What is a business?

• A business is an organized effort by individuals or groups to produce and sell goods or services for profit to satisfy needs and wants.

Producing Goods and Services

• Businesses produce goods and services to meet consumer needs and wants.
• Businesses aim to achieve goals, with profit being the primary one, through the production of goods for sale.

Profit

• Profit is what remains after deducting all business expenses from sales revenue.
• Businesses receive sales revenue from consumers in exchange for products or services.
• Businesses must use money to cover operational expenses.
• A profit occurs when a business's sales revenue exceeds its expenses

Employment

• Employment provides individuals with the means to purchase products, supporting businesses.
• Employed individuals use their earnings to buy goods and services, which stimulates job creation.
• Employment has a positive impact on the economy.

Income

• Income for an individual is the money received for their labor.
• A business's income is the amount earned after covering expenses, representing a return on investment.

Types of Employee Income:

• Wage: Hourly or daily payment for services.
• Salary: Fixed, regular payment (often bi-weekly or monthly).
• Bonus: Extra money as a reward for good performance.
• Overtime: Pay for work outside regular hours, usually at higher rates.
• Commission: Percentage of a sales price for a salesperson's services.
• Fringe benefits: Extra benefits supplementing wages, like a company car or healthcare.

Choice

• Choice is selecting from alternatives, offering consumers freedom and variety.
• Freedom of choice exists when consumers can select from many competitor products.
• Greater business competition leads to greater choice for consumers.

Innovation

• Innovation is creating new or significantly improving a product, service, or process.
• Invention is the development of something new.
• New technologies lead to new products, markets, and opportunities.
• Research and development by business owners produce goods and services that are often taken for granted.

Entrepreneurship and Risk

• Entrepreneurs transform ideas into businesses and are prepared to take risks.
• Entrepreneurs explore untapped markets, which involves uncertainty, innovation, and creativity.
• Entrepreneurs find new ways to promote products, adapt, and diversify.

Wealth

• Increased production leads to greater wealth generation in the economy.
• Individuals operating businesses drive economic growth.

Quality of Life

• Quality of life is an individual's overall wellbeing, combining material and non-material benefits.
• Businesses provide employment, offering income and opportunities for self-esteem.
• Many businesses implement environmentally friendly procedures to address quality of life issues.

Ways to Classify a Business

• Size
• Legal structure
• Industry sector
• Geographic spread

Size Classifications

• Micro business: Fewer than 5 employees, including the owner.
• Small business: 5-19 employees.
• Medium business: 20-199 employees.
• Large business: 200+ employees.
• Small to Medium Enterprises (SMEs): Less than 200 employees and/or less than $10 million turnover.
• SMEs comprise 98% of Australian businesses and employ 7 million people.

Quantitative Measures

• Number of employees
• Number of owners
• Market share
• Legal structure

Qualitative Measures

• Owner makes most decisions.
• Owner provides most capital.
• Little market control
• Independently owned and operated
• Locally based

Geographical Spread

• Local: Serves the immediate area.
• National: Operates within one country.
• Global: Multinational with branches in many countries.

Market Capitalisation

• The total value of a company’s shares of stock.

Industry Sectors

• Primary Sector: Raw materials and natural resources.
• Secondary Sector: Transforms raw materials into finished goods.
• Tertiary Sector: Provides services.
• Quaternary Sector: Processes information and knowledge (e.g., finance, education).
• Quinary Sector: Services traditionally performed at home (e.g., hospitality, childcare).

Legal Structures

• Sole trader
• Partnership
• Private company
• Public company

Public Sector Businesses

• Include central and local government and government-owned businesses.
• The number of government-owned firms has decreased significantly over the last 20 years.
• Examples: Australian Rail Track Corporation Limited, NBN Co, Essential Energy, Defence Housing Australia, Sydney Water, Australia Post.

Public Sector (Government Business Enterprises - GBEs)

• GBEs carry out government policies while delivering essential community services.
• GBEs aim to increase asset value and returns to shareholders (the government).
• Government-appointed boards of directors or management usually control the GBE.
• The government has a strong interest in the performance and financial returns of GBEs.
• GBEs are the largest employers of Australians, but a small proportion of overall businesses.
• GBEs are owned and operated by all levels of government.

