Revision NotesExam QuestionsPast Papers
IGCSEBusinessCambridge (CIE)Revision Notes1. Understanding Business Activity1.4 Types of BusinessesThe Main Types of Ownership

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

Revision Note

Danielle Maguire

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

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 

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

Last updated:

You've read 0 of your 5 free revision notes this week

Sign up now. It’s free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Test yourself

    Did this page help you?

    Previous:Why Businesses FailNext:Deciding on the Business Ownership Model
    Author
    Reviewer
    Danielle Maguire

    Author: Danielle Maguire

    Expertise: Business Content Creator

    Danielle is an experienced Business and Economics teacher who has taught GCSE, A-Level, BTEC and IB for 15 years. Danielle's career has taken her from across various parts of the UK including Liverpool and Yorkshire, along with teaching at a renowned international school in Dubai for 3 years. Danielle loves to engage students with real life examples and creative resources which allow students to put topics in a context they understand.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.