Choosing Appropriate Business Ownership (Edexcel IGCSE Business)

• When a business is first established, its owner needs to decide whether to operate as a sole trader or partnership, or form a private limited company
  • Businesses that require little start-up capital and are low-risk, can operate effectively as a sole trader or partnership
  • Where a large amount of start-up capital is required, or where the business is high-risk, the owner will be better protected if they form a private limited company
    
    
• As a business grows, its owner may choose to change its legal structure
  • A partnership may be formed to attract more capital, bring in new skills or involve others to provide greater stability
  • A private limited company may be formed to reduce the increased level of risk, attract new capital or provide for business continuity
    
    

Examples of Suitable Ownership Types for Small Businesses

Example	Suitable Ownership	Explanation
Rupa Ling is setting up a small online tutoring business she intends to run from her own home	Sole Trader	Minimal capital equipment is required to establish the business It is unlikely to be risky as running costs are low
Kwame Ofori has invited two friends to join him in running and expanding his successful fashion retail business	Partnership or Private Limited Company	Planned business growth could be funded through capital investment by Kwame's friends for which they are likely to want a say in running the business As a successful business, the financial risks are likely to be small so a partnership could be suitable If Kwame and his friends want limited liability protection, they should form a private limited company
L&H Building Supplies' senior partner would like to ensure that her children can run the business after her retirement	Private Limited Company	Continuity can be assured as shares can be passed to new owners without dissolving the business The children will have the protection of limited liability The senior partner can continue to own shares following retirement

• Private limited companies that require significant capital to grow could consider a stock market flotation to become a public limited company
  • The original owners receive significant financial rewards following flotation but lose some control over the business as ownership is diluted
  • The business must meet strict criteria to become a public limited company and follow specific financial rules, such as publishing detailed annual financial reports
    
    
• Venture capitalists provide an alternative form of finance for business owners who prefer the business to remain privately owned
  • In return for a share in the business, these investors provide capital for a determined period of time
  • They may be willing to invest in risky enterprises that have failed to secure external finance from other sources, such as banks
    
    
• Alternatively, private limited companies may enter into joint ventures with other businesses to achieve a specific objective
  • A separate limited company is established for the duration of the joint venture and is usually dissolved upon its completion
    
    

Examples of Suitable Ownership Types for Large Businesses

Example	Suitable Ownership	Explanation
Family-owned Technologie Przyszłości Ltd requires finance to open two further AI research centres in Poland	Private Limited Company with venture capitalists	As AI is a new technology, the growth plans may be considered too risky for traditional lenders such as banks Venture capitalists may be more interested in the potential for high returns on investment Opening two research centres is relatively small scale so vast sums raised through stock market flotation are unlikely to be needed The family owners can retain control by remaining as a private limited company
UK brewery company Brewdog Ltd aims to expand globally following rapid European growth	Public Limited Company	Ambitious growth plans in a competitive global market is likely to require significant finance that may only be raised through a stock market flotation The business has enjoyed recent success so its IPO would attract significant attention and shares are likely to be attractive to investors