Choosing Appropriate Business Ownership (Edexcel IGCSE Business)

Business ownership for small businesses

Spec point — 1.2.2 · Most appropriate business type for a given enterprise and justification of suggestions

• 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

Ownership types for small businesses

• Rupa Ling is setting up a small online tutoring business she intends to run from her own home

  • Suitable Ownership: Sole Trader

  • Explanation:

    • Minimal capital equipment is required to establish the business
    • 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

  • Suitable Ownership: Partnership or Private Limited Company

  • Explanation:

    • Growth could be funded through capital investment by friends, who will likely want input in running the business
    • Financial risks are likely low, so a partnership could be appropriate
    • For 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

  • Suitable Ownership: Private Limited Company

  • Explanation:

    • Continuity assured as shares can be transferred to new owners without dissolving the business
    • The children benefit from limited liability protection
    • The senior partner can retain ownership through shares even after retirement

Business ownership for larger businesses

Spec point — 1.2.2 · Most appropriate business type for a given enterprise and justification of suggestions

• 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

Ownership types for large businesses

• Family-owned Technologie Przyszłości Ltd requires financing to open two further AI research centres in Poland

  • Suitable Ownership: Private Limited Company with venture capitalists

  • Explanation:

    • AI is considered risky by traditional lenders like banks
    • Venture capitalists may be attracted by the potential for high returns
    • Opening two research centres is a relatively small-scale project, so large-scale funding from stock market flotation isn't required
    • Family owners can retain control by remaining a private limited company

• UK company Brewdog Ltd aims to expand globally following rapid European growth

  • Suitable Ownership: Public Limited Company

  • Explanation:

    • Ambitious global growth will likely require substantial finance available through stock market flotation
    • The business's recent success could attract significant investor attention, making an IPO attractive

Exam Hint 'State' questions refer to a specific business so you must ensure that you include some context in your response, even though it is worth only one mark