The Main Types of Ownership (Cambridge (CIE) IGCSE Business)

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Written by: Danielle Maguire

Reviewed by: Steve Vorster

Risk, Ownership and Limited Liability

When an entrepreneur starts a business, they need to consider what kind of legal structure they want for their business
Their decision will depend upon a range of factors
- The level of personal risk they are willing to take
- The advice they receive
- The level of privacy they would prefer in running the business

Diagram: types of business ownership

Businesses can operate as sole traders, partnerships, private limited companies or public limited companies — **Businesses can operate as sole traders, partnerships or companies**

Sole traders and partnerships are unlimited liability businesses
- They are easy to set up and start trading
- Information about their financial performance does not need to be shared outside of the business
Private limited companies and public limited companies offer the protection of limited liability to their owners (shareholders
- Setting up a company is a legal process that takes time to arrange
- Information about financial performance needs to be shared with Companies House and is available for scrutiny by any interested third party

Comparison of Unlimited & Limited Liability

Liability	Description	Implications
Unlimited liability	The owners are fully responsible for all debts owed by the business Owners are also legally responsible for any unlawful acts committed by those connected to the business	There is no legal distinction between the owners and the business As a result, these business owners may have to use their own personal assets to pay debts or legal fees E.g. a sole proprietor may need to sell their home to pay creditors if their business fails
Limited liability	Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails Shareholders are not responsible for business debts In most cases, shareholders cannot be held responsible for unlawful acts committed by those connected with the business	Companies are incorporated and owners are considered a separate legal entity to the business This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees E.g. In 2018 construction company Carillion entered liquidation and the shareholders lost their investments

Liability

Description

Implications

Unlimited liability

The owners are fully responsible for all debts owed by the business

Owners are also legally responsible for any unlawful acts committed by those connected to the business

There is no legal distinction between the owners and the business

As a result, these business owners may have to use their own personal assets to pay debts or legal fees

E.g. a sole proprietor may need to sell their home to pay creditors if their business fails

Limited liability

Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

Shareholders are not responsible for business debts

In most cases, shareholders cannot be held responsible for unlawful acts committed by those connected with the business

Companies are incorporated and owners are considered a separate legal entity to the business

This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

E.g. In 2018 construction company Carillion entered liquidation and the shareholders lost their investments

Sole Traders, Partnerships and Limited Companies

Sole traders

When an entrepreneur starts a business, they will often start operating as a sole trader
This is a business that has a single owner, who may choose to hire employees or operate alone

Evaluation of Sole Trader Businesses

Advantages	Disdadvantages
Easy and inexpensive to set up The owner has complete control over the business All profits belong to the owner Simple tax arrangements	Unlimited liability, meaning the owner is personally responsible for any debts the business incurs Limited access to finance and capital Limited skill set of the entrepreneur

Over time - or if the business requires significant investment - they may change the legal structure of the business

Partnerships

A sole trader may join with others to form a partnership
A partnership is a formal arrangement by two or more entrepreneurs to manage and operate a business and share its profits
Partnerships are often formed to gain more funding, increase capacity or increase skills and experience in the business
Businesses commonly established as partnerships include law firms, accountancy businesses and small-scale construction businesses
Partnerships can often be identified by suffixes such as '& Son' or 'and Partner'

Evaluation of Partnership Businesses

Advantages	Disadvantages
Partnerships are easy and inexpensive to set up Partners share responsibilities, decision-making and liability for debts More skills and knowledge are available Increased access to finance and capital	Partners have unlimited liability Potential for disputes between partners Profits are often shared equally, regardless of the contribution It is often difficult to transfer ownership to new owners

Private limited companies

An entrepreneur may choose to form a private limited company to provide more financial security, as they will benefit from limited liability
The ownership of the private limited company is broken down into a specified number of shares
These shares can be held in their entirety by the entrepreneur, sold to friends and family or to venture capitalists
Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO

Evaluation of Private Limited Companies

Advantages	Disadvantages
Limited liability means owners are not personally responsible for the company's debts Access to greater finance and capital Easier to transfer ownership to new shareholders Can provide a professional image and reputation	They are expensive and time-consuming to set up More complex legal requirements and regulations than sole traders Annual financial reporting and auditing are required Shareholders have little control over the company as the founder usually imposes their agenda

Public limited companies

When a business is growing rapidly, it may require a significant amount of capital to fund its expansion
To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)
This is a complex legal process which involves undergoing a stock market flotation
Public limited companies sell their shares to the public on the stock exchange, meaning they can have a large number of owners
Public limited companies must publish their annual reports and hold an AGM each year
- A board of directors, whose members are elected by shareholders at the AGM, acts as the governing body of a company,
- The board of directors appoints a CEO to lead the company

