Compare the main forms of private-sector business organisation - sole trader, partnership, private limited company and public limited company - and their advantages and disadvantages

What this dot point is asking

This outcome wants you to compare the main legal forms a private-sector business can take and explain their advantages and disadvantages. The four forms are the sole trader, the partnership, the private limited company and the public limited company. The central ideas are ownership, control, how capital is raised, and whether the owners have limited or unlimited liability.

The answer

Sole trader

A sole trader is a business owned and controlled by one person. It is the simplest and most common form.

• Advantages: easy and cheap to set up, the owner keeps all profit, has full control, and enjoys privacy (accounts are not published).
• Disadvantages: unlimited liability (the owner is personally responsible for all debts), hard to raise finance, long hours and full responsibility, and the business ends if the owner stops.

Partnership

A partnership is a business owned by two or more partners (often 2 to 20) who share the work, profits and responsibility, usually under a partnership agreement (a deed).

• Advantages: more capital than a sole trader, shared workload, and partners can bring different skills.
• Disadvantages: unlimited liability (in an ordinary partnership), profits are shared, decisions must be agreed (risk of disagreement), and one partner's mistakes bind the others.

Private limited company (Ltd / Pte Ltd)

A private limited company is an incorporated business owned by shareholders. Shares cannot be sold to the general public. It is a separate legal entity from its owners.

• Advantages: limited liability (shareholders can lose only what they invested), more capital from selling shares to family and selected investors, and continuity (the company carries on if an owner leaves).
• Disadvantages: more expensive and complex to set up, must publish some accounts, shares cannot be sold freely, and there is some loss of privacy and control.

Public limited company (plc / Ltd by shares listed)

A public limited company is a large incorporated business whose shares can be sold to the public on a stock exchange.

• Advantages: can raise very large amounts of capital from the public, limited liability, high status and profile, and easier future borrowing.
• Disadvantages: expensive to set up and run, must publish full detailed accounts, risk of takeover if outsiders buy enough shares, original owners lose control, and pressure for short-term profit and dividends.

Choosing a form

The right form depends on how much capital is needed, how important control and privacy are to the owners, and the risk involved (limited liability protects personal assets). Firms often start as sole traders and become companies as they grow.

Examples in context

Example 1. A market stall becomes a company. A trader starts as a sole trader selling phone accessories from a market stall, keeping all the profit and all the risk. As sales grow she wants to open shops and protect her savings, so she forms a private limited company with a friend as co-shareholder, gaining limited liability and extra capital. This shows the common path from sole trader to company as a business grows and risk rises.

Example 2. A plc raising capital to expand. A large supermarket chain that wants to open dozens of new stores becomes a public limited company and floats on the stock exchange, raising hundreds of millions from public shareholders. The trade-off is that the founding family no longer controls all decisions and must publish full accounts, but the capital funds rapid expansion. This illustrates why big, fast-growing firms become plcs despite the loss of control.

Try this

Q1. State two advantages of being a sole trader. [2 marks]

• Cue. Any two of: easy and cheap to set up, the owner keeps all the profit, the owner has full control, and the business stays private (accounts not published).

Q2. Explain what is meant by limited liability and why it benefits shareholders. [3 marks]

• Cue. Limited liability means shareholders can lose only the money they invested in the company, not their personal assets, because the company is a separate legal entity. It benefits shareholders by protecting their homes and savings if the business fails, which makes them more willing to invest.

Q3. Analyse one disadvantage for the owners of turning a private limited company into a public limited company. [4 marks]

• Cue. Selling shares to the public means new shareholders gain voting rights, so the original owners lose some control over decisions and risk a takeover if outsiders buy enough shares. They must also publish detailed accounts, reducing privacy, and may face pressure to pay dividends rather than reinvest. So the cost of raising large public capital is a real loss of control and privacy for the founders.