Types of Business Ownership

Why legal structure matters

Every business has a legal structure (also called a form of ownership). It decides who owns the business, who runs it, who keeps the profit, and who is responsible if things go wrong. Choosing the right structure is one of the first big decisions an entrepreneur makes, and it can change as the business grows.

Before we look at each type, you need two ideas that run through the whole topic: the private sector vs public sector, and limited vs unlimited liability.

Key terms

Private sector — businesses owned by private individuals (e.g. a corner shop, Tesco, a franchise).

Public sector — organisations owned and run by the government, funded mainly through taxes (e.g. state schools, the NHS, the police). Their aim is usually to provide a service, not to make a profit.

Liability — the most tested idea in this topic

Liability means legal responsibility for the debts of a business. Get this right and you will pick up easy marks.

Unlimited liability — there is no legal difference between the owner and the business. If the business cannot pay its debts, the owner must pay using their own personal assets (savings, car, even their house).
Limited liability — the business is a separate legal "person" (it is incorporated). Owners can only lose the money they have invested; their personal assets are safe.

Watch out

Liability is limited or unlimited — never say a sole trader has "limited liability". A sole trader and an ordinary partnership both have unlimited liability. Only incorporated businesses (Ltd and plc) give their owners limited liability.

Sole traders

A sole trader is a business owned and run by one person. It is the most common form of business. The owner may employ staff, but they alone own the firm.

Real world

Most plumbers, hairdressers, market traders and freelance designers are sole traders. It is the natural starting point for someone testing a business idea with little money.

Partnerships

A partnership is owned by two or more people (usually 2–20) who share the work, the profits and the responsibility. Partners often sign a deed of partnership setting out how profits are split and how decisions are made.

Advantages: more capital than a sole trader; shared workload and skills; shared decision-making; still cheap and easy to set up.
Disadvantages: unlimited liability (each partner can be liable for the whole firm's debts); profits must be shared; disagreements can arise; one partner's mistake affects everyone.

Limited companies — getting incorporated

A limited company is incorporated: it has a separate legal identity from its owners. The company can own property, owe money and be sued in its own name. Ownership is divided into shares, so the owners are called shareholders.

Key terms

Incorporation — the legal process of forming a company that is separate from its owners, giving the owners limited liability.

Shareholder — a person who owns part of a company by holding shares.

Dividend — a share of a company's profits paid out to its shareholders.

#### Private limited company (Ltd)

Shares can only be sold privately, with the agreement of the other shareholders — they cannot be offered to the general public.

Advantages: limited liability; easier to raise capital than a sole trader (can sell shares to family, friends, investors); separate legal identity continues even if an owner leaves.
Disadvantages: more expensive and complex to set up; must register with Companies House and publish accounts (less privacy); shares cannot be sold to the public, limiting how much can be raised.

#### Public limited company (plc)

A plc can sell its shares to the general public, usually by floating on a stock exchange. These are normally large, well-known businesses.

Advantages: can raise very large amounts of capital from the public; limited liability; high status and public profile.
Disadvantages: very expensive to set up and run; accounts are public; risk of takeover because anyone can buy shares; owners (shareholders) may pressure managers for short-term profit; original founders can lose control.

Watch out

"Public limited company" does not mean it is in the public sector. A plc is a private-sector business — public here just means the public can buy its shares.

Franchises

A franchise lets one business (the franchisee) trade using the name, products and systems of an established business (the franchisor), usually for a fee plus a share of revenue.

Advantages (for the franchisee): uses a proven brand and business model, so lower risk; gets training, support and national marketing; easier to get finance.
Disadvantages (for the franchisee): must pay an initial fee plus ongoing royalties; little freedom — must follow the franchisor's rules; reputation depends on other franchisees.

Real world

McDonald's, Subway and Domino's grow largely through franchising. The local restaurant is owned by a franchisee, but it looks and runs exactly like every other branch.

Not-for-profit and social enterprises

Not every business exists to maximise profit.

A not-for-profit organisation (e.g. a charity) reinvests any surplus to support its cause rather than paying it to owners.
A social enterprise trades like a normal business but its main aim is a social or environmental goal — profits are reinvested to achieve that mission.

Comparing the ownership types

How a business changes structure as it grows

A successful business often changes its legal structure over time because its needs change.

1. A new entrepreneur starts as a sole trader — cheap, simple, full control.
2. As it grows they take on a partner to add money and skills.
3. To gain limited liability and raise more capital, they incorporate as a private limited company (Ltd).
4. If it becomes very large and needs huge investment, it may float on a stock exchange and become a public limited company (plc).

Exam tip

"Should this business change its legal structure?" questions reward a balanced judgement. Weigh the benefit (e.g. limited liability and more capital from becoming an Ltd) against the cost (e.g. more paperwork, public accounts, lost privacy), then give a justified conclusion that refers back to the business in the case study.

Worked example

Priya runs a growing bakery as a sole trader and wants to open three more shops.

Becoming a private limited company would give her limited liability (protecting her home if the expansion fails) and let her sell shares to raise the finance needed for new shops.

The drawbacks are higher set-up costs and having to publish her accounts. On balance, because expansion is risky and needs capital, incorporating as an Ltd is a sensible move.

Quick recap

Private sector = privately owned; public sector = government owned.
Unlimited liability (sole trader, partnership) risks personal assets; limited liability (Ltd, plc) does not.
Incorporation creates a separate legal identity and gives owners limited liability.
Shareholders own companies and receive dividends from profit.
An Ltd sells shares privately; a plc can sell shares to the public.
Businesses often grow from sole trader → partnership → Ltd → plc.