Choosing the correct business entity affects who owns the business, who controls it, and how the law views it. This topic compares the main entity types by legal form and ownership pattern.

Understanding business entities

A business entity is the form through which business activity is carried out. For this syllabus point, the most important distinctions are:

• who owns the business

• whether the business has a separate legal identity

• how ownership is represented

• whether ownership and management are the same or separated

Legal structure explains the relationship between the business and the law. Ownership structure explains who has a claim over the business and how that claim is held.

A key distinction is whether a business is incorporated or unincorporated. Sole traders and partnerships are usually unincorporated. Limited companies are incorporated.

Sole traders

A sole trader is the simplest ownership structure because one person owns the business.

In a sole trader business, the owner provides the capital, makes the main decisions, and is entitled to the profits. If the business makes a loss, that loss belongs to the owner.

Because the business is not legally separate from its owner, the assets and liabilities of the business are closely linked to the owner. The business may trade under a business name, but that does not create a separate legal entity.

This structure combines ownership and control in one person. The essential features are one owner and no separate legal identity.

Partnerships

A partnership has more than one owner, so ownership is shared.

In a partnership, the owners are called partners. Partners contribute capital to the business and share profits according to the agreed arrangement. They may also take part in managing the business.

For this syllabus, a partnership is normally treated as an unincorporated form of business. This means the partnership does not have the same separate legal standing as a limited company. The partners are therefore central to the identity of the business.

A partnership differs from a sole trader mainly because ownership is shared rather than held by one individual. However, it is similar in that the business is not usually viewed as a separate legal person in the same way as a company.

Limited companies

A limited company has a very different legal structure from a sole trader or partnership.

Because the company is a separate legal entity, it can own assets, enter contracts, and incur liabilities in its own name. The business does not legally disappear when shareholders change.

Ownership in a limited company is divided into shares. The owners are called shareholders.

This means ownership can be transferred by buying and selling shares, subject to the rules applying to that type of company. It also means that ownership and day-to-day management may be separated. Shareholders own the company, but directors usually manage it on their behalf.

Another important feature is limited liability.

This diagram summarizes the corporate governance chain: shareholders elect directors, and directors appoint officers to run operations. It also emphasizes that limited liability generally limits financial exposure to the corporation’s assets rather than shareholders’ personal assets. This is a visual bridge between the ideas of ownership (shareholders) and control (directors/officers). Source

This legal separation between company and owners is one of the main reasons why limited companies are treated as a distinct entity type. In accounting and business language, the company itself is the legal owner of its assets, not the individual shareholders.

Public limited companies

A public limited company is a specific type of limited company.

A public limited company still has all the core legal features of a limited company. It is incorporated, has separate legal identity, and is owned by shareholders. The difference is mainly in the ownership structure and the way shares may be offered.

Because shares can be offered to the public, ownership may be spread across a very large number of shareholders. This can produce a much wider separation between ownership and control than in a sole trader business or a partnership.

Not every limited company is public. Some limited companies are privately owned, while a plc is organized so that public share ownership is possible. A public limited company is still a limited company, not a completely separate category outside company ownership.

Key structural differences to identify

When comparing these entities, focus on structure rather than opinion.

• Sole trader

  • one owner

  • unincorporated

  • owner and business are the same legal person

• Partnership

  • two or more owners

  • unincorporated in normal syllabus treatment

  • partners jointly own the business

• Limited company

  • ownership divided into shares

  • incorporated

  • separate legal entity from shareholders

• Public limited company

  • a type of limited company

  • ownership through shares

  • shares may be offered to the public

A strong understanding of this topic depends on separating legal structure from ownership structure. Legal structure asks whether the business exists separately from its owners. Ownership structure asks whether the business belongs to one owner, several partners, or shareholders.