Understand the different legal structures that businesses adopt

The idea

Legal structure determines who owns a business, how it is controlled, how profits are shared and the extent of owners' liability. Unincorporated structures include sole traders and partnerships; owners have unlimited liability, so personal assets are at risk. Incorporated structures include private and public limited companies; they have separate legal identity and limited liability, but must register and disclose more information. Other forms include not-for-profit organisations. Choosing a structure affects access to finance, tax, risk and decision-making. For example, a sole trader keeps all profit but faces unlimited liability, while a private limited company can sell shares to raise capital but must file accounts. Understanding these differences allows students to recommend a suitable structure for a given business context.

What earns the marks

• Identifies and names a range of legal structures, including sole trader, partnership, private limited company, public limited company, and not-for-profit organisations.
• Explains the key difference between unincorporated and incorporated structures, including separate legal identity and limited versus unlimited liability.
• Describes how ownership, control and profit distribution vary between structures, for example sole trader versus private limited company.
• Explains how the choice of legal structure affects access to finance, risk, tax and administrative requirements.
• Applies knowledge to a business scenario by recommending a suitable legal structure and justifying the choice with reference to the context.

Common mistakes and how to put them right

• Thinking a private limited company and a public limited company are the same.

  Put it right: A private limited company cannot offer shares to the general public, while a public limited company can.

• Believing a partnership always has limited liability.

  Put it right: In a standard partnership, partners usually have unlimited liability, although limited liability partnerships exist.

• Assuming a sole trader cannot employ staff.

  Put it right: A sole trader can employ staff, but remains the sole owner with unlimited liability.

• Confusing a franchise with a legal structure.

  Put it right: Franchising is a method of growth, not a legal structure like a sole trader or limited company.

Exam tips

• When comparing legal structures, use a table or clear paragraphs to contrast liability, ownership, finance and control.
• In application questions, name the structure and then link its features directly to the case study details, such as the need for capital or the owner's attitude to risk.
• For evaluation questions, weigh up the advantages and disadvantages of at least two structures before making a justified recommendation.