sole traders, partnerships, private limited companies and public limited companies

Resources → Subject Notes → Business Studies → Lesson Plan

1. Understanding Business Activity (Unit 1)

1.1 Purpose and Nature of Business

  • Needs vs. Wants: Needs are essential for survival; wants are desires that can be satisfied by goods and services.
  • Scarcity: Limited resources mean choices must be made – the basis of economic activity.
  • Opportunity Cost: The value of the next best alternative foregone when a decision is taken.
  • Business Activity: The production of goods and services to satisfy wants and needs while making a profit.

1.2 Classification of Businesses

CriteriaPrimarySecondaryTertiary
What is produced?Raw materials (e.g., farming, mining)Manufactured goods (e.g., cars, clothing)Services (e.g., banking, education)
Typical examplesCoal mine, fisheryFactory, constructionHospital, travel agency
  • Private vs. Public sector: Private businesses are owned by individuals or companies; public sector organisations are owned and run by the government.

1.3 Enterprise, Growth and Size

  • Enterprise: The willingness to take risks, innovate and organise resources to create a business.
  • Growth – measured by:
    • Turnover (sales revenue)
    • Number of employees
    • Market share
    • Physical expansion (new premises, new product lines)
  • Reasons for business failure (common AO3 points):
    • Poor cash‑flow management
    • Inadequate market research / wrong product
    • Over‑expansion or under‑capitalisation
    • Bad location, low quality, weak leadership

1.4 Business Objectives & Stakeholder Objectives

  • Typical business objectives (AO1):
    • Profit maximisation (short‑term)
    • Growth (market share, sales, assets)
    • Survival (especially for start‑ups)
    • Improving quality / customer satisfaction
    • Corporate social responsibility (CSR)
  • Stakeholders and their likely objectives:
    StakeholderTypical Objective
    Owners / ShareholdersProfit, return on investment
    ManagersAchieve targets, career progression
    EmployeesJob security, good wages, safe conditions
    CustomersValue for money, quality, service
    SuppliersSteady orders, timely payment
    GovernmentTax revenue, employment, regulation compliance
    Community / NGOsEnvironmental protection, ethical practice

1.5 Assessment Tips (AO1‑AO4)

  • Define key terms (need, want, scarcity, opportunity cost).
  • Use the business activity cycle diagram to show how resources become outputs and income.
  • When answering “why” questions, link objectives to stakeholder needs and to the nature of the sector.
  • Evaluate by weighing short‑term profit against long‑term sustainability or CSR.

2. People in Business (Unit 2)

2.1 Motivation

TheoryKey IdeaFinancial / Non‑Financial Motivators
Maslow’s Hierarchy of NeedsPeople are motivated by a hierarchy from basic to self‑actualisation.Salary (physiological), safe contracts (security), recognition (esteem), career development (self‑actualisation)
Taylor’s Scientific ManagementBreak work into tasks, pay for output.Piece‑rate wages, performance bonuses
Herzberg’s Two‑Factor TheoryHygiene factors prevent dissatisfaction; motivators create satisfaction.Hygiene: good conditions, policies; Motivators: responsibility, achievement, advancement

2.2 Management Functions & Leadership Styles

  • Planning, Organising, Leading, Controlling (POLC) – the core managerial cycle.
  • Leadership styles (AO2):
    • Autocratic – decisions by manager alone.
    • Democratic – staff involvement in decisions.
    • Laissez‑faire – minimal direction.

2.3 Trade Unions and Industrial Relations

  • Trade unions negotiate collective agreements on pay, conditions, hours.
  • Employers may use:
    • Collective bargaining
    • Lock‑outs, strikes (industrial action)
    • Alternative dispute resolution (mediation, arbitration)
  • Legal controls: Trade Union and Labour Relations (Consolidation) Act 1992 (UK) – similar statutes in other jurisdictions.

