Business legal forms - Ownership control and agency

Learning Outcomes

By the end of this article, you will be able to identify and distinguish between the main business legal forms—sole trader, partnership, company, cooperatives, and others—as well as understand the key differences in ownership and management. You will explain agency relationships, control structures, and the implications of limited and unlimited liability. You will be able to evaluate the impact of business form choice on decision-making, responsibility, and stakeholder interests in the context of the ACCA Business and Technology syllabus.

ACCA Business and Technology (BT) Syllabus

For ACCA Business and Technology (BT), you are required to understand the various legal forms that businesses may take, the separation of ownership and management, and the agency concept. These are fundamental for understanding stakeholder roles, governance, and overall business structure.

• Explain the main types of business legal forms: sole trader, partnership, company, cooperatives, NGOs, and public sector
• Compare the characteristics of limited and unlimited liability
• Explain the separation of ownership and management in different legal forms
• Describe the agency concept and its implications for decision-making and control
• Identify the impact of business form choice on stakeholders, risk, and management

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the key distinction between a company and a partnership in terms of legal identity and liability?
2. In which legal form is separation of ownership and management most clearly present?
3. Define the term 'agency relationship' in the business context.
4. True or false? Sole traders enjoy limited liability for business debts.

Introduction

The legal form a business adopts shapes its structure, control, liability, and stakeholder relationships. From sole traders to partnerships, companies, cooperatives, and public sector entities, the legal status determines how ownership, management, and control are exercised. Understanding these forms is essential for addressing issues such as liability, governance, agency, and stakeholder interests.

Key Term: business legal form
The structure created by law under which a business is established and operated, determining issues such as ownership, liability, and management responsibility.

Key Term: limited liability
The legal principle that restricts business owners’ financial responsibility for company debts to the amount they have invested.

Key Term: unlimited liability
The situation where owners are personally responsible for all the debts of the business, without limit.

Key Term: agency relationship
The arrangement where one party (the agent) is authorised to act on behalf of another (the principal), typically seen between business owners and managers.

Main business legal forms

Sole trader

A sole trader is a business owned and operated by a single person. The owner has complete control, receives all profits, but is also personally liable for all debts.

Features:

• Owned and controlled by one person
• No legal distinction between business and owner
• Owner makes all key decisions
• Unlimited liability

Partnership

A partnership involves two or more individuals sharing ownership and management. Partners contribute resources, share profits, and are personally liable for the partnership's debts unless the partnership is a separate legal entity (e.g. in some limited liability partnerships).

Features:

• Shared ownership and joint decision-making
• Profits and losses divided as per agreement
• Unlimited liability for most partnerships (some exceptions, such as Limited Liability Partnerships)
• No legal distinction between partners and business (in traditional partnerships)

Limited company

A limited company is a separate legal entity from its shareholders. It may be privately or publicly owned. Shareholders' liability is limited to their investment. Management is commonly delegated to appointed directors.

Features:

• Distinct legal entity
• Separation of ownership (shareholders) and management (directors)
• Decision-making via the board of directors
• Limited liability
• Perpetual succession

Other forms

• Cooperatives: Owned and controlled by their members, each member typically having one vote. Profits are usually distributed amongst members.
• Non-governmental organisations (NGOs): Not-for-profit, often with specific social, community, or advocacy objectives.
• Public sector organisations: Government controlled, mandated to provide services for the public good.

Comparing business forms

Exam Warning Remember: Only companies offer limited liability and clear legal separation between business and owners as standard. This impacts risk and decision-making.

Separation of ownership and management

In companies, the legal form enables owners (shareholders) to appoint directors as managers. This division allows professional management and contributes to business continuity. In sole traders and most partnerships, owners are also managers.

Agency relationship in business

When ownership and management are distinct, as in companies, directors and managers act as agents on behalf of the shareholders (principals). This creates an agency relationship, where agents are expected to act in the best interests of their principals.

Key Term: principal
The person or group who authorises another (the agent) to act on their behalf and whose interests should be protected by the agent.

Key Term: agent
The person or entity authorized to act for a principal in dealings with third parties, such as a director managing a company on behalf of shareholders.

Agency implications

Where agency relationships exist, issues may arise if managers' decisions benefit themselves rather than the owners (agency problem). Strong governance mechanisms—like oversight, reporting requirements, and alignment of incentives—are essential to mitigate this risk.

Worked Example 1.1

A public limited company has thousands of shareholders who do not participate in day-to-day operations. The board of directors manages the business and makes all major decisions.

Question: Who owns the company, and who controls it? Answer:
Ownership lies with the shareholders. Control is exercised by directors acting as agents for the shareholders.

Limited and unlimited liability

• Limited liability (companies): Investors risk losing only their investment; personal assets are protected.
• Unlimited liability (sole traders, most partnerships): Owners are fully responsible for debts; personal assets may be used to pay business obligations.

Worked Example 1.2

Riz owns a bakery as a sole trader. The business fails and owes £25,000 to suppliers. Riz has £5,000 in business assets and £40,000 in personal savings.

Question: Is Riz personally liable for the debts?
Answer:
Yes, as a sole trader, Riz will have to use personal savings to cover the remaining £20,000.

Decision-making and control

• Sole traders: Full autonomy, but also full risk.
• Partnerships: Shared decision-making; joint risk.
• Companies: Directors make decisions on behalf of multiple, often distant, owners.

Agency and stakeholder interests

The choice of business legal form affects stakeholder influence, risk exposure, and control. In businesses with separate ownership and management, stakeholders—such as employees, creditors, and the public—may rely on legal requirements and governance codes to ensure accountability.

Worked Example 1.3

A managing partner in a law firm enters into a contract with a supplier without the other partners’ approval.

Question: Are all partners bound by this contract? Answer:
Yes, in a general partnership, any partner usually has authority to bind the partnership, so all partners are responsible.

Summary

Business legal forms determine who owns, manages, controls, and bears risk in an organisation. Understanding the separation between ownership and control is fundamental for assessing agency relationships, liability, and stakeholder protection. Companies create clear distinctions between principals (shareholders) and agents (directors), and offer limited liability. Other forms, such as sole traders and partnerships, combine ownership and management but may expose owners to greater personal risk.

Key Point Checklist

This article has covered the following key knowledge points:

• Define the different business legal forms (sole trader, partnership, company, cooperative, NGO, public sector)
• Distinguish between limited and unlimited liability
• Explain the separation of ownership and management
• Describe the agency relationship and identify principals and agents
• Analyse the impact of business form choice on decision-making and stakeholder interests
• Recognise typical agency problems and how governance can address them

Key Terms and Concepts

• business legal form
• limited liability
• unlimited liability
• agency relationship
• principal
• agent