Types of business ownership
AQA also says:
Spec content: Sole traders; Partnerships; Private limited companies (ltd); Public limited companies (plc); Not-for-profit organisations.
Students should be able to: understand the different legal structures businesses adopt; analyse the benefits and drawbacks of each (including management and control, sources of finance available, liability and distribution of profits); understand the concept of limited liability and which structures benefit from it; evaluate which structure would be most appropriate for a variety of business examples. Students are not expected to understand the legal process of incorporation.
Types of Business Ownership
When setting up a business, one of the most important decisions is choosing the appropriate legal structure. This affects how the business is owned and controlled, how profits are distributed, what sources of finance are available, and — critically — the extent to which the owner's personal assets are at risk if the business fails. The key concept that separates many structures is limited liability.
A sole trader is a business owned and run by one person. It is the simplest and most common legal structure — no formal registration is required beyond notifying HMRC.
| Advantages | Disadvantages |
|---|---|
| Simple and cheap to set up | Unlimited liability — personal assets at risk |
| Owner keeps all profits | Difficult to raise large amounts of finance |
| Full control over all decisions | Relies entirely on one person — illness or absence can halt the business |
| Privacy — no obligation to publish accounts | Limited skills — one person cannot be expert in everything |
Best suited to: small, local businesses — plumbers, hairdressers, market traders, freelance designers.
A partnership is a business owned by two or more people (typically 2–20 partners) who share responsibility, profits, and losses. A partnership agreement (deed) sets out how profits are divided and how decisions are made.
| Advantages | Disadvantages |
|---|---|
| Shared workload and complementary skills | Unlimited liability for all partners |
| More capital available than a sole trader | Profits shared between partners |
| Shared decision-making and responsibility | Disagreements between partners can disrupt the business |
| Still relatively simple to set up | Each partner is liable for the actions of the others |
Best suited to: professional practices — law firms, accountancy firms, medical practices, architects.
A private limited company (ltd) is a separate legal entity from its owners (shareholders). Shares can only be sold privately — they cannot be offered to the general public. Owners benefit from limited liability.
| Advantages | Disadvantages |
|---|---|
| Limited liability — personal assets protected | More complex and costly to set up than sole trader/partnership |
| Can raise finance by selling shares (privately) | Must file annual accounts at Companies House (less privacy) |
| Business continues if an owner leaves or dies | Profits shared as dividends among shareholders |
| Greater credibility with suppliers and lenders | Cannot sell shares to the public — limits growth potential |
Best suited to: established small-to-medium businesses wanting protection from personal liability — family businesses, growing SMEs.
A public limited company (plc) can sell shares to the general public on a stock exchange. This enables very large amounts of capital to be raised but brings significant regulatory requirements and loss of control.
| Advantages | Disadvantages |
|---|---|
| Limited liability for all shareholders | Risk of hostile takeover if shares are publicly traded |
| Can raise very large amounts of capital via stock market | Significant legal and administrative costs |
| High public profile increases brand credibility | Must publish detailed financial accounts — no privacy |
| Easier to attract institutional investors | Pressure from shareholders for short-term profit can conflict with long-term strategy |
Best suited to: large corporations requiring significant capital for growth — Tesco plc, BP plc, Rolls-Royce plc.
A not-for-profit organisation (including charities, social enterprises, and community interest companies) exists primarily to pursue a social, charitable, or community purpose rather than to generate profit for owners. Any surplus is reinvested into the organisation's mission.
| Advantages | Disadvantages |
|---|---|
| Tax benefits (charities are exempt from many taxes) | Cannot distribute profit to owners/shareholders |
| Eligible for grants not available to commercial businesses | May struggle to attract commercial investment |
| Strong public trust and positive brand perception | Dependent on donations, grants or trading surplus — income less predictable |
Examples: Oxfam, the National Trust, local food banks, social enterprises providing employment for disadvantaged communities.
Key Takeaways
- Unlimited liability (sole trader, partnership) means personal assets are at risk; limited liability (ltd, plc) protects them.
- Sole traders and partnerships are simple to set up but carry greater personal financial risk.
- Private limited companies offer limited liability and can raise finance by selling shares privately — but cannot sell to the public.
- Public limited companies can raise large amounts via the stock market but face significant regulatory requirements and loss of control.
- Not-for-profit organisations prioritise social/charitable goals over profit; any surplus is reinvested into the mission.