2.4 Recruitment, Selection and Training

  1. Recruitment methods (AO2):
    • Internal – promotion, transfer, employee referral.
    • External – adverts, recruitment agencies, online job boards, university fairs.
  2. Selection tools:
    • Application forms, CVs, interviews, assessment centres, psychometric tests.
  3. Training & Development:
    • On‑the‑job (coaching, job rotation) vs. off‑the‑job (classroom, e‑learning).
    • Induction for new staff, continuous professional development (CPD) for skill‑upgrading.

2.5 Redundancy, Dismissal and Legal Controls

  • Redundancy – genuine job loss due to reduced demand, automation or restructuring. Requires fair selection criteria and statutory redundancy pay.
  • Unfair dismissal – termination without a fair reason or due process; employees may claim compensation.
  • Key legislation (UK examples):
    • Employment Rights Act 1996 – contracts, notice, redundancy.
    • National Minimum Wage Act 1998.
    • Health and Safety at Work Act 1974.

2.6 Communication in Business

  • Internal communication – memos, intranet, team meetings, briefings.
  • External communication – letters, emails, advertising, social media, press releases.
  • Barriers – language, cultural differences, physical distance, noise, technology failures.
  • IT‑based methods – video‑conferencing, collaborative platforms (Slack, Teams), cloud‑based document sharing.

2.7 Assessment Tips (AO1‑AO4)

  • When describing a theory, give a short definition, then illustrate with a real‑world example (e.g., a fast‑food chain using piece‑rate pay).
  • For “evaluate” questions, weigh the impact of a motivational method on productivity against cost and employee morale.
  • Use the “PEEL” structure (Point, Explain, Evidence, Link) for clear, exam‑style answers.

3. Marketing (Unit 3)

3.1 Role of Marketing

  • Identifies and satisfies customer wants and needs profitably.
  • Creates a competitive advantage through differentiation or cost leadership.

3.2 Market Segmentation, Targeting and Positioning (STP)

Segmentation CriteriaExamples
GeographicRegion, climate, urban/rural
DemographicAge, gender, income, family size
PsychographicLifestyle, personality, values
BehaviouralBenefit sought, usage rate, loyalty
  • Targeting – choose one or more segments that offer the best potential profit.
  • Positioning – craft a clear image of the product in the mind of the target market (e.g., “affordable luxury”).

3.3 Market Research

  • Primary research – surveys, interviews, focus groups, observation. Provides up‑to‑date, specific data but can be costly.
  • Secondary research – published statistics, trade journals, internet sources. Cheaper, but may be outdated or not perfectly relevant.
  • Sampling – random, stratified, convenience. Ensure sample size is large enough for reliability.

3.4 The Marketing Mix (4 Ps)

ProductPricePlacePromotion
  • Features, quality, branding, packaging, warranty.
  • Pricing objectives (profit, market‑share), strategies (penetration, skimming), discounts, credit terms.
  • Distribution channels, logistics, retail formats, e‑commerce.
  • Advertising, sales promotion, public relations, direct marketing, personal selling.

3.5 Evaluating Marketing Decisions (AO3‑AO4)

  • Use a cost‑benefit analysis – compare expected sales uplift with marketing spend.
  • Consider short‑term vs. long‑term effects (e.g., heavy discounting may boost sales now but erode brand value).
  • Assess impact on different stakeholders – customers (value), shareholders (profit), competitors (market pressure).

4. Operations (Unit 4)

4.1 Production Methods

  • Job/Batch production – small quantities, high flexibility (e.g., custom furniture).
  • Mass production – large volumes, low cost per unit (e.g., cars).
  • Continuous production – 24/7 process, often in utilities (e.g., electricity).

4.2 Location Decisions

  • Factors: proximity to market, raw materials, labour, transport links, government incentives, environmental impact.
  • Use a location‑decision matrix** (weighting criteria) to justify choices.