Government Enterprises

• Usually government owned and operated.
• The least common type of business (approximately 500 in Australia).
• Examples: Australian Rail Track Corporation Limited, NBN Co, Sydney Water, Australia Post (became public companies in the 1980s to improve efficiency and profitability).

Private Sector Businesses

• Owned by private individuals and firms.
• Include sole traders, partnerships, private limited companies, and public limited companies.

Unincorporated Businesses

• Rely on specific individuals or small groups for survival--no legal separation between owner and the business.
• Owners have unlimited liability.

Incorporated Businesses

• Legally separate from their owners.
• Have limited liability to protect shareholders--investors only lose the amount they invested if the business fails.

Sole Trader

• One owner who: Provides most of the finance, makes all decisions, takes all responsibility.
• Easy to establish, but has unlimited liability.
• Liberating but stressful.

Advantages of Sole Trader

• Low cost of entry.
• Simplest form.
• Complete control.
• Less costly to operate.
• No partner disputes.
• Owner keeps all profits.
• Fewer government regulations.
• No tax on profits, but personal income tax applies.

Disadvantages of Sole Trader

• Personal, unlimited liability for business debts.
• Business ends when the owner dies.
• Difficult to operate if sick.
• Wide variety of tasks.
• Difficult in raising finance for expansion.

Partnerships

• Owned and operated by 2-20 people (generally).
• Can be set up with or without a legally binding agreement.
• Unlimited liability.
• Limited partnerships.

Advantages of Partnerships

• Low startup costs.
• Less costly to operate than a company.
• Shared responsibility and workload.
• Pooled funds and talent.
• Minimal government regulation.
• No taxes on business profits, but personal income tax applies.
• Business can continue after the death of a partner.

Disadvantages of Partnerships

• Personal unlimited liability.
• Liability for all debts, including partner debts.
• Potential for disputes.
• Difficulty in finding a suitable partner.
• Divided loyalty and authority.

Private (Proprietary) Companies

• Small to medium sized.
• 2-50 private shareholders.
• Shareholders can only sell shares to people approved by the business.
• Pty Ltd status with limited liability protection.

Public Companies

• Large businesses listed on the Australian Securities Exchange (ASX).
• At least one shareholder with no maximum limit.
• Anyone can buy or sell shares.
• At least three directors (two must be Australian).
• Ltd status.

Company Advantages

• Easier to attract public finance.
• Limited liability (separate legal entity).
• Can transfer ownership easily.
• Enjoys a long life (perpetual succession).
• Experienced management (board of directors).
• Greater spread of risk.
• Company tax rate lower than personal income tax rate.
• Growth potential legislation allows a company to have only one shareholder and one director.

Company Disadvantages

• Cost of formation.
• Double taxation (company and personal).
• Personal liability for business debts if directors knew of insolvency.
• Must publish a yearly annual report of audited accounts.
• Public disclosure obligations.
• Potential inefficiencies due to size.

Franchise

• A business model where a franchisee leases the name and products from a franchisor.
• The franchisee provides startup money and the franchisor provides: Management skills, training, advertising and marketing, product supplies.
• The franchisee typically pays an ongoing annual fee to the franchisor.

Factors Influencing Choice of Legal Structure

• Size
• Ownership
• Finances

Size Considerations

• Size determines the structure of a business.
• Businesses typically start as sole traders or partnerships.
• Growth may necessitate raising finance through shareholders.
• Rapid growth may prompt seeking company status for limited liability.

Ownership Considerations

• Complete control aligns with sole trader status.
• Shared ownership and responsibility align with partnerships or private companies.
• Public ownership divides shares among thousands of shareholders.
• Original owners must hold over 50% of shares to retain control.

Finance Considerations

• Expansion requires finances for equipment, research, staffing, and market development.
• Sole traders and partnerships may find it difficult to secure finance due to unlimited liability.
• Businesses can seek finance from: Venture capital, Shares (by becoming a private or public company).
• Becoming a public company does not guarantee finance.

Other Considerations

• Legal liability: Protecting owners from personal liability (i.e., becoming a company).
• Tax implications: Owners of companies must pay both personal and company tax.
• Cost and complexity of formation: Sole traders are the simplest to set up, while companies require more cost, regulation, and administration.