exchange, making it much easier to raise large amounts of capital from a wide range of investors.

Recap

  • Incorporated businesses have a separate legal identity from their owners.
  • The main advantage of incorporation is limited liability for shareholders.
  • Limited liability protects the personal assets of the owners from business debts.
  • Private limited companies (Ltd) sell shares privately.
  • Public limited companies (plc) sell shares to the public on a stock exchange.
  • A plc can raise more capital but has more legal formalities and public scrutiny than an Ltd.

Quick check

  1. What does the abbreviation 'plc' stand for?1 mark
  2. Explain why the ability to sell shares on the stock exchange is a major advantage for a plc.2 marks

5. Other Business Models: Franchises & Joint Ventures

Beyond the standard ownership structures, businesses can also be organised in other ways.

A Franchise is an arrangement where a successful business (the franchisor) grants a licence to another person or business (the franchisee) to trade using its brand name and business model. The franchisee pays an initial fee and ongoing royalties. In return, they get a proven business idea, training, and marketing support. Examples include McDonald's, Subway, and The Body Shop.

A Joint Venture is when two or more separate businesses agree to work together on a specific project or to create a new business together. They pool their resources and expertise to achieve a common goal. This is often used for large, risky projects or for entering a new foreign market where a local partner provides essential knowledge.

Key term

Franchise: A business model where a franchisor grants a licence to a franchisee to use their brand, products, and business systems in return for a fee.

Fun fact

The first modern business format franchise is often cited as being created by Isaac Singer in the 1850s to sell and repair his sewing machines across the USA.

Worked example 16 marks

Jamal has been made redundant and has £50,000 to invest. He wants to open a coffee shop. He could either start his own independent shop or buy a franchise from a well-known chain like 'Costa Coffee'. Evaluate the advantages and disadvantages for Jamal of buying the franchise. [6]

  1. 1

    Advantage 1: Reduced Risk. The Costa Coffee brand is already well-established with a loyal customer base. This means Jamal is more likely to get customers from day one, reducing the risk of failure that a new independent business faces.

  2. 2

    Advantage 2: Support. The franchisor (Costa) provides training, equipment, marketing materials, and ongoing support. Jamal would not have to figure everything out for himself.

  3. 3

    Disadvantage 1: Cost. Jamal has to pay an initial franchise fee and ongoing royalty payments (a percentage of sales) to Costa. This reduces his profit margin compared to an independent shop.

  4. 4

    Disadvantage 2: Lack of Control. Jamal must follow all of Costa's rules regarding products, pricing, and store layout. He has very little freedom to be creative or adapt the business to his own ideas.

  5. 5

    Evaluation: For Jamal, buying the franchise is likely the safer option. Although profits will be lower and he has less control, the established brand and support system significantly lower the risk of losing his £50,000 investment. For someone new to business, this support is invaluable.

Recap

  • A franchise involves a franchisor licensing their brand to a franchisee for a fee.
  • The franchisee gets a proven business model and support.
  • The franchisor gets rapid expansion with less capital investment.
  • A joint venture is a temporary partnership between two or more businesses for a specific project.
  • Joint ventures allow firms to share costs, risks, and expertise.
  • Joint ventures are common for entering foreign markets or for large-scale engineering projects.

Quick check

  1. Identify one benefit for the franchisor and one benefit for the franchisee in a franchise agreement.2 marks
  2. Why might a car manufacturer form a joint venture to build a factory in a new country?2 marks

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define the term 'secondary sector' and give one example of a business in this sector.2 marks
  2. Explain two differences between a sole trader and a private limited company.4 marks
  3. Explain why a government might choose to keep a service, such as the national railway, in the public sector.4 marks
  4. A partnership of accountants is considering converting the business into a private limited company. Explain two advantages to the partners of doing this.4 marks
  5. Distinguish between a private limited company (Ltd) and a public limited company (plc).5 marks
  6. Analyse two reasons why the tertiary sector has grown in importance in many developed economies.6 marks
  7. Evaluate the decision to buy a franchise as a way of starting a new business.6 marks
  8. Why do you think an entrepreneur might choose to start a business as a sole trader despite the risk of unlimited liability? Justify your answer.6 marks
  9. The table shows the percentage of the workforce in each sector for Country Y. | Sector | 2000 | 2020 | |---|---|---| | Primary | 40% | 20% | | Secondary | 35% | 45% | | Tertiary | 25% | 35% | Analyse the changes in employment and explain what they suggest about the economic development of Country Y.8 marks
  10. The directors of 'Gourmet Foods Ltd', a successful private limited company, want to expand rapidly by opening 50 new stores. They are considering converting to a public limited company (plc) to raise the finance. Do you recommend this course of action? Justify your answer by considering the advantages and disadvantages.10 marks

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