0264 · 1.4.1Different types of business organisation

Sole traders and ownership basics

0:00Two friends are preparing to open Willow Café. They have savings, a menu and premises, but their choice of business organisation will affect much more than the name above the door. It determines who controls decisions, where investment comes from and who is responsible for debts. By the end, you will understand these trade-offs and use them to recommend a suitable organisation. Capital is money invested in a business to finance its activities.

0:22Owners might provide it themselves, invite other investors or borrow from lenders. Their choice of organisation affects the options available and the control they retain. We will compare ownership, finance, responsibility for debts and the ability to continue when an owner leaves. Sole traders, partnerships and the two kinds of limited company are types of legal ownership. Franchises and joint ventures are arrangements in which businesses work together under an agreement.

0:47A social enterprise is identified by its wider purpose, and it can use any of these legal structures. A sole trader is a business owned and controlled by one person, who may employ others. Imagine Lena’s Salon, where the owner cuts hair and employs an assistant. The owner makes the decisions and receives the profit, while the assistant is paid wages. Profit is total revenue minus total costs. Those wages are part of the salon’s spending.

1:11For the owner, a major advantage is that a sole trader is easy and cheap to set up with few legal formalities. This makes the structure suitable for someone starting with limited money. Full control also allows quick decisions, such as changing appointment times. The owner keeps all the profit because there are no other owners entitled to a share. Close contact with customers can help Lena’s Salon understand individual preferences and encourage repeat visits.

1:34The owner can also keep the business’s accounts private, so competitors have less financial information. However, limited capital restricts investment because finance depends heavily on personal resources and borrowing. An expensive refit may therefore be difficult to fund. Unlimited liability means the owner is personally responsible for all the business’s debts, so personal possessions can be sold to pay them. If Lena’s Salon cannot repay its debts, the owner’s personal savings and home could be at risk.

2:01This connects business borrowing directly to personal financial security. The risk matters especially when expensive equipment or premises require substantial commitments. The owner may also work long hours because responsibility for running the salon rests on one person. Employees can help with tasks, but the owner still carries the main decision-making burden. Continuity means the business keeps trading when an owner dies, retires or leaves. A sole trader lacks guaranteed continuity because the business may end when the owner dies or retires.

Partnerships and private limited companies

2:31A partnership is a business in which two or more people agree to own and run it together. At Meadow Farm, one partner understands crop production and another has experience selling to food shops. Their combined skills can improve decisions across different activities. Sharing the workload also allows each partner to concentrate on work they perform well. More owners can contribute more capital, so the partnership may afford equipment beyond either person’s individual budget.

2:55However, profit must be divided because ownership is shared. The amount each partner receives depends on their agreement. Someone joining a partnership therefore trades some individual independence and profit for additional resources and support. A partnership agreement sets out each partner’s capital contribution, how profit is shared and how disputes are settled. Clear terms help prevent arguments about money or responsibilities. Nevertheless, disagreements can delay decisions, such as whether to buy machinery or preserve cash.

3:24The partners bear the consequences if delayed decisions interrupt production or cause missed sales. In the ordinary partnership studied here, the owners have unlimited liability. Each partner therefore faces personal financial risk from the business’s debts. There is also no guaranteed continuity, because a partner’s death or departure may end the existing partnership. An agreement can make arrangements for these events, but shared ownership still depends on the partners’ relationship.

3:49Incorporation means forming a company with a separate legal identity from its owners. The company can own property, enter contracts and owe debts in its own name. A share is one unit of ownership in a company. Shareholders are the people or organisations that own these units, and the money they pay provides capital. Limited liability means the owners can lose only the money they invested in the business. If the company fails, its debts belong to that separate legal organisation.

4:14This protection makes investment more attractive because shareholders can limit their financial exposure. The company must repay its debts from its own resources, and an investment can still lose all its value. Shareholders own the company, while directors are people appointed to manage it. In a small company, the same individuals may perform both roles. Larger companies often employ directors who manage operations on behalf of many shareholders. Incorporation also provides continuity because changes in ownership leave the company’s separate legal identity in place.

4:44A private limited company is an incorporated business whose shares are sold privately to people chosen by its existing shareholders. These investors might include family members, friends or employees. Choosing investors helps founders retain control, especially when they keep a majority of the voting shares. The business can obtain extra capital without inviting unrestricted public investment. Suppose Kestrel Bikes needs equipment to manufacture bicycle parts. Becoming a private limited company allows its founders to invite selected investors to buy shares.

