Business ownership
Choosing an ownership structure means comparing the options set out in BUS.EN2 directly against each other on practical criteria: how easy and cheap they are to set up, how much finance they allow the business to raise, how much control the founder keeps, and the level of liability the owner accepts.
Method
- Learn to compare ownership structures directly against each other on specific criteria: ease or cost of setting up, ability to raise finance, level of control the founder keeps, and liability.
- Learn that unincorporated structures, sole trader and ordinary partnership, are quick and cheap to set up and keep control with the founder, but limit how much finance can be raised and carry unlimited liability.
- Learn that incorporated structures, Ltd and plc, are more complex and costly to set up, but can raise more finance by selling shares and give owners limited liability.
- Learn franchising as an alternative: the franchisee pays for the right to trade using an established brand, product and business model, trading some independence for a lower-risk, proven format.
- For recommend or justify questions, identify the entrepreneur's stated priorities in the case, such as wanting to keep full control or needing to raise a large amount of capital, and match the structure that best fits those priorities.
- Learn that a business can, and often does, change its ownership structure as it grows, for example a sole trader becoming a private limited company once it needs more capital than the owner alone can provide.
Worked example
Grace and her sister want to open a small cake decorating business together. They have enough savings between them to cover start-up costs, want to keep the business simple and cheap to run, and are comfortable being personally responsible if anything goes wrong, since the risk of large debts is low. Justify which ownership structure would suit Grace and her sister best.
- Identify their priorities from the case: keeping things simple and cheap to set up, and being comfortable with personal responsibility for the low level of risk involved.
- Consider the incorporated option: forming a Ltd would give limited liability, but is more complex and costly to set up and requires filing annual accounts, which does not match their stated wish to keep things simple.
- Consider the unincorporated option: an ordinary partnership is quick and cheap to set up, with no complex legal filing requirements, matching their priority of simplicity.
- Weigh the liability trade-off against the case detail: a partnership carries unlimited liability, but the case states they are comfortable with this given the low risk of large debts in their type of business.
- Write the justified decision: a partnership best suits Grace and her sister, since it is simple and cheap to set up as they want, and its unlimited liability is an acceptable trade-off given they have already said they are comfortable with the low risk their cake business involves.
Practice questions
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Q1State one ownership structure that is generally quicker and cheaper to set up than a private limited company.Show answer
Answer: A sole trader, or an ordinary partnership.
Q2Identify which type of ownership structure allows a business to raise finance by selling shares privately to a small number of investors.Show answer
Answer: A private limited company (Ltd).
Q3Give one disadvantage of an unincorporated structure such as a sole trader compared with a Ltd.Show answer
Answer: The owner has unlimited liability, so their personal assets are at risk if the business cannot pay its debts, and it is generally harder to raise large amounts of finance.
Q4State what a franchisee pays a franchisor for.Show answer
Answer: The right to trade using the franchisor's established brand, product and business format.
Q5Give one advantage of buying a franchise rather than starting an entirely independent business.Show answer
Answer: It uses a proven business format with support from the franchisor, which reduces the risk of failure compared with an unproven, independent idea.
Q6Explain why a growing business might change from being a sole trader to a private limited company.Show answer
Answer: Because it may need to raise more finance than the owner alone can provide, and forming a Ltd allows this while also gaining limited liability to protect the owner's personal assets.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Explain one advantage and one disadvantage of buying a franchise rather than setting up a completely independent business.
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Idris has invented a new type of children's board game and wants to start selling it. He has no savings of his own but a group of six family members are willing to invest a total of 15,000 pounds between them if they can each become part-owners with limited liability. Idris wants to keep the business affordable to run and does not want to expose the family investors to unlimited personal risk. Justify which ownership structure Idris should choose.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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