IB DP Business Management: What is a business? and Types of business entities – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions follow the IB Business management guide, first assessment 2024, sections 1.1 (What is a business?) and 1.2 (Types of business entities). The content is SL and HL. Every business, person and figure below is invented. Model answers use standard-form definitions and general terms for legal features.

Read the study guide or the revision notes. See also the IB DP Business Management hub and the printable checklist.

Questions

1. Hollin Ridge Growers Cooperative grows apples, presses them into juice, sells the juice in its farm shop, and funds a small team that researches new apple varieties using genetic data. Identify the sector of each of the four activities. [4]

2. (a) Define the term entrepreneur. [2]

(b) Outline two challenges of starting up a business. [4]

3. Eskarra is an invented country with 4,000,000 workers. Employment by sector is: primary 480,000, secondary 1,120,000, tertiary 2,240,000 and quaternary 160,000.

(a) Calculate the percentage of workers employed in the tertiary sector. [2] (b) Calculate the percentage of workers employed in the primary and secondary sectors combined. [2] (c) Explain one way a new business in Eskarra might be affected by the size of the tertiary sector. [3]

4. Distinguish between the private sector and the public sector. [3]

5. Ines Valdry and Tomas Mistlethwaite run a partnership, a bakehouse. Ines invested £90,000 and Tomas £60,000. Their agreement shares profit in proportion to the capital each invested. This year’s profit is £45,000.

(a) Calculate the profit each partner receives. [3] (b) Explain one disadvantage of operating as a partnership rather than as a privately held company. [3] (c) State two features of a partnership. [2]

6. Outline two features of a sole trader. [4]

7. Garnwick Foods is a privately held company with 2,000,000 shares. The founding family holds 1,500,000 of them. The directors propose to become publicly held by selling 1,000,000 new shares at £4 each.

(a) Calculate the money raised, and the percentage of the company the family would hold afterwards. [3] (b) Evaluate whether Garnwick Foods should become a publicly held company. [7]

8. Hollin Ridge Growers Cooperative made a surplus of £36,000. Its rules say 25% is reinvested in the business and the rest is shared equally among its 240 members.

(a) Calculate the payment to each member. [3] (b) Explain one way a cooperative differs from a privately held company. [3]

9. Quorvale Reading Trust is an NGO that supplies books to village schools, funded by donations and grants.

(a) Distinguish between an NGO and a for-profit social enterprise. [3] (b) Explain one challenge the trust may face because of the way it is funded. [3]

10. Dovrenne Metro Link is owned by a regional government. It sells tickets and aims to cover its costs while keeping fares affordable. Explain one way a public sector company differs from a private sector company. [3]

11. Noor plans to open Cavendale Kite Studio, which would sell and repair kites. Start-up costs are £24,000. She has £9,000 of savings. A friend, Elias, offers to join her and invest £8,000.

(a) Calculate the extra finance Noor needs if she starts alone, and if she starts with Elias. [2] (b) Recommend whether Noor should open as a sole trader or in a partnership with Elias. [8]

Answers

1. Growing apples is primary [1]. Pressing them into juice is secondary [1]. The farm shop is tertiary [1]. The genetic-data research team is quaternary [1]. [4] Examiner insight: Classify each activity by what it does, one answer per activity; naming only the firm’s overall sector does not show you can separate the four.

2. (a) An entrepreneur is a person who identifies a business opportunity [1] and organizes resources and bears the risk of loss to exploit it [1]. [2]

(b) First challenge: raising start-up finance [1], because a new business has no trading record, so lenders may see it as risky [1]. Second challenge: early cash flow [1], since the business pays for premises and stock before customers pay it [1]. Competition, regulation and long hours would also fit. [4] Examiner insight: “Outline” asks for a brief account: a named challenge plus one line of detail.

3. (a) 2,240,000 ÷ 4,000,000 × 100 [1] = 56% [1]. [2]

(b) (480,000 + 1,120,000) = 1,600,000 [1]; 1,600,000 ÷ 4,000,000 × 100 = 40% [1]. [2]

(c) A large tertiary sector, 56% of workers, means many people work in services [1], so a new service firm may find skilled staff easily but face many competitors [1]. A manufacturer might find fewer available workers with factory skills, because only 28% work in the secondary sector [1]. [3] Examiner insight: Show the division by the total; in part (c), tie the effect to a figure in the stem.

4. The private sector is made up of businesses owned by private individuals or groups [1]. The public sector is made up of organizations owned and controlled by the government [1]. A distinction needs both sides: private firms are usually run for profit and answer to owners, while public organizations usually aim to provide a service and answer to government [1]. [3] Examiner insight: “Distinguish” asks you to make the difference clear; describing only one side, or using a sentence that fits both sectors, leaves the difference unstated.

5. (a) Total capital = £90,000 + £60,000 = £150,000 [1]. Ines: 90,000 ÷ 150,000 = 60%, so £27,000 [1]. Tomas: 40%, so £18,000 [1]. [3]

(b) In general terms, partners have unlimited liability, so each could be held responsible for business debts beyond what they invested [1], whereas a privately held company’s owners are in general limited to their investment [1]. If the bakehouse owed £60,000 against assets of £42,000, the £18,000 shortfall could fall on the partners’ personal wealth [1]. [3]

(c) Two features, for example: owned by two or more people [1]; decisions and risk are shared, often under an agreement [1]. [2] Examiner insight: A disadvantage is stronger when set against the alternative the question names, with a number from the stem.