5:13This can provide more capital than an ordinary partnership could obtain from its partners. Limited liability also protects those shareholders’ personal possessions, while continuity supports longer-term commitments to customers and suppliers. These benefits come with disadvantages for the company and its owners. Legal formalities make incorporation more complicated and costly than establishing a sole trader. Accounts must be published under the relevant rules, so financial information becomes available to others.

5:39Shares cannot be offered to the general public, which limits the pool of potential investors. Retaining control depends on how ownership is divided. Founders who sell enough voting shares to other investors can lose their majority. A private limited company gives them influence over who joins, but share sales still change the balance of ownership. This makes the amount of finance raised and the proportion of control retained connected decisions.

Public limited companies

6:01A public limited company is an incorporated business that can sell shares to the general public through a stock exchange. A stock exchange is a market where company shares are bought and sold. Access to this wider pool of investors allows very large amounts of capital to be raised. That can support projects beyond the resources of a small group of owners. Imagine Harbour Parts planning a large factory to produce components for vehicles.

6:23Public investment could help finance the buildings and machinery required for this expansion. Shareholders gain limited liability, which encourages people to invest without exposing all their personal possessions. The company also has continuity, so individual investors can leave while the business continues operating. However, complex legal formalities make this structure costly to establish and administer. Published accounts reveal financial information that competitors may use. Anyone can buy available shares, so another investor could purchase enough ownership to gain control through a takeover.

6:54Original shareholders therefore face greater difficulty keeping control over the business’s future. Separation between shareholders and managers can create another disadvantage for owners. Directors might favour choices that suit their own interests, while shareholders want decisions that benefit their investment. Owners must therefore monitor how the company is managed. Individuals and other businesses own a public limited company, so it is in the private sector. The public sector is organisations owned and controlled by the government.

Franchises, joint ventures and social enterprises

7:22A franchise is an arrangement giving another business the right to use an established name, logo and trading methods for payment. The franchisor is the business that owns the brand and sells this right, and the franchisee is the person or business that buys it. The agreement connects separately owned businesses through a shared brand and a particular way of operating. Bright Café could allow a franchisee to open a café under its name.

7:44The new owner pays an initial fee for the right to join the network. A royalty is a regular payment to the franchisor, often based on sales or profit. The agreement sets out the support provided and the rules the franchisee must follow. For the franchisor, expansion can be faster because franchisees provide capital for their own outlets. Bright Café can reach new locations without paying the whole cost of every premises.

8:06Fees and royalties provide an additional income stream. Franchisee managers also have a strong incentive to make their outlets successful because their own money is invested. The franchisor faces a reputation risk if a franchisee provides poor service. Customers associate that experience with the shared brand, which can reduce demand across the network. Control is also weaker than direct ownership because separate operators handle everyday activities. Profit is also shared, because the franchisor receives only fees and royalties while the franchisee keeps whatever the outlet earns after paying them.

8:36For the franchisee, a known brand can reduce the risk of entering the market because customers already recognise the offer. Training helps the owner use established trading methods effectively. National advertising can attract customers without each outlet funding an entire campaign. Banks may lend more readily because a proven brand makes the new outlet less likely to fail. These advantages require payment, so fees and royalties reduce the franchisee’s retained profit.

9:00Rules can restrict freedom over products, prices or decoration, which limits responses to local preferences. For example, an owner may need permission before adding a popular local dish. The licence may also expire without renewal, which threatens the ability to continue trading under that brand. A joint venture is an arrangement where two or more businesses work together on a project and share its capital, risks and profits. Imagine Clear Supplies, which makes equipment for hospitals, and Coastline Medical, a distributor in a market that is new to the manufacturer.

9:30They agree to develop a supply project together. Each business contributes something useful while remaining a separate organisation. Shared costs reduce the amount each partner must finance, so a larger project becomes more affordable. Sharing risks also reduces each participant’s exposure to an unsuccessful project. Combined knowledge can improve decisions, especially when one partner understands local customers and regulations. Coastline Medical’s experience could help Clear Supplies select suitable products and reach hospitals more effectively.

