What are the different legal forms a business can take and how do they affect liability and control?
The main forms of business (sole trader, partnership, private limited company, public limited company), limited and unlimited liability, the difference between private and public sector, and the implications of becoming a plc.
A focused answer to AQA A-Level Business 3.1, covering the main forms of business, limited and unlimited liability, the difference between the private and public sector, and the implications of becoming a public limited company.
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What this dot point is asking
AQA wants you to describe the main legal forms of business, explain limited and unlimited liability, distinguish the private and public sectors, and analyse the implications of becoming a public limited company. The liability distinction and the trade-offs of flotation are the key examined ideas.
The main forms of business
As a business moves from sole trader through to plc, it gains access to finance and limited liability but loses simplicity, privacy and, eventually, control.
Limited and unlimited liability
Limited liability matters because it reduces the risk of ownership, which encourages people to invest and lets companies raise capital from many shareholders.
Private and public sector
The private sector is the part of the economy owned and run by individuals and shareholders for profit (sole traders through to plcs). The public sector is owned and run by the state to provide services (the NHS, state schools, public service broadcasters), funded mainly by taxation and usually aiming at service provision rather than profit. The two sectors have different objectives, which shapes how each is run and judged.
Implications of becoming a plc
Flotation gives a plc access to large-scale equity finance from the public, a higher profile and the ability for owners to realise share value. But it dilutes ownership and control, exposes the firm to takeover, brings far more regulation, disclosure and scrutiny, and creates pressure for short-term profit and dividends that can clash with long-term plans. It is a major strategic step, worthwhile only when the need for capital outweighs the costs.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20209 marksAnalyse the implications for a growing private limited company of becoming a public limited company (a stock market flotation). (9 marks)Show worked answer →
Set out the benefits and drawbacks of flotation.
Benefits: a plc can raise large amounts of capital by selling shares to the public on the stock market, funding major expansion; it gains a higher profile and credibility; and existing owners can realise the value of their shares. This access to equity finance supports growth without raising gearing.
Drawbacks: ownership is diluted and spread among many shareholders, so the original owners lose some control and risk a takeover; the firm faces far more regulation, disclosure and scrutiny (publishing detailed accounts); and the pressure for short-term profit and dividends from shareholders can conflict with long-term plans. Flotation is also costly. Judgement: flotation suits a firm needing large-scale equity finance and willing to accept lost control and scrutiny; a firm valuing control might stay private. Markers reward developed benefits and drawbacks (capital versus control and regulation) applied to a growing company and a supported judgement.
AQA 20184 marksExplain the difference between unlimited and limited liability. (4 marks)Show worked answer →
Unlimited liability means the owner is personally responsible for all the debts of the business, so if it fails their personal assets (home, savings) can be taken to pay creditors; this applies to sole traders and ordinary partnerships. Limited liability means the owners (shareholders) can lose only the money they invested in the business, not their personal assets, because the company is a separate legal entity; this applies to private and public limited companies.
The key difference is whether the owner's personal wealth is at risk. Limited liability reduces the risk of ownership and encourages investment. Markers reward an accurate definition of each and the explicit contrast over whether personal assets are at risk.
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Sources & how we know this
- AQA A-level Business (7132) specification — AQA (2015)