Before an idea can trade, it needs a legal shape — and that single choice decides how much of the owner's own money is genuinely at risk if things go wrong.
Every idea covered so far — the opportunity spotted in 1.2, the aims set in 1.3.1, the finance arranged in 1.3.4 — needs a legal structure to actually operate within. This sub-topic covers the concept of liability and the three main types of business ownership available to a start-up, plus a genuinely different option: buying into an already-established franchise rather than starting completely from scratch.
The owner is personally responsible for all the business's debts. If the business fails owing money, the owner's personal savings, car or even home could be used to repay what's owed.
The owner's liability is limited to what they've invested in the business. If the business fails, personal assets beyond that original investment are protected.
This single distinction has a real practical implication for anyone starting a business: unlimited liability means genuinely risking your own personal finances if things go wrong, while limited liability offers real protection — though as you'll see below, that protection usually comes with extra legal responsibilities attached.
The simplest and cheapest structure to set up, giving the owner full control and all of the profit — but with unlimited liability, and the entire workload resting on one person.
Shares the workload, decision-making and profit between several owners, bringing a wider range of skills and more capital to the business — but usually still carries unlimited liability, and disagreements between partners can be genuinely difficult to resolve.
Gives owners the protection of limited liability and a separate legal identity from its owners — but is more complex and costly to set up, and must publish its accounts publicly each year, which sole traders and partnerships don't have to do.
Rather than building a completely new business from scratch, an entrepreneur can pay to operate a franchise — the right to trade under an already-established business's brand, products and operating system, in exchange for an upfront fee and ongoing royalty payments.
Drag each scenario into the business ownership option it best illustrates.
Standalone questions below are typical of Section A — no case study needed. The 6 and 9-mark questions are built around a Source Booklet–style case study, matching how Section B and C actually work in the real exam.
Which one of the following business ownership types has unlimited liability?
A. Private limited company
B. Sole trader
C. A company selling shares on the stock exchange
D. None of the above
Answer: B.
Outline one advantage of operating as a private limited company rather than a sole trader.
Structure guide: two linked points — eg "A private limited company benefits from limited liability (1), meaning the owners' personal assets are protected if the business fails (1)." Points must connect; unlinked points cap the mark at 1.
Explain one disadvantage of purchasing a franchise rather than starting an independent business.
Structure guide: 1 mark identifying a disadvantage, plus 2 further marks developing it — eg "Franchisees must pay ongoing royalty payments to the franchisor (1), which reduces the amount of profit the franchisee keeps (1), even though the franchisee is doing all of the day-to-day work of running the business (1)."
Analyse the impact on Ellie of choosing to operate as an independent sole trader rather than purchasing a franchise.
Structure guide: application (AO2) and analysis (AO3a) together — eg identify that as a sole trader Ellie keeps full control over her branding and all of her profit, with no franchise fees to pay (AO2), then analyse how this gives her complete independence, but also means she must build customer trust and awareness entirely from scratch without an already-recognised brand name to draw on, a genuine challenge the franchise option would avoid (AO3a).
Ellie is considering two options: setting up independently as a sole trader, or purchasing a franchise of an established coffee chain. Justify which option Ellie should choose.
Structure guide: apply knowledge to Ellie's specific situation (AO2), analyse points on both sides (AO3a) — the sole trader route offers full control and profit but genuine risk building a brand from nothing, while the franchise offers a proven model and instant recognition at the cost of ongoing fees and reduced independence — then reach a clear, justified choice (AO3b).