Sole traders, partnerships and private limited companies

Sole trader

Owned by one person, who may employ others.

• Advantages: easy and cheap to set up; the owner keeps all the profit and makes all decisions; financial affairs stay private.
• Disadvantages: unlimited liability; finance limited to savings and loans; heavy workload; the business may not survive the owner's illness or death.

Partnership

Owned by two or more people who share the work, decisions and profits, usually under a deed of partnership setting out shares of capital and profit and how disputes are settled.

• Advantages: more capital and a wider range of skills; work and responsibility shared.
• Disadvantages: usually unlimited liability, and each partner can be liable for debts run up by the others; disagreements; profits shared.

Private limited company (Ltd)

A company is incorporated: it is a separate legal entity from its owners, the shareholders. It can own assets, sue and be sued in its own name. Shares are sold privately, often to family and friends, and cannot be offered to the general public.

• Advantages: limited liability for shareholders; easier to raise finance by selling shares and to borrow; continuity if a shareholder dies; seen as more credible by suppliers and lenders.
• Disadvantages: more set-up paperwork and costs; accounts must be filed and are available to the public; shareholders cannot sell shares freely; profits shared as dividends.

Worked example

Jonah and Priya run a successful catering partnership. They want to borrow $200,000 to open a second kitchen. Explain why they might become a private limited company first.

1. As partners they have unlimited liability, so their homes are at risk if the expansion fails.
2. As shareholders of an Ltd their risk is limited to their investment.
3. The company could also raise money by selling shares to family or friends, and banks may see it as more credible.

Answer: Becoming an Ltd protects their personal assets and widens their finance options, at the cost of more paperwork and public accounts.

Check yourself

1. What does it mean for a company to be incorporated?
   • It has a legal identity separate from its owners
   • It is owned by the government
   • It has unlimited liability
   • Its shares are sold on a stock exchange
   Show answer

   It has a legal identity separate from its owners. Incorporation creates a separate legal entity.

2. A deed of partnership sets out
   • the price of shares on the stock market
   • the company's tax rate
   • how profits are shared and how disputes are settled
   • the liability of shareholders
   Show answer

   how profits are shared and how disputes are settled. It is the partners' agreement.

3. Which is an advantage of being a sole trader?
   • The owner keeps all the profits
   • Limited liability
   • Easy access to share capital
   • Continuity if the owner dies
   Show answer

   The owner keeps all the profits. No one else shares the profit.

4. A disadvantage of a private limited company compared with a sole trader is that
   • the owners have unlimited liability
   • it cannot borrow from banks
   • it can only have one owner
   • its accounts must be filed and made public
   Show answer

   its accounts must be filed and made public. Companies lose financial privacy.

5. Why might a partner be liable for a debt they did not personally agree to?
   • Partners are shareholders
   • Partners usually share unlimited liability for the business's debts
   • The deed always transfers debts to the eldest partner
   • Partnerships are separate legal entities
   Show answer

   Partners usually share unlimited liability for the business's debts. In an ordinary partnership each partner can be pursued for the firm's debts.

6. Shares in a private limited company
   • are traded on a stock exchange
   • must be sold to employees
   • carry unlimited liability
   • cannot be offered for sale to the general public
   Show answer

   cannot be offered for sale to the general public. Ltd shares are sold privately and transfer needs agreement.

7. Explain one reason why a sole trader might choose to become a private limited company.
   Show answer

   To gain limited liability, so the owner's personal assets such as their house are protected if the business fails; it also makes it easier to raise finance by selling shares.. Limited liability protects personal assets; shares make finance easier to raise.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.