Sole Trader

· Sole trader = a business owned and controlled by one person.
· The owner keeps all profits but also bears all losses.
· Usually has unlimited liability: the owner is personally responsible for business debts.
· Advantages: easy to set up, owner has full control, keeps profits, simple accounting records, quick decision-making.
· Disadvantages: limited finance, heavy workload, lack of continuity if owner stops trading, unlimited liability, limited management expertise.
· Accounting link: the business is still treated as a separate accounting entity, so business transactions must be recorded separately from the owner’s personal transactions.

Partnership

· Partnership = a business owned by two or more partners.
· Partners usually share capital, profits, losses, management responsibilities and decision-making.
· Most ordinary partnerships have unlimited liability, so partners may be personally responsible for partnership debts.
· Advantages: more capital than a sole trader, shared workload, more skills and expertise, easier to expand, shared decision-making.
· Disadvantages: profits are shared, disagreements may occur, decisions may be slower, unlimited liability, partnership may end if a partner leaves or dies.
· Accounting link: partnerships often need capital accounts, current accounts, and a profit appropriation account later in the syllabus.

Limited Company

· Limited company = a business owned by shareholders and managed by directors.
· It has separate legal identity, meaning the company is legally separate from its owners.
· Shareholders usually have limited liability, so they normally only risk the amount invested in shares.
· Advantages: limited liability, easier to raise large amounts of finance, continuity, separate legal identity, ownership can be transferred through shares.
· Disadvantages: more legal requirements, accounts may need to be published, more complex administration, separation of ownership and control may cause conflict.
· Accounting link: limited companies use share capital, dividends, debentures, reserves, and a statement of changes in equity later in financial statements.

Public Limited Company (plc)

· Public limited company (plc) = a limited company whose shares can be offered to the general public.
· Ownership is through shareholders, but control is usually exercised by directors.
· Advantages: can raise large finance from share issues, limited liability for shareholders, high public profile, continuity.
· Disadvantages: strict legal controls, higher costs, public disclosure of accounts, possible loss of control if many shareholders buy shares.
· Exam focus: compare a plc with a sole trader or partnership when discussing growth, finance, risk and control.

Ownership, Management and Control

· Ownership = who owns the business: sole owner, partners or shareholders.
· Management = who runs day-to-day operations: owner, partners, managers or directors.
· Control = who makes major decisions and has legal power over the business.
· In a sole trader, ownership and control are usually the same person.
· In a partnership, control is shared between partners.
· In a limited company, ownership and control may be separated because shareholders own the company while directors manage it.

Advantages and Disadvantages: Quick Comparison

· Sole trader: best for small, simple businesses needing control and flexibility, but risky due to unlimited liability and limited finance.
· Partnership: useful where owners need shared capital and expertise, but conflict and unlimited liability can be major drawbacks.
· Limited company: suitable for larger businesses needing more finance and limited liability, but has more legal and accounting requirements.
· plc: suitable for very large businesses seeking finance from the public, but faces high regulation and possible loss of control.
· Exam answers should always link advantages/disadvantages to the context: size, risk, finance needs, control, continuity and stakeholder impact.

Sources of Finance and Methods of Funding

· The syllabus requires understanding of finance methods for different entities, including loans, bank overdrafts, payment by instalments, rental/leasing, trade credit, and company finance sources.
· Loans: borrowed finance repaid over time; may be secured against assets or unsecured.
· Bank overdraft: short-term borrowing from a bank account; flexible but can be expensive and repayable on demand.
· Payment by instalments: buying assets by paying in regular amounts over time.
· Rental/leasing: using an asset without buying it; helps cash flow but ownership stays with the lessor.
· Trade credit: buying goods or services now and paying suppliers later; useful for short-term working capital.
· Limited company finance: may include ordinary shares, rights issues, bonus issues, debentures, retained earnings and other reserves later in the syllabus.

Choosing the Best Entity in Exam Questions

· Choose sole trader when the owner wants control, simple records and direct access to profits.
· Choose partnership when the business needs more capital, shared workload or specialist skills.
· Choose limited company when owners want limited liability, continuity and better access to finance.
· Choose plc when a business needs very large amounts of capital and is willing to accept public regulation and wider shareholder ownership.
· Always justify decisions using evidence from the scenario, not just memorised definitions.

Common Exam Traps

· Do not confuse business entity concept with legal identity: a sole trader is separate for accounting purposes but not usually legally separate from the owner.
· Do not say all businesses have limited liability; sole traders and ordinary partnerships usually have unlimited liability.
· Do not write about Limited Liability Partnerships because the syllabus says questions on LLPs will not be set.
· Do not list finance sources without explaining whether they are suitable for the business’s size, risk, cash flow and ownership structure.
· Do not forget that shareholders own a limited company, while directors usually manage it.