IB Business Management HLUnit 1.2 — Types of Business EntityPaper 1 & 2Core idea~11 min read
Sole Traders, Partnerships and Companies
Inside the private sector there is a ladder. At the bottom you own everything, control everything and risk everything. Every step up brings more money and more skills, and takes away a little control. Knowing which rung a firm is on tells you most of what you need to know about it.
📘 What you need to know
A sole trader has one owner. Cheap to start, full control, but unlimited liability.
A partnership has two or more owners sharing capital, skills and decisions — and usually still unlimited liability.
A private limited company (Ltd) sells shares to invited people only, and gives owners limited liability.
A public limited company (plc) sells shares to anyone on a stock exchange, after a flotation.
Unlimited liability means personal assets can be taken to pay business debts. Limited liability caps the loss at what you invested.
Companies are separate legal entities — the business, not the owner, owns the assets and owes the debts.
More owners means more money, but less control and more rules.
The ownership ladder
Firms do not have to climb. Plenty of profitable businesses stay sole traders on purpose, because the owner wants the control more than the growth.
Sole trader
One owner. They may still employ people — “sole” refers to ownership, not to being alone in the building.
Advantages
Disadvantages
Cheap and quick to set up, with very little paperwork
Unlimited liability — personal assets are at risk
Complete control over every decision
Hard to raise finance; banks see one person as risky
All the profit belongs to the owner
One person cannot be good at everything
Decisions are instant, so the firm reacts fast
Time off is difficult; illness can close the business
Simple tax arrangements and high personal satisfaction
The business ends if the owner stops
Partnership
Two or more owners join up. Common in law, accountancy and medicine, where a group of qualified people share an office and a reputation.
A partnership agreement is the document that stops later arguments. It sets out how profits are split, who can vote on what, and what happens if someone wants out.
Advantages
Disadvantages
More capital than one person could raise alone
Still unlimited liability in a standard partnership
Responsibility and stress are shared
Disputes, because decisions need agreement
A wider range of skills and knowledge
Profits are often split equally even if effort is not
Cover for holidays and illness
Ownership is hard to transfer or sell
The unfair-split problem is worth remembering. If one partner brings in most of the clients but profits are shared equally, resentment builds fast. That is exactly the sort of tension examiners want you to spot in a case study.
The step that changes everything: limited liability
Limited liability also unlocks investment. People will put money into a company they do not run, because the worst case is losing the amount they chose to risk.
Private limited company (Ltd)
Ownership is divided into shares, but those shares can only be sold to people the existing owners invite — usually family, friends or venture capitalists. Many Ltds are family businesses. Day-to-day decisions often sit with a managing director or CEO.
Advantages
Disadvantages
Limited liability protects the owners’ personal assets
More expensive and slower to set up
Easier to raise finance; lenders see it as more solid
Legal requirements are more complex than a sole trader’s
Ownership transfers by selling shares
Annual accounts must be filed and audited
A more professional image with customers and suppliers
Less privacy — outsiders can see some financial data
Public limited company (plc)
When a firm needs a very large amount of capital, it can float on a stock exchange and sell shares to the public. That process is expensive, heavily regulated and permanent in its consequences.
Benefit of floating
What it gives the firm
Access to capital
Very large sums raised quickly, often cheaper than borrowing
Shared risk
Ownership spread over many shareholders, so no one person carries it
Liquidity
Shares are easy to buy and sell, which makes them worth more
Expertise
A board of directors brings outside experience
Profile
Higher visibility with customers, suppliers and investors
Continuity
Shares can be sold or inherited without ending the business
The price of going public: detailed accounts must be published, the media reports on every decision, legal and accounting costs are large, and the original founder can lose control — or the whole company — if someone buys enough shares.
🧩 How to answer “should this firm change its legal structure?”
Say where it is now and what that structure is costing the owner.
Name the trigger from the case study — needs capital, fears debt, wants to expand.
Give the gain of moving up: limited liability, more finance, shared skills.
Give the loss: control, privacy, set-up cost, ongoing paperwork.
Judge it against the owner’s motive. An owner who values independence may be better off staying put.
EXAM-STYLE
Recommend whether a sole trader should become a private limited company. [6]
Case: Lena runs a growing catering business alone. She wants two vans and a bigger kitchen, which needs £60,000. She has been turned down by one bank already.
Case for becoming an Ltd
Limited liability means her flat is no longer security for business debt.
and she can sell shares to raise the £60,000 without a bankCase against
Set-up costs, legal advice and annual accounts all cost money and time she does not have.
plus she must share decisions with new shareholdersJudgement
The bank refusal is the deciding fact: she cannot fund the growth any other way.
Yes — become an Ltd, keeping a majority of the shareskeeping over half the shares protects her control while still raising money
EXAM-STYLE
Explain the importance of limited liability to shareholders. [4]
What it does
It caps the loss at the amount invested. Personal assets cannot be taken.
Why that matterslower risk → more people willing to invest → more finance availableWithout it, almost nobody would buy shares in a company they do not personally manage.It lowers risk, which raises the supply of capital
💡 Exam tip
Always link structure to the owner’s goal. The “best” structure depends entirely on what the owner wants.
Control versus capital is the trade-off running through this whole topic. Say it explicitly.
Small firms rarely need a plc. A business turning over modest sales is not floating on a stock exchange.
Mention the separate legal entity point when explaining limited liability — it shows you understand why it works.
Do not list advantages. Pick two, develop them, and tie them to the case study.
If the case mentions a bank refusing a loan, that is a strong hint that the structure needs to change.
⚠ Common mix-up
A sole trader can have employees. “Sole” is about ownership, not headcount.
Ltd shares are not on the stock exchange. They are sold privately, to invited buyers only.
Limited liability does not protect the business. The company can still go bankrupt; it protects the owners’ personal money.
Partnerships are not automatically limited. Unless the case says otherwise, assume unlimited liability.
Becoming a plc does not guarantee more money. Flotation is costly and can fail if investors are not interested.
Shareholders are owners, not lenders. They receive dividends, not interest, and only when profits allow.
Up next: Social Enterprises That Make a Profit — businesses that trade like any other firm but exist for a cause, including the co-operatives owned by their own members.
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