4.3 Quality Management

  • Techniques: Total Quality Management (TQM), ISO 9001, Six Sigma, quality circles.
  • Benefits: reduced waste, higher customer satisfaction, lower re‑work costs.

4.4 Stock Control

MethodKey FeatureAdvantageDisadvantage
Just‑In‑Time (JIT)Materials arrive when neededLow holding costsVulnerable to supply disruption
Economic Order Quantity (EOQ)Calculates optimal order sizeBalances ordering & holding costsAssumes constant demand
ABC AnalysisClassifies inventory (A = high value, C = low)Focuses control on most important itemsRequires accurate data

4.5 Evaluating Operations Decisions

  • Consider cost, quality, speed, flexibility and impact on the environment.
  • Use a SWOT analysis** for a new production method (e.g., adopting robotics).

5. Financial Information and Decision‑Making (Unit 5)

5.1 Sources of Finance

SourceTypeAdvantagesDisadvantages
Owner’s capital / family & friendsEquity (internal)No interest, retains controlLimited amount, may strain relationships
Bank loan / overdraftDebt (external)Fixed repayment schedule, retains ownershipInterest cost, collateral required
Shares (private Ltd / PLC)Equity (external)Large sums possible, spreads riskDilutes ownership, dividends payable
Hire‑purchase / leasingDebt‑likeSpreads cost of equipmentHigher total cost than cash purchase
Government grants / subsidiesNon‑repayableFree capital for specific projectsOften restricted to certain activities

5.2 Key Financial Statements (AO1)

  • Income Statement (Profit & Loss Account) – shows revenue, expenses, profit for a period.
  • Balance Sheet – snapshot of assets, liabilities and shareholders’ equity at a point in time.
  • Cash‑flow Statement – inflows and outflows from operating, investing and financing activities.

5.3 Ratios for Decision‑Making (AO2)

RatioFormulaInterpretation
Gross Profit MarginGross Profit ÷ Sales × 100%How efficiently production converts sales into profit.
Current RatioCurrent Assets ÷ Current LiabilitiesShort‑term liquidity – ability to pay debts.
Return on Capital Employed (ROCE)Profit before interest & tax ÷ Capital Employed × 100%Overall profitability of capital used.
Break‑Even Point (units)Fixed Costs ÷ (Selling Price – Variable Cost per unit)Sales level where profit = 0.

5.4 Evaluating Financial Decisions

  • Use payback period and net present value (NPV) for investment appraisal.
  • Consider risk – e.g., higher interest rates increase debt‑service risk.
  • Balance short‑term liquidity with long‑term profitability.

6. Business Organisation (Unit 6)

6.1 Overview

Business organisations are grouped into un‑incorporated (sole trader, partnership) and incorporated (private limited, public limited). The choice affects legal status, liability, capital‑raising, management and continuity.

6.2 Sole Trader

  • Legal status: No separate legal personality – owner and business are the same.
  • Liability: Unlimited – personal assets at risk for business debts.
  • Capital: Owner’s savings, personal borrowing, or assets.
  • Decision‑making: Owner makes all decisions – fast and flexible.
  • Profit: All profit belongs to the owner (Profit = Revenue – Expenses).
  • Continuity: Ends on death, retirement or decision to cease trading.
  • Regulation: Minimal – only tax, health & safety, and possibly licensing.
  • Examples: Local bakery, freelance photographer, corner shop.

6.3 Partnership

  • Legal status: Un‑incorporated (unless a Limited Liability Partnership is formed).
  • Liability: Unlimited and joint‑and‑several – each partner liable for the whole debt.
  • Capital: Contributions from all partners; can be larger than a sole trader.
  • Decision‑making: Shared; usually set out in a written partnership agreement.
  • Profit sharing: As agreed (commonly in proportion to capital or effort).
  • Continuity: May dissolve if a partner leaves unless the agreement provides for continuation.
  • Regulation: Minimal – similar to sole traders.
  • Examples: Law firms, small accounting practices, family restaurants.

