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Deciding on the Business Ownership Model

Exam code: 7115
Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Unincorporated Businesses and Limited Companies

Unincorporated businesses and limited companies

  • A business may be unincorporated or incorporated. These terms are closely linked to the concepts of limited liability and unlimited liability

    • An unincorporated business does not have a separate legal identity from its owner(s)

      • If the business is sued the owner is responsible and may need to cover legal costs with their own money

      • Unincorporated business types include sole traders and partnerships

    • An incorporated business is called a company and has a separate legal identity from its owner(s)

      • If the business goes bankrupt its owners (shareholders) cannot be held responsible for debts and only lose the money they initially invested

      • Incorporated businesses include private limited companies (Ltd) and public limited companies (PLC)

Comparing unincorporated and incorporated businesses

Unincorporated businesses

Incorporated companies

  • The owner has no legal separation from the business

  • A unique legal entity that is separate from business owners (shareholders)

  • The owner(s) carry full liability (unlimited liability) for the business and it's activities

  • Reduced risk and liability of the business to the owners (limited liability)

  • Can be started with little or no money

  • Can be expensive to incorporate

Recommending a form of Business Ownership

Recommending a form of business ownership

  • An entrepreneur must choose the ownership structure that suits the business needs, particular circumstances and the level of personal liability involved

  • Deciding on the best form of legal ownership requires the owners to consider many different factors

1. Type of ownership

  • Is unlimited or limited liability most appropriate?

  • Is the business based on an original idea or a franchise?

2. Desire for control and privacy

  • How much direct control over decisions does the owner(s) want?

  • Does the owner(s) want to share the workload?

  • Does the owner mind if the financial accounts are made publicly available?

3. Financial considerations

  • How much start-up finance is required?

  • How might the choice of finance affect the break even point/profits?

  • How is finance to be managed?

4. The aims and stage of business growth

  • Is the business new or established?

  • Does the owner want it to grow?

Examples of business ownership recommendations

Business description

Key considerations

Recommendations

  • Sarah wants to set up a new pizza business. She has 3 different options

    • Buy a franchise like Dominoes

    • Start small as a sole trader

    • Start small but register as a private limited company

  • Sarah does not have much money

  • Banks are often willing to lend to  franchisees due to relatively low risk, but this money has to be repaid

  • With a private limited company, the owner is not liable for outstanding expenses if business failure occurs

  • A private limited company may be a better option as it is relatively inexpensive to setup and provides Sarah with legal protection

  • The Franchise option is attractive but may be best bought into after some time, once Sarah knows she actually likes running a pizza business!

  • Sarah lacks finance so starting small and growing organically may be the best way forward

  • AMF is a large, fast-growing private limited company (Ltd) that specialises in commercial cleaning and maintenance services

  • AMF is seeking to to raise finance to continue their expansion. They can either

    • Become a Public Limited Company and sell shares

    • Take out a large bank loan

  • If AMF sells shares, they lose some control of the company but do gain access to a large pool of money

    • This money does not need to be repaid

    • New shareholders would have high expectations

  • Bank loans have to be repaid with interest, but AMF would keep control of their business

  • Going public would quickly provide access to large sums of money

  • AMF could investigate the cost and likelihood of getting a bank loan before they make a final decision

  • Their final decision may depend on how much money they need to raise. If it is significant, going Public would be the best way forward

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