Business ownership: the features, advantages and disadvantages of sole traders, partnerships, private limited companies (Ltd) and public limited companies (plc), the meaning of limited and unlimited liability, and the not-for-profit sector.

What this topic is asking

OCR J204 topic 1.3 wants you to know the main legal forms a business can take, the features of each, their advantages and disadvantages, and the crucial difference between limited and unlimited liability. You also need to recognise the not-for-profit sector. The exam frequently sets a growing business deciding whether to change form, so you must be able to weigh the trade-offs for a specific firm.

Sole traders

Advantages: quick and cheap to set up, the owner makes all the decisions and keeps all the profit, and the accounts can stay private. Disadvantages: unlimited liability puts personal assets at risk, it can be hard to raise finance, and the owner carries all the work and risk alone.

Partnerships

Advantages: more owners means more capital and a wider range of skills, and the workload and decisions are shared. Disadvantages: profits are split, partners can disagree, decisions must be shared, and (unless it is a limited liability partnership) the partners have unlimited liability, so each can be liable for the others' actions.

Limited and unlimited liability

This single idea explains most of the trade-offs in this topic. Limited liability makes it safer to invest and easier to attract shareholders, but it comes with the duty to register the company and publish accounts.

Private limited companies (Ltd)

Advantages: limited liability protects the owners, it is easier to raise finance by selling shares than for a sole trader, and the company continues even if an owner leaves. Disadvantages: more expensive and complex to set up, it must register with Companies House and publish annual accounts (loss of privacy), and shares cannot be sold to the general public.

Public limited companies (plc)

Advantages: can raise very large amounts of finance by selling shares to the public, which funds major expansion, and the size brings a higher profile. Disadvantages: ownership can be diluted so the original owners may lose control, it faces the most regulation and disclosure, and there is pressure from shareholders for short-term profit and dividends. There is also a risk of takeover if someone buys a majority of the shares.

The not-for-profit sector

OCR expects you to recognise that not all businesses exist to maximise profit. A social enterprise trades like a normal business but uses its profits for a social purpose; a charity raises funds to support a cause. Their success is measured by their social impact, not just by profit.

Try this

Q1. State one advantage and one disadvantage of being a sole trader. [2 marks]

• Cue. Advantage: keeps all profit / quick to set up. Disadvantage: unlimited liability / hard to raise finance.

Q2. Explain one reason a growing business might change from a sole trader to a private limited company. [3 marks]

• Cue. To gain limited liability (protect personal assets) as debts grow, or to raise finance by selling shares.