6.4 Private Limited Company (Ltd)

  • Legal status: Separate legal entity – can own property, sue and be sued.
  • Ownership: Shares held by private individuals or other companies.
  • Liability: Limited – shareholders liable only for unpaid amount on shares.
  • Capital: Raised by issuing shares to a limited number of shareholders and/or borrowing.
  • Management: Directors run day‑to‑day; shareholders appoint directors.
  • Profit distribution: Dividends after corporation tax.
  • Continuity: Perpetual – survives changes in ownership.
  • Regulation: Companies Act compliance (annual accounts, filing, audits if thresholds met).
  • Examples: Local manufacturing firms, tech start‑ups before they go public.

6.5 Public Limited Company (PLC)

  • Legal status: Separate legal entity.
  • Ownership: Shares freely traded on a stock exchange; ownership can be widely dispersed.
  • Liability: Limited – shareholders’ liability limited to unpaid share capital.
  • Capital: Can raise large sums by public share issues and borrowing.
  • Management: Board of directors elected by shareholders; professional managers run daily operations.
  • Profit distribution: Dividends after tax; retained earnings may be reinvested.
  • Continuity: Perpetual.
  • Regulation: Strict – audited annual reports, stock‑exchange rules, Companies Act.
  • Examples: British Petroleum (BP plc), Unilever plc.

6.6 Franchise (as a business unit)

  • Legal status: Franchisee operates a separate legal entity (often a sole trader, partnership or Ltd).
  • Ownership: Franchisee owns the outlet; franchisor owns the brand and intellectual property.
  • Liability: Franchisee bears business risk; franchisor’s risk limited to brand reputation.
  • Capital: Franchisee funds start‑up; franchisor may raise capital via its own structure.
  • Advantages: Established brand, proven system, training, marketing support.
  • Disadvantages: Ongoing royalties, limited freedom, strict compliance.
  • Typical sectors: Fast‑food (McDonald’s), retail (Subway), hospitality.

6.7 Joint Venture (JV)

  • Legal status: Can be a separate limited company or a contractual partnership.
  • Ownership: Parent companies own shares in proportion to contribution.
  • Liability: Shared – each party liable only for its contribution unless otherwise agreed.
  • Capital: Cash, assets, technology, expertise contributed by partners.
  • Purpose: Enter new markets, share R&D costs, combine complementary skills.
  • Advantages: Access to resources, risk sharing, faster market entry.
  • Disadvantages: Potential conflict over control, profit sharing, exit strategy.
  • Examples: Sony Ericsson, Airbus.

6.8 Public‑Sector Business Organisations

  • Legal status: Established by statute; may be a public corporation or an agency.
  • Ownership: The state holds legal title to assets.
  • Liability: Government bears financial risk; public not directly exposed.
  • Capital: Funded through taxation, government borrowing, or public‑sector bonds.
  • Examples: BBC, Network Rail, NHS Trusts.

