Types of business entities

Three key features are: one owner, unlimited liability, and no separate legal identity between owner and business.

A sole trader is a business owned and run by one person.

An advantage is complete control: the owner can make decisions quickly without consulting partners or shareholders.

A feature describes what it IS (e.g. one owner, unlimited liability). An advantage describes what is GOOD about it (e.g. easy to set up, quick decisions).

Unlimited liability means the owner is personally responsible for all business debts, so personal assets can be used to pay creditors.

The biggest personal risk is unlimited liability, where personal assets may be used to pay business debts.

Two valid features are: one owner makes decisions; unlimited liability (owner personally responsible for debts).

A disadvantage is unlimited liability: the owner's personal assets may be used to pay business debts.

Because it is an advantage (a benefit). A feature must describe the legal/structural characteristics, such as one owner or unlimited liability.

There is no separate legal identity: the owner and the business are treated as the same legal entity.

One person often does many roles (marketing, finance, operations), which can cause long hours and burnout, reducing effectiveness.

Because features are objective and legal/structural, and many students mistakenly write advantages instead. Examiners want precise definitions like unlimited liability and one owner.

They cannot sell shares and lenders may view the business as higher risk because it depends on one person, limiting access to large funding.

Unlimited liability means the owner is personally responsible for business debts. If the business fails, creditors can claim the owner's personal assets, increasing personal financial risk and making the owner more cautious about expansion.

The business has no legal continuity: it usually ends if the owner dies, retires, or becomes unable to operate it.

A sole trader owes €20,000 after the business fails. If the business cannot pay, creditors can claim the owner's personal savings or assets to recover the debt.

In many countries, sole traders have fewer requirements to publish detailed financial accounts, so competitors have less access to performance information.

Use: (1) Identify the point, (2) Explain how it works, (3) State the impact on the business/owner.

A sole trader cannot sell shares, so they often rely on personal savings and bank loans, which can limit growth.

One owner runs the business and keeps the profit, but carries all the risk because liability is unlimited.

A partnership can raise more finance because multiple partners can contribute capital, which can fund growth or investment more easily than one person alone.

A partnership is a business owned by two or more people who share profit, risk and decision-making.

A partnership is a business owned by two or more people who share profit, risk and decision-making, usually under a deed of partnership.

(1) Owned by two or more partners who share profits. (2) Partners typically have unlimited liability for the partnership's debts.

Two or more owners (partners) share profits, and partners typically have unlimited liability for the partnership's debts.

Partners have unlimited liability and may be liable for debts caused by another partner's decisions, increasing personal risk.

It sets clear rules (profit share, roles, capital, dispute resolution, exit rules), reducing misunderstandings and helping resolve conflicts between partners.

Unlimited liability: personal assets may be used to pay partnership debts, including debts caused by other partners.

More resources: partnerships can combine capital and skills, enabling growth and better decision-making than a sole trader relying on one person.

Students describe the partnership but forget to compare explicitly to the sole trader, so they lose application marks.

Unlimited liability means partners are personally responsible for the partnership's debts, so personal assets can be used to pay creditors.

An active (general) partner is involved in running the business day-to-day and usually has unlimited liability.

A sleeping partner does not manage but usually still has unlimited liability. A limited partner has limited liability but cannot manage the business.

Access to more skills: partners can specialise (e.g. one handles finance, one marketing), improving decisions and performance compared with one sole trader doing everything.

A deed of partnership is a legal agreement that sets out how the partnership will operate, such as profit shares, roles, capital contributions, and how disputes or exits are handled.

A sleeping (silent) partner invests capital but does not take part in daily management; they still usually have unlimited liability.

A limited partner can only lose the amount invested (limited liability) but is not allowed to manage the business.

It reduces disputes by clearly stating rules for profit sharing, roles, decision-making, and what happens if a partner leaves.

Example: partners vote on whether to expand (open a second outlet) and agree how to fund it, rather than one person deciding alone.

Disagreements can slow decisions and damage relationships, reducing efficiency; conflicts may arise over workload, strategy, or profit share.

Ltd shares are sold privately to selected investors; PLC shares are sold publicly and traded on a stock exchange.

An incorporated business owned by shareholders, where shares are sold privately and shareholders have limited liability.

An incorporated business whose shares are sold to the general public on a stock exchange; shareholders have limited liability.

Both are incorporated businesses with separate legal identity, and both provide limited liability to shareholders.

Shares are traded on a public stock exchange, and the business is owned by shareholders with limited liability.

Shares are sold privately to selected investors, and shareholders have limited liability.

PLCs typically have greater access to finance because they can raise funds from a wider public share issue.

Because it can sell shares to the general public, giving access to a much larger pool of investors.

Shareholders can only lose the value of their investment (their shares) and are not personally responsible for company debts.

They must meet strict disclosure rules (such as publishing financial accounts) for transparency to investors and regulators.

Private limited companies (Ltd) are more likely to keep control because shares are not sold to the general public.

The company is legally separate from its owners, so it can own assets, enter contracts, sue and be sued in its own name.

The business continues to exist even if owners change, leave, or die.

PLCs have a higher risk of hostile takeover because shares are publicly traded and can be bought by outside investors.

Another company or investor can buy enough shares to gain control, potentially against the wishes of current directors.

It is owned by its members, who use the business and share the benefits.

A business owned and run by its members for their mutual benefit.

Members are often highly motivated because they directly benefit from the cooperative’s success.

Each member has equal voting rights regardless of how much money they invested.

Decision-making can be slower because members must be consulted and voting is democratic.

It is owned by members, and decisions are made democratically (one member, one vote).

Profits are shared among members or reinvested to improve benefits and services for members.

They have limited ability to attract external investors compared with companies that can issue shares.

They cannot easily sell shares to external investors, so access to capital is more limited.

Cooperatives combine business activity with democratic member control, which can increase motivation but reduce speed and access to finance.

A business with a social or environmental mission that earns revenue through trading and reinvests profits into its mission.

Profit is used as a tool to support the mission, and is mainly reinvested rather than paid out to owners.

They prioritise a mission (social/environmental), and generate revenue from trading to fund that mission.

It operates like a business by selling goods/services, and it reinvests profits to achieve a social or environmental mission.

A social enterprise mainly earns income from trading, while charities typically rely more on donations and grants.

They are businesses that trade for income, rather than depending mainly on donations.

For-profit firms mainly aim to maximise profit for owners, while social enterprises prioritise impact and reinvest profits into the mission.

They need sufficient revenue to cover costs and continue delivering their mission long term.

Selling products or services (e.g., reusable bottles) and using profits to fund a social goal (e.g., clean water projects).

Social enterprises blend business methods with a mission, using trading revenue to fund impact and reinvesting most profits.