9:59However, each business receives only its agreed share of the project’s profit. Disagreements over spending or responsibilities can delay action and increase costs. Different organisational cultures may also make cooperation difficult because employees expect their own familiar ways of working. Conflicting management styles can create uncertainty over who approves decisions, so clear responsibilities are important for the project’s success. A social enterprise is a business that aims to make a profit and also has social or environmental objectives.

10:29It reinvests most of its profit in those aims. Repair Works might sell refurbished furniture and use its earnings to provide training for people seeking employment. Customers pay for the furniture, so trading generates income, and most of the resulting profit pays for the training. This approach can attract customers and employees who value the organisation’s purpose. Reinvested profit also helps fund continuing social or environmental activity. However, spending on those aims can leave less money available for other business investment or distribution to owners.

10:59The organisation must manage its costs carefully so its trading activities can sustain its wider purpose.

Choosing an organisation for Willow Café

11:05Return to Willow Café, a small start-up that will sell drinks and light meals with four employees. Opening the café needs sixty thousand dollars of capital, and the two friends have exactly that amount in savings. They want to manage the café together, retain control and protect their personal homes. Consider whether a partnership or a private limited company better meets these owners’ needs. Begin by identifying the most important details in the case.

11:27The available savings already cover the opening requirement, so attracting public investors is unnecessary. Personal financial protection matters because both owners want to safeguard their homes. Shared management also matters, so the recommended structure must allow them to participate in decisions together. Compare the options against those priorities. A partnership allows shared ownership and involves fewer legal formalities, which would simplify setting up the café. However, its unlimited liability exposes the owners’ personal possessions to business debts.

11:57A private limited company gives them limited liability, and they can retain all the shares to preserve control. I recommend a private limited company because limited liability protects the friends’ homes from the café’s debts. They can retain all the shares because their sixty thousand dollars already covers the opening requirement, so they can keep control. A partnership would be simpler to establish, but unlimited liability conflicts with their priority of protecting personal possessions.

12:21A private limited company is therefore the stronger choice because protection and control outweigh the additional legal formalities.

Exam answers and recap

12:28Paper One Short Answer and Data Response and Paper Two Case Study both use stimulus material about businesses. A question may ask you to define an organisation, explain an advantage or justify a choice. To define, give precise meaning. An explain answer must set out purposes or reasons, say why and how, supported with relevant evidence. For example, consider the instruction to explain one advantage of a franchise for a new café owner.

12:54The established brand helps customers recognise the café’s offer. This can encourage visits before the owner has built a local reputation. The benefit belongs to the franchisee, and the explanation connects brand recognition to attracting customers. Keep the roles clear when answering franchise questions. The franchisor supplies the brand and trading methods, while the franchisee pays to use them. Identify company owners as shareholders and the people responsible for management as directors.

13:18Distinguish public limited companies by their right to sell shares to anyone, and public sector organisations by government ownership. For a recommendation, select one option and support it with details from the case. Explain how its features meet the owners’ particular needs. Then show why the strongest alternative is weaker for that situation. Your conclusion should make the priority clear, such as personal protection, access to capital or keeping control.

13:43A sole trader is a business owned and controlled by one person, who may employ others. Unlimited liability means the owner is personally responsible for all the business’s debts, so personal possessions can be sold to pay them. A partnership is a business in which two or more people agree to own and run it together. Its partners carry that same unlimited liability, but they also share capital, skills and profit.

14:04A private limited company is an incorporated business whose shares are sold privately to people chosen by its existing shareholders. Limited liability means the owners can lose only the money they invested in the business. A public limited company is an incorporated business that can sell shares to the general public through a stock exchange. It can raise far more capital, but anyone can buy its shares, so a takeover becomes possible.

14:25Both kinds of company have continuity. A franchise is an arrangement giving another business the right to use an established name, logo and trading methods for payment. The franchisor sells this right, and the franchisee pays an initial fee and royalties. A joint venture is an arrangement where two or more businesses work together on a project and share its capital, risks and profits. Each business gains the other’s knowledge but receives only its agreed share of the profit.

14:51A social enterprise is a business that aims to make a profit and also has social or environmental objectives. It reinvests most of its profit in those aims. To recommend a type of organisation, connect its features to the owners’ resources, risks and priorities, as the Willow Café answer did.