Forms of business — Edexcel A-Level Business
Test yourself on Forms of business with PEARSON EDEXCEL A-Level practice questions.
7 days Premium · Then free forever · No card, no charge
Forms of business explained
The choice of legal form is really a choice about liability, control, finance and disclosure, and a good answer runs all four.
Read the full explanation
An unincorporated owner and the business are the same legal person, so business debts reach personal assets such as the house, which is tolerable for a low risk consultancy and reckless for a builder carrying stock and employing staff. Taking partners brings capital and specialist skill but also liability for decisions the other partners make, which is why a deed of partnership matters. Incorporation creates a separate legal identity, caps the owner's loss at what they put in and makes it possible to sell shares to an investor, at the price of filing accounts at Companies House, more administration and sharing control. Evaluate on the risk of the trade, the finance needed for growth and how much control the founder wants to keep.
b) Franchising, social enterprise, lifestyle businesses, online businesses
These four models differ in how the business reaches customers and how much independence the founder keeps. Buying into a proven format lowers the failure rate because brand, training and supply chain already exist, but the buyer pays an upfront fee and a continuing royalty on revenue and must follow the operating manual, while for the brand owner it is growth funded by somebody else's capital. A social enterprise trades commercially yet exists to fund a mission, reinvesting its surplus rather than distributing it, which is how The Big Issue operates. A business built around the owner's chosen way of living is kept to a size one person can run, so satisficing explains its decisions. Selling through a website starts with low fixed costs and national reach, yet low barriers to entry mean rivals appear quickly and acquiring a customer can cost more than the margin on a first order.
c) Growth to PLC and stock market flotation
Floating, or making an initial public offering, is the point at which a company's shares are offered to the public and then traded on an exchange such as the London Stock Exchange or its junior market AIM. The pull is money and exit: large-scale equity finance carrying no interest and no repayment date, a route for founders and venture capital backers to sell part of their holding, and the profile a listed name brings. The price is real. Underwriting and prospectus costs run into millions before a single share is sold, the founder's stake is diluted, results must be published and defended to institutional investors, and an open share register makes a hostile takeover possible. Evaluation should reach the divorce of ownership from control, and note that the market can receive a float badly, as it did with Deliveroo in 2021.
Your focus
- a) Sole trader, partnership and private limited company
- b) Franchising, social enterprise, lifestyle businesses, online businesses
- c) Growth to PLC and stock market flotation
Forms of business exam tips
Marking Points
- Contrast unlimited liability, where personal assets are exposed, with limited liability, where a shareholder can lose only the amount invested.
- Link form to finance, since an incorporated business can issue shares to an investor while a sole trader relies on savings, retained profit and loans.
- Apply the argument to the risk of the particular trade in the case, because the cost of unlimited liability depends on what could go wrong.
- Weigh the burden of incorporation, including published accounts, filing duties and dilution of control, against the protection it buys.
- Explain the franchise bargain from both sides: lower risk and a known brand for the person buying in, rapid growth with limited capital for the brand owner.
- Quantify the franchise cost where the data allows, since a royalty charged on revenue is paid whether or not the outlet makes a profit.
- Define a social enterprise by what happens to the surplus, not by the absence of one.
- Apply the cost structure of trading online: low fixed costs and wide reach set against low barriers to entry, delivery costs and customer acquisition cost.
- Explain that this raises permanent equity capital rather than debt, so there is no interest charge and no repayment date.
- Set the gain against the costs, including flotation fees, dilution of the founder's stake, continuing disclosure and exposure to a hostile takeover.
- Use the divorce of ownership from control to explain short-termism, where managers chase the figure institutional shareholders watch.
- Judge whether the business genuinely needs finance on that scale, since a private company can grow on retained profit, bank debt or private equity.
Examiner Tips
- 💡This is usually a recommend or justify item, so pick one form, give two supported reasons and state what would change your mind.
- 💡Use the extract's figures, such as the finance required or the value of assets at risk, as the evidence behind the choice.
- 💡Do not spend the answer defining the three forms; one clause each, then spend the marks on the decision.
- 💡Franchising is a frequent assess item, and a clear structure is risk, control, cost and growth, judged for the named person in the extract.
- 💡If the case gives a joining fee and a royalty rate, calculate the annual cost and compare it with forecast profit before reaching a judgement.
- 💡Name the real business from the extract throughout, because generic model answers lose the application marks.
- 💡This is usually a twenty mark evaluation, so plan two developed arguments each way and a conclusion that turns on how much finance the firm needs.
- 💡Weigh floating against the alternatives named in the extract, such as a bank loan or private equity, rather than discussing it in isolation.
- 💡Use ownership and control language explicitly, because that is the phrase the mark scheme rewards.
Common Mistakes
- Claiming limited liability means the business cannot be sued or that its debts vanish, when the company remains liable and only the shareholder's personal assets are protected.
- Saying a private limited company can sell its shares on the stock exchange, which only a public limited company may do.
- Assuming a partnership is automatically safer than trading alone, which ignores liability for a partner's decisions.
- Claiming the person buying a franchise takes no risk, when the fee, the lease and the stock are all at risk and a damaged brand drags every outlet down.
- Assuming a small owner-run business has failed to grow, when the owner has chosen not to.
- Treating an online business as cheap in every respect and forgetting delivery, returns and digital marketing costs.
- Saying the company raises the money when existing shareholders are selling their own shares, in which case the cash goes to them rather than to the business.
- Assuming the share price always rises after listing, when several well-known floats have fallen on the first day.
- Confusing a public limited company with a public sector organisation owned by the state.