Choose the Structure
How to choose the right legal structure for a business: weighing up control, finance, liability and profit, and matching the structure to a start-up or an established business.
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Picking a structure
When someone sets up a business they must choose a legal structure, such as a sole trader, a partnership or a private limited company. The best choice depends on the business: how much control the owner wants, how much money it needs to raise, how much risk the owner can take, and how the profit will be shared. This module looks at how to weigh these up.
Words for the choice
Learn these four terms before you weigh up the structures.
Sole trader or company?
The choice is often a trade-off between control and safety.
Judge it against this business
A top answer judges the structure against the particular business and its stage, not in general. A brand new business with little money often starts as a sole trader, while a growing, established business may become a private limited company to gain limited liability and raise finance. Always weigh the trade-offs.
Match the factor
- control
- sources of finance
- liability
- distribution of profits
- who makes the decisions in the business
- how easily the business can raise money
- whether owners could lose personal possessions
- how the profit is shared out
Match the business to a structure
- one person starting a small market stall
- two friends pooling money and skills
- an established firm wanting limited liability and more finance
- a group that reinvests its surplus for a good cause
- a sole trader, which is quickest to set up and answerable to nobody
- a partnership, which shares the workload but also the liability
- a private limited company, which protects personal assets and can sell shares privately
- a not-for-profit organisation, which has no shareholders expecting a dividend
What is limited liability?
What does limited liability mean?
- The owners can only lose the money they put in, not their personal possessions.
- The owners can lose their personal possessions if the business fails.
- The business does not have to pay any tax.
- The business can only borrow a limited amount of money.
Who has limited liability?
Select the TWO structures that have limited liability.
- A private limited company.
- A public limited company.
- A sole trader.
- An ordinary partnership.
A growth path
Put a common growth path for a business in order, earliest first.
- A sole trader starts alone
- Partners join to share skills and money
- The business becomes a private limited company
- The company floats as a public limited company
Summarise the choice
When choosing a structure, an owner weighs up control, _____, liability and profit. A sole trader keeps full control but has _____ liability, so personal possessions are at risk. A private limited company gives its owners _____ liability and can raise more money. Two people who share skills and money form a _____. A new business often begins as a _____ trader before it grows.
Count the owners
A partnership must have at least how many owners?
Find the unlimited liability
Tap the TWO structures that have unlimited liability.
- Sole trader
- Private limited company
- Ordinary partnership
- Public limited company
- A company with shareholders
Recommend a structure
Choose the most suitable structure for each business.
- One person wants to start a small business quickly and keep all the profit
- Two friends want to share the start-up costs and their different skills
- A growing firm wants limited liability and to raise more finance by selling shares privately
Justify a choice
A person is setting up a new bakery on their own with little money. Recommend the most suitable business structure and justify your choice.
- Recommend a structure for this business
- Explain one benefit of your choice
- Explain one drawback they should consider