Evaluation of Public Limited Companies

Advantages	Disadvantages
Significant amounts of capital can be raised very quickly The risks associated with ownership are spread among a larger group of shareholders Becoming a PLC raises a company's profile and increases its visibility with customers, suppliers, and potential investors	The business is required to adhere to a range of legal and financial regulations, which can be costly and time consuming to comply with Selling shares to the public creates many shareholders, who have a say in how the company is run PLCs are expected to deliver consistent growth and profits to their shareholders

Franchises & Joint Ventures

Franchising

Franchising involves a business (franchisee) buying the rights to operate an existing successful business model (franchisor)
- This right includes the use of its branding and software tools as well as business support, in exchange for an initial lump sum plus ongoing royalties

Some of the many food franchises available in the US include Wendy's, Dunkin' Donuts and Subway — **Some of the many food franchises available in the US**

The franchisee operates the business under the franchisor's established system and receives training, marketing support, and ongoing assistance
Franchisors usually require the franchisee to operate as a private limited company

Evaluation of Owning a Franchise

Advantages	Disadvantages
A ready-made, recognised brand name which is promoted centrally by the franchisor The franchisor provides training, such as how to make pizzas properly, so as to ensure quality and brand consistency Equipment and consistent supplies are provided through the franchisor The franchisor guarantees an exclusive geographical area or market to the franchisee so competition is limited Advice, training and the use of software systems are ongoing The franchisor may also provide loans, insurance and recruitment support	The cost of purchasing a well-known franchise is likely to be high, compared to starting a business from scratch Core decisions are made by the the franchisor, reducing the autonomy of business owners Royalties linked to the level of sales must be paid regularly, regardless of profit Required materials, supplies or equipment sold by the franchisor may be sold to the franchisee at inflated prices If the franchisee does not follow strict franchise rules or fails to meet quality expectations, their franchise rights can be removed

Advantages

Disadvantages

A ready-made, recognised brand name which is promoted centrally by the franchisor
The franchisor provides training, such as how to make pizzas properly, so as to ensure quality and brand consistency
Equipment and consistent supplies are provided through the franchisor
The franchisor guarantees an exclusive geographical area or market to the franchisee so competition is limited
Advice, training and the use of software systems are ongoing
The franchisor may also provide loans, insurance and recruitment support

The cost of purchasing a well-known franchise is likely to be high, compared to starting a business from scratch
Core decisions are made by the the franchisor, reducing the autonomy of business owners
Royalties linked to the level of sales must be paid regularly, regardless of profit
Required materials, supplies or equipment sold by the franchisor may be sold to the franchisee at inflated prices
If the franchisee does not follow strict franchise rules or fails to meet quality expectations, their franchise rights can be removed

Examiner Tips and Tricks

A franchise is not a form of business ownership - it is an alternative to starting up a brand new business from scratch. In most cases franchisors require businesses to operate as private limited companies as this ownership type is considered to have more stability than sole traders or partnerships

Joint ventures

A joint venture is a medium- to long-term agreement for two or more separate businesses to join together to achieve a defined business outcome, such as entry into a new market
- A new combined business entity is formed
- Risks and returns are shared by the parties involved in the joint venture
- Businesses in a joint venture are usually looking to benefit from complementary strengths and resources brought to the venture
Many European companies have set up joint ventures with businesses in China
- Chinese managers and employees understand market needs and consumer tastes, which gives the venture a greater chance of success
- The Chinese government encourages joint ventures rather than foreign direct investment (FDI)
- German car manufacturer BMW and Chinese rival Brilliance Auto Group formed a joint venture called BMW Brilliance in 2003 to produce and sell BMW cars in China

Evaluation of Joint Ventures

Advantages	Disadvantages
Each partner in the joint venture benefits from sharing expertise and resources, such as distribution channels and R&D expertise Joint ventures are less risky than 'going it alone' if entering a new market or diversification Local knowledge can be accessed when one of the joint venture partner companies is already based in the country Costs are shared between joint venture companies, which is very important for expensive projects such as new aircraft	If the joint venture is successful, profits have to be shared between the partner businesses Disagreements may occur regarding important decisions due to the input of managers in both businesses The objectives of each business may change over time, leading to a conflict of objectives between joint venture partners If the joint venture fails, it may need to be dismantled, reorganised or sold, which is likely to take significant time and resources

Advantages

Disadvantages

Each partner in the joint venture benefits from sharing expertise and resources, such as distribution channels and R&D expertise
Joint ventures are less risky than 'going it alone' if entering a new market or diversification
Local knowledge can be accessed when one of the joint venture partner companies is already based in the country
Costs are shared between joint venture companies, which is very important for expensive projects such as new aircraft

If the joint venture is successful, profits have to be shared between the partner businesses
Disagreements may occur regarding important decisions due to the input of managers in both businesses
The objectives of each business may change over time, leading to a conflict of objectives between joint venture partners
If the joint venture fails, it may need to be dismantled, reorganised or sold, which is likely to take significant time and resources

Last updated: 12 June 2024

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