6.9 Comparison of Main Forms

Feature Sole Trader Partnership Private Ltd (Ltd) Public Ltd (PLC) Franchise (unit) Joint Venture Public‑Sector Org.
Legal statusNot separateNot separateSeparate legal entitySeparate legal entitySeparate entity (owned by franchisee)Separate entity or contractual partnershipStatutory body / public corporation
Ownership of assetsOwnerPartners (as agreed)ShareholdersShareholders (public)Franchisee (unit) – brand owned by franchisorParent companies (pro‑rata)State / government
LiabilityUnlimited (personal)Unlimited (joint‑and‑several)Limited to unpaid share valueLimited to unpaid share valueFranchisee bears business risk; franchisor limited to brand reputationShared as per agreementGovernment bears risk
Capital‑raising abilityOwner’s savings / borrowingPartners’ contributions / borrowingPrivate share issue + borrowingPublic share issue + borrowingFranchisee funds own outlet; franchisor raises capital separatelyContributions from each partnerTaxation, government borrowing
Decision‑makingOwner onlyPartners (agreement)Directors (shareholder control)Board of directors (shareholder control)Franchisee runs outlet within franchisor’s systemJoint‑management committee / agreed proceduresGovernment ministers / civil service
ContinuityEnds on owner’s death/retirementMay end if partner leaves (unless agreement)PerpetualPerpetualDepends on franchise agreement (usually long‑term)Usually limited to project life‑spanPerpetual (subject to policy changes)
RegulationMinimalMinimalCompanies Act compliance (annual accounts, filing)Strict – Companies Act + stock‑exchange rulesFranchisor’s brand standards + consumer lawContract law +, if a company, Companies ActPublic‑sector accounting standards, statutory oversight
Typical sectorsRetail, services, tradesProfessional services, small manufacturingManufacturing, tech start‑ups, family businessesLarge‑scale manufacturing, utilities, financeFast‑food, retail, hospitalityR&D, infrastructure projects, international market entryTransport, health, broadcasting

6.10 Practice Question (AO2 / AO4)

Question: A technology start‑up wants to raise £5 million quickly, protect the founders’ personal assets and be able to offer shares to future investors. Which form of business organisation would you recommend and why? Include at least three relevant points from the syllabus in your answer.

Suggested answer structure:

  1. Identify the most suitable form – a public limited company (PLC) (or a private limited company that could later convert to a PLC).
  2. Explain why, using syllabus terminology:
    • Limited liability protects founders’ personal assets.
    • Separate legal entity gives credibility and perpetual existence – attractive to investors.
    • Ability to issue shares to the public (PLC) or to a larger pool of private investors (Ltd) provides the required capital‑raising capability.
    • Regulatory compliance (Companies Act, stock‑exchange rules) signals good governance, reducing investor risk.
  3. Briefly evaluate drawbacks – higher compliance costs, possible loss of control, need for greater transparency.

6.11 Key Points to Remember (AO1)

  1. Unlimited liability = high personal risk; limited liability = risk confined to share capital.
  2. Ownership is linked to legal title – either the individual(s) (un‑incorporated) or shareholders (incorporated).
  3. Separate legal status protects owners but adds statutory obligations.
  4. Capital‑raising potential rises from sole trader → partnership → Ltd → PLC.
  5. Only incorporated forms have guaranteed perpetual existence.
  6. Management shifts from owner‑managed (sole trader, partnership) to director‑managed (Ltd, PLC) and mixed arrangements in franchises/JVs.

6.12 Suggested Diagram

A flowchart showing the hierarchy of business organisations – sole trader → partnership → private limited company → public limited company. Use icons to indicate changes in:

  • Liability (unlimited → limited)
  • Capital‑raising ability (personal → public)
  • Continuity (finite → perpetual)

7. Quick Revision Checklist (All Units)

  • Define key terms: need, want, scarcity, opportunity cost, stakeholder, liability, profit, revenue, break‑even.
  • Recall the four Ps of marketing and give one real‑world example for each.
  • State the four functions of management (POLC) and match a leadership style to each.
  • Identify three sources of finance and classify each as debt or equity.
  • Explain the difference between a private Ltd and a public PLC – focus on share issues and regulation.
  • Be able to calculate and interpret a simple ratio (e.g., current ratio) and a break‑even point.
  • Remember the main advantages and disadvantages of franchising and joint ventures.

8. References to the Cambridge IGCSE Business Studies (0450) Syllabus

The content above aligns with the following syllabus sections and assessment objectives:

  • AO1 – Knowledge and understanding of business activity, people, marketing, operations, finance and organisational forms.
  • AO2 – Application of knowledge to real‑world situations (e.g., case‑study examples, practice questions).
  • AO3 – Analysis of business decisions (e.g., evaluating financing options, marketing mix choices).
  • AO4 – Evaluation of alternatives, weighing advantages and disadvantages, making justified recommendations.

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