What legal structures can a business take, and how does the choice affect liability, control and finance?
Business structures: sole traders, partnerships, private and public limited companies, and not-for-profit organisations, including limited and unlimited liability and the implications for ownership, control and finance.
A focused answer to the WJEC A-Level Business Unit 1 content on business structures, covering sole traders, partnerships, private and public limited companies and not-for-profit organisations, with limited versus unlimited liability and the effects on ownership, control and finance, with UK and Welsh examples.
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What this dot point is asking
WJEC Unit 1 expects you to know the main legal structures a business can take and how the choice affects liability, ownership, control and the ability to raise finance. The key concept running through it all is liability - whether the owners' personal assets are at risk. Strong answers compare structures on these dimensions and judge which suits a given firm, rather than listing features.
The answer
Limited and unlimited liability
This single distinction shapes the whole topic. Sole traders and most partnerships have unlimited liability and so carry personal financial risk. Limited companies (Ltd and plc) have limited liability, which protects investors and makes it easier to attract them.
Sole trader
A sole trader is owned and run by one person. It is the simplest, cheapest and quickest structure to set up, the owner keeps all the profit and makes all the decisions, and affairs stay private. The drawbacks are unlimited liability, difficulty raising finance (only personal funds and loans), no one to share the workload, and the business ending if the owner stops. It suits small, local start-ups.
Partnership
A partnership has 2 or more owners who share capital, skills, decisions and (usually) unlimited liability under a deed of partnership. Compared with a sole trader, more capital and a wider range of skills are available and the workload is shared. But profits are shared, decisions can lead to disagreement, and each partner is liable for the others' actions. Partnerships are common among professionals such as solicitors and accountants.
Private limited company (Ltd)
Public limited company (plc)
A public limited company (plc) can sell its shares to the general public on a stock exchange (a flotation). This raises large amounts of capital for growth and gives high status. However, flotation is expensive, the company must publish detailed accounts (so there is little privacy), it faces short-term pressure from shareholders for dividends, and it is exposed to loss of control through a takeover if another party buys a majority of shares. The plc suits large firms needing substantial finance.
Not-for-profit organisations
Not-for-profit organisations (charities, social enterprises, mutuals and co-operatives) exist to pursue a social, community or ethical aim rather than to maximise profit for owners. Any surplus is reinvested in the cause. They may enjoy tax advantages and goodwill, but they still must cover their costs and are accountable to members, donors or regulators.
Examples in context
Example 1. A sole trader plumber. A self-employed plumber in Wrexham operates as a sole trader: quick to set up, full control, all profit retained, but with unlimited liability, so an expensive claim could reach personal savings. The example shows why the sole-trader form suits a low-risk, one-person service business, and why such owners often take out insurance to manage the liability they cannot limit.
Example 2. A growing firm incorporating. A successful family bakery in Cardiff turns itself into a private limited company as it opens more branches. Limited liability protects the family's personal assets if the expansion fails, and the company can issue shares to a few investors to fund new premises, while the family keeps control by holding most shares. The example illustrates the move from unlimited to limited liability and the link between structure and finance for a growing business.
Try this
Q1. Define the term limited liability. [2 marks]
- Cue. Shareholders can only lose the amount they invested in the company; their personal assets are protected because the company is a separate legal entity.
Q2. Explain one disadvantage of operating as a sole trader. [3 marks]
- Cue. For example, unlimited liability means the owner is personally responsible for all business debts, so personal assets are at risk if the business fails.
Exam-style practice questions
Practice questions written in the style of WJEC exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
WJEC 20196 marksExplain two advantages of operating as a private limited company rather than as a sole trader.Show worked answer →
Limited liability. Shareholders of a private limited company can only lose the money they invested; their personal assets are protected if the company fails, unlike a sole trader who has unlimited liability.
Easier to raise finance. A limited company can sell shares to private investors and is often seen as more credible by banks, so it can raise more capital to grow than a sole trader relying on personal funds and loans.
Markers reward two distinct, developed advantages, ideally including limited liability, applied to a firm wanting to grow.
WJEC 20218 marksEvaluate the decision of a growing business to become a public limited company (plc).Show worked answer →
For: floating on a stock exchange raises large amounts of capital from the public, funding rapid growth, and raises the firm's profile and credibility.
Against: a plc faces high flotation costs, must publish detailed accounts (less privacy), is exposed to a possible loss of control through takeover, and faces short-term shareholder pressure for dividends.
A strong evaluation concludes that going public suits a firm needing large-scale finance for expansion but warns of the loss of control and the regulatory burden, so the decision depends on the firm's size, growth plans and the owners' willingness to dilute control. Markers reward a supported judgement.
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Sources & how we know this
- WJEC GCE AS/A level Business specification — WJEC (2015)