1.4 Types of Businesses

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1.4 Types of Businesses

Big Idea: A business can be owned and structured in different ways — as a sole trader, partnership, or company — and each choice involves different levels of personal risk, control, complexity, and financial protection.

Quick Summary

Sole traders — one owner, unlimited liability, easy to set up, keep all profits
Partnerships — two or more owners, unlimited liability, shared responsibility and profits
Private limited companies (Ltd) — limited liability, complex to set up, shares held privately
Public limited companies (PLC) — limited liability, shares sold publicly on stock exchange, large capital access
Franchises — pay to use an established brand and system; not a form of ownership but an alternative
Joint ventures — two separate businesses join to achieve a shared goal; risks and profits shared
Public sector — government-owned businesses providing essential services

⚖️ Limited vs Unlimited Liability — The Foundation Concept

What is Liability?

Liability simply means responsibility for debts. When a business owes money (to suppliers, banks, creditors), someone has to pay it back. The question is: whose personal assets are on the line?

This is the single most important distinction between business ownership types. It affects everything: how much you can lose, how risky your personal life becomes, and how protected you are if the business fails.

Unlimited Liability

Definition: You (the owner) are personally responsible for ALL debts of the business. If the business owes £100,000 and only has £30,000 in assets, the remaining £70,000 comes from YOUR pocket — you may need to sell your house, car, or other personal possessions to cover it.

⚠️ Real Example: Why This Matters

A sole trader runs a small restaurant. Bad year: the business fails and owes suppliers £50,000. But the business only has £15,000. The owner must personally pay the extra £35,000 — from savings, by taking a loan, or by selling personal assets. The owner's personal life is financially destroyed.

Who has unlimited liability?

Sole traders
Partnerships (each partner is personally liable)

Limited Liability

Definition: You (the owner/shareholder) can only lose the money you invested. If you bought £50,000 of shares in a company and it collapses owing £1 million, you lose your £50,000 but no more. You are NOT personally responsible for the remaining debts.

✓ Real Example: The Safety Net

A person invests £20,000 buying shares in a private company. The company fails and owes £500,000. The shareholder loses their £20,000 investment but nothing more. They don't have to sell their house or personal assets. The creditors lose money, but the shareholder is protected.

Who has limited liability?

Private limited companies (Ltd)
Public limited companies (PLC)

Why? Because the company is a separate legal entity. The company, not the owner, is the legal entity that borrows money and signs contracts. If the company fails, the company goes bankrupt — not the owner.

Aspect

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Also in the full note

👤 Sole Traders
🤝 Partnerships
🏢 Private Limited Companies (Ltd)
📈 Public Limited Companies (PLC)
🍕 Franchises — An Alternative, Not an Ownership Type
🔗 Joint Ventures
🎯 Deciding on the Right Business Ownership Structure
🏛️ Public Sector Businesses

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1.4 Types of Businesses