1.5.4 Forms of Business

Why do entrepreneurs often start as a sole trader and later change their business form?

They start as sole traders for simplicity and control, then may change form to gain funding or provide security through limited liability.

What are the most common forms of business at start-up?

Sole trader, partnership, private limited company (Ltd). Each has advantages and disadvantages.

What is the difference between limited and unlimited liability?

• Limited liability: owners are legally separate from the business; only lose what they invested.

• Unlimited liability: owners are legally the same as the business; liable for all debts.

What is the difference between incorporated and unincorporated businesses?

• Incorporated: legal identity separate from owners; can own assets, owe money, enter contracts (e.g., Ltd, Plc).

• Unincorporated: no legal distinction between owner and business; owner liable for debts (e.g., sole traders, partnerships)

What is a sole trader?

A business owned by one person with unlimited liability.

Give one advantage and one disadvantage of a sole trader.

Advantage: Easy to set up; full control.
Disadvantage: Unlimited liability; limited finance.

What is a partnership?

A business owned by 2+ people sharing responsibilities and decisions.

Give one advantage and one disadvantage of a partnership.

Advantage: More skills & knowledge, better finance access.
Disadvantage: Profits shared; potential disputes.

What is a private limited company (Ltd)?

a company owned by shareholders, has limited liability, and a separate legal identity.

Give one advantage and one disadvantage of a Ltd.

Advantage: Limited liability, greater access to finance.
Disadvantage: Expensive to set up; shares not on the stock market.

What is a Public Limited Company (PLC)?

A business with limited liability whose shares are publicly traded, allowing large capital raising

Why might a business move from a Private Ltd (LTD) to a PLC?

To raise capital quickly via stock market flotation, selling shares publicly for the first time.

What are the benefits of becoming a PLC?

Quick capital, shared ownership risk, expert board decision-making, and higher public profile.

What are the disadvantages of becoming a PLC?

Diluted control, slower decisions, funding depends on share price, exposure to negative publicity.

What should be considered when deciding a business form?

Owner, product, market size, funds, and profitability.

How does stock market flotation raise capital for a PLC?

By selling shares to investors, capital doesn’t need repayment, but shareholders expect dividends and some control.

What is a franchise?

A business model where a franchisee buys rights to operate a proven system, brand, and support from a franchisor.

What are the advantages for a franchisor?

Rapid expansion, royalties from franchisee, shared risk, can select franchisee.

What are the disadvantages for a franchisor?

High setup costs, less control, strict laws, profit shared, slower innovation, reputation risk.

What are the advantages for a franchisee?

Established brand, proven model, training/support, marketing help, easier finance, higher success rate.

What are the disadvantages for a franchisee?

Pay royalties, limited entrepreneurship, setup costs, franchisor can withdraw rights.

What is a social enterprise?

A business that benefits society and reinvests profits.

What is a lifestyle business?

A small owner-run business aiming for a set income to support a particular lifestyle, prioritising owner interest over growth.

What are the key exam tips for business forms?

Know limited vs unlimited liability, Ltd vs PLC share rules, focus on relevant ownership type, answer in context, and consider stock market flotation effects.