Different legal structures suit different types of business activity. Choosing the right form of organisation affects ownership, liability, taxation and the ability to raise finance.
Sole traders
A sole trader (or sole proprietor) is the simplest form of business. The owner makes all decisions and keeps all profits but has unlimited liability – their personal assets are at risk if the business fails. Sole traders are easy to set up and suitable for small, local enterprises that require a personal service.
Partnerships
A partnership is an unincorporated business owned by two or more people who share profits and responsibilities. A partnership agreement often sets out how decisions and profits are shared. Like sole traders, most partners have unlimited liability unless they register as a limited liability partnership (LLP). Partnerships allow owners to pool skills and resources, but disagreements can occur.
Limited companies
Incorporated businesses have a separate legal identity from their owners, providing limited liability for shareholders.
- Private limited companies (Ltd) – shares are owned by a small group of investors and are not available to the public. They must publish accounts but disclosure is less detailed than public companies.
- Public limited companies (plc) – shares can be sold to the public via a stock exchange. They can raise large amounts of capital but are subject to greater regulation and disclosure requirements.
Both types of company are managed by a board of directors elected by the shareholders.
Franchises
A franchise is an arrangement in which a business (the franchisor) sells the right to use its brand name and business model to an independent operator (the franchisee). The franchisee pays an initial fee and ongoing royalties in return for marketing, training and support. This allows rapid expansion for the franchisor and a lower‑risk start‑up for the franchisee, but limits the franchisee’s freedom to make changes.
Joint ventures and other forms
Two or more businesses may form a joint venture to undertake a specific project, sharing costs, risks and profits. Other ownership forms include co‑operatives (businesses owned and run by their members for mutual benefit) and social enterprises (organisations that reinvest profits to achieve social objectives rather than maximise shareholder returns).
| Form | Main features | Advantages | Disadvantages |
|---|---|---|---|
| Sole trader | Owned and controlled by one person; unincorporated. | Simple to set up; owner keeps all profits; full control. | Unlimited liability; long hours; limited capital. |
| Partnership | Owned by two or more partners; unincorporated. | Shared skills and workload; more capital than a sole trader. | Unlimited liability (unless LLP); profits shared; potential disagreements. |
| Private limited company (Ltd) | Incorporated; shares not sold to the public. | Limited liability; separate legal entity; easier to raise capital. | Legal formalities; shares cannot be freely sold; disclosure of accounts. |
| Public limited company (plc) | Incorporated; shares traded on a stock exchange. | Large amounts of capital can be raised; limited liability. | Strict regulation; risk of takeover; separation of ownership and control. |
| Franchise | Independent franchisees trade under a franchisor’s brand and system. | Established brand; support and training; reduced risk. | Franchise fees and royalties; less independence; reputation tied to franchisor. |
| Co‑operative | Owned and run by members who use its services or work there. | Members share profits and decision making; focuses on member needs. | Raising capital can be difficult; slower decision making as all members are consulted. |
| Social enterprise | Business with primarily social or environmental objectives; profits are reinvested. | Generates positive social impact; can access grants and donations. | Limited distribution of profits to owners; balancing social and commercial goals can be challenging. |
| Joint venture | Two or more firms create a separate business for a specific project. | Shared risk and resources; access to partners’ expertise and markets. | Potential for disagreements; profits must be shared; objectives may diverge. |
Public corporations
A public corporation (also called a state‑owned enterprise) is a business owned and controlled by the government. It is set up to provide goods or services in the national interest rather than solely for profit.
Advantages of public corporations
- Ensure the provision of essential services that might be unprofitable if left to the private sector (such as public transport or utilities).
- Can achieve economies of scale and avoid wasteful duplication of resources.
- Profits can be reinvested for social benefit rather than distributed to private shareholders.
- Protect strategic industries and employment and support economic development.
Disadvantages of public corporations
- Less incentive to minimise costs or innovate because profit is not the primary motive.
- Decision making may be influenced by political considerations rather than efficiency.
- Potential bureaucratic inefficiencies and slower responses to market changes.
- Losses must be covered by taxpayers.
Examples and applications
A sole trader could be a local hairdresser or a corner shop owned by one person who takes all the decisions and keeps all the profits. A partnership is common in professional services such as law and accountancy, where partners share the workload, skills and profits. A private limited company might be a family‑run furniture manufacturer whose shares are owned by family members. A public limited company is a large corporation such as Apple or Unilever whose shares can be bought by the public on the stock exchange. Well‑known franchises include fast‑food chains like McDonald’s and Subway, where independent franchisees operate outlets using the franchisor’s brand and business model. Co‑operatives are common in agriculture: farmers pool resources to buy supplies and market their products jointly. A social enterprise such as TOMS Shoes reinvests profits to provide shoes for children in need. A joint venture occurs when two firms collaborate on a specific project, such as two car companies partnering to develop a new electric vehicle.