6. Feature one: one owner, who keeps all the profit [1] and makes decisions alone [1]. Feature two: unlimited liability in general terms, so the owner’s own possessions could be used to pay debts if it fails [1], and finance is limited to what one person can raise [1]. [4] Examiner insight: Give each feature a short reason or consequence; restating “one owner” in new words adds nothing.

7. (a) Money raised = 1,000,000 × £4 = £4,000,000 [1]. New total = 3,000,000 shares [1]. Family share = 1,500,000 ÷ 3,000,000 = 50%, down from 75% [1]. [3]

(b) In favour: £4,000,000 of new finance, a large sum compared with a private company’s usual sources [1], could fund growth without the interest cost of a loan [1]. Against: the family’s stake falls from 75% to 50%, so it has less control, and any further share issue could remove majority control [1]. A publicly held company must also disclose more information, which is costly and shows competitors its position [1]. Managers may face pressure for short-term returns [1]. Judgement: if the money funds a large, profitable project, going public is justified because the family still keeps 50% [1]; if loans or retained profit can fund growth, staying private protects control, so the decision turns on the funding need [1]. [7] Examiner insight: “Evaluate” asks you to weigh strengths and limitations, so a final judgement that depends on a stated condition from the case usually reads as more convincing than a list of pros and cons.

8. (a) Reinvested = 25% × £36,000 = £9,000 [1]. Shared = £36,000 − £9,000 = £27,000 [1]. Per member = £27,000 ÷ 240 = £112.50 [1]. [3]

(b) A cooperative is owned and run by its members [1], who typically have one vote each regardless of the amount they contribute [1]. A privately held company is owned by shareholders whose voting power usually follows the number of shares held, so control can sit with the largest holder [1]. [3] Examiner insight: A difference is clearest when it contrasts the same feature in both organizations, here how votes are allocated, rather than describing each separately.

9. (a) An NGO is independent of government and does not aim to make profit for owners, so it is non-profit [1]. A for-profit social enterprise, such as a cooperative or a private sector company with a social aim, trades to make a surplus or profit as well as pursuing its purpose [1]. In an NGO any surplus is kept for its mission, while a for-profit form may share profit with owners or members [1]. [3]

(b) The trust depends on donations and grants [1], which may not be renewed, so income is uncertain [1]. This makes it hard to plan long-term, for example committing to supply books to schools for several years [1]. [3] Examiner insight: Link the cause (funding source) to a consequence in the trust’s actual activity.

10. A public sector company is owned by the government [1], so its main aim is to serve the public interest, such as affordable transport, even when this limits profit [1]. A private sector company is owned by private shareholders and usually puts the return to owners first, so it could raise fares or drop unprofitable routes [1]. [3] Examiner insight: Use the stem: referring to affordable fares shows you applied the idea.

11. (a) Alone: £24,000 − £9,000 = £15,000 [1]. With Elias: £15,000 − £8,000 = £7,000 [1]. [2]

(b) Partnership, advantages: the extra finance cuts the amount to find from £15,000 to £7,000 [1], which makes a loan more likely to be approved [1], and Noor gains a second person to share the work and skills [1]. Sole trader, advantages: Noor keeps all profit and all decisions [1], and avoids disagreement with a partner [1]. Partnership, risks: in general terms both would have unlimited liability, so Noor could be answerable for Elias’s decisions [1]. Judgement: a partnership seems better, because over half the shortfall is covered and the finance risk is the key start-up challenge [1], provided they agree profit shares and duties in writing and Noor trusts Elias; if she doubts that, she should open alone and seek a loan or grant for the £15,000 [1]. [8] Examiner insight: A recommendation gains from a stated reason tied to the numbers and a condition that would change it; a choice with no weighing of the alternative reads as description.

Where marks are usually lost

• Giving a sector label but not tying it to a named activity from the stem.
• Mixing up the private/public sectors with the four economic sectors.
• Calculating a percentage without showing the division by the total.
• Listing entity features with no consequence for the owner.
• Describing only one side in a “distinguish” question.
• Treating limited liability as freedom from all loss.
• Calling every social enterprise non-profit, when the guide lists for-profit forms too.
• Writing “evaluate” or “recommend” answers with no judgement.

Next steps

• Revise from the revision notes and re-read the study guide.
• Course pages: the IB DP Business Management hub and the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Does limited liability mean owners can lose nothing? No. Limited liability means shareholders cannot lose more than they invested, but they can still lose the money they put into the business. Treating it as freedom from all loss is a common error.

What are common mistakes on business sectors and entity questions? Students often give a sector label without tying it to an activity in the stem, mix up the private and public sectors with the four economic sectors, list entity features with no consequence for the owner, and calculate percentages without showing the division. Calling every social enterprise non-profit also loses marks.

Which sections of the IB Business Management guide cover business types? Section 1.1 (What is a business?) and section 1.2 (Types of business entities) are the first two sections of Unit 1 in the IB Business management guide, first assessment 2024.

How should you answer a recommend question on choosing a business entity? Compare at least two entity types against the case’s size, finance needs and risk, and give a reasoned judgement. A recommendation with no comparison, or an “evaluate” answer with no conclusion, earns little credit.

Official syllabus

IB Diploma Programme Business management guide, first assessment 2024, published by the International Baccalaureate Organization. Sections 1.1 and 1.2 of Unit 1.