Forms of business ownership: sole traders, partnerships, private and public limited companies, and not-for-profit and public-sector organisations; limited and unlimited liability; incorporation; and the factors affecting the choice of legal structure.

What this theme is asking

Eduqas expects you to know the main legal forms a business can take, the crucial difference between limited and unlimited liability, what incorporation means, and the factors that drive the choice of structure. This explains why a start-up is usually a sole trader and why a growing firm often incorporates, and it links directly to finance, risk and growth.

Unincorporated businesses

A sole trader is a business owned and run by one person. It is the simplest and cheapest form, with few legal formalities, full control for the owner and privacy of accounts. But the owner has unlimited liability, can find it hard to raise finance, bears all the risk and workload, and the business ends if they stop trading.

A partnership is owned by two or more people who share capital, decisions, profits and (usually) unlimited liability, governed by a partnership agreement (a deed). It brings more capital, shared workload and a wider range of skills than a sole trader, but partners share profits, can disagree, and each is liable for the others' business actions.

Incorporated businesses

A private limited company (Ltd) is owned by shareholders whose shares are sold privately (often family or invited investors), not on a public exchange. It gives limited liability, easier access to finance than a sole trader, and continuity, while keeping control within a small group.

A public limited company (PLC) can sell shares to the public on a stock exchange, raising large amounts of capital. This funds large-scale growth and raises the firm's profile, but a PLC faces the most regulation and disclosure, risks loss of control (anyone can buy shares, raising the threat of takeover), and faces pressure from shareholders for short-term returns. A flotation, where a company first sells shares to the public, marks the move from Ltd to PLC.

Not-for-profit and the public sector

Not all organisations aim to maximise private profit. Not-for-profit organisations include charities (which pursue a social purpose and reinvest any surplus) and social enterprises (which trade commercially but reinvest most profit into a social or environmental mission). The public sector comprises organisations owned by the state, such as the NHS or state schools, funded mainly by taxation and run to provide a service rather than to profit. Their objectives (welfare, access, value for money) differ from those of private firms, which affects how their performance is judged.

Factors affecting the choice of structure

The right legal form depends on:

• Liability and risk. The more the owner has to lose, the stronger the case for limited liability.
• Finance needed. Bigger funding needs push towards companies, which can issue shares.
• Control. A sole trader keeps full control; selling shares dilutes it.
• Size and growth plans. Small, simple ventures suit sole trader status; ambitious growth suits incorporation.
• Costs and admin. Companies face more set-up cost, regulation and public disclosure.
• Privacy. Sole traders keep accounts private; companies must file them.

Examples in context

A market-stall trader operates as a sole trader for its simplicity and privacy. Two friends opening a restaurant form a partnership to pool capital and skills. A growing regional brand becomes a private limited company to protect the owners and fund expansion. A household-name retailer is a PLC, floated to raise capital from the public. A community food bank runs as a charity, and the local hospital sits in the public sector.

Try this

Q1. State two features of a sole trader. [2 marks]

• Cue. Any two of: one owner, unlimited liability, easy and cheap to set up, full control, private accounts, limited access to finance.

Q2. Explain one benefit to shareholders of a company having limited liability. [3 marks]

• Cue. If the business fails, shareholders can lose only the money they invested, not their personal assets, which encourages people to invest in the company.