Business legal forms - Sole trader partnership company and l...

Learning Outcomes

After reading this article, you will be able to distinguish between sole traders, partnerships, companies (including private and public), and limited liability partnerships (LLPs). You will understand their key characteristics, legal status, ownership, liability, and requirements. By the end, you should be able to choose the most suitable form of business for various situations according to ACCA exam standards.

ACCA Business and Technology (BT) Syllabus

For ACCA Business and Technology (BT), you are required to understand the core business legal forms and their importance in organisational structure and stakeholder relationships. You must be confident with:

• The main types of commercial business forms: sole trader, partnership, limited company, and limited liability partnership (LLP)
• The legal identity and implications of each business type
• Differences in ownership, liability, and legal requirements
• Key features affecting decision-making, continuity, and fundraising ability

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. Which business form offers its owners limited liability?
   1. Sole trader
   2. Partnership
   3. Company
   4. Both c and d

2. True or false? In a general partnership, each partner is personally responsible for all the partnership’s debts.

3. Which business form is considered to have a separate legal personality from its owners?

4. List two important differences between an LLP and a general partnership.

Introduction

Every business must select an appropriate legal form at the outset. The choice of legal structure affects not only liability and ownership, but also business continuity, decision-making, and access to capital. This article covers the basic legal forms most commonly examined in ACCA exams: sole trader, partnership, company (both private and public), and LLP.

Key Term: Legal form of business
The legally recognised structure in which a business is organised, determining its legal status, liability, and regulatory obligations.

Sole Trader

A sole trader is the simplest business form, owned and controlled by one individual.

Sole Trader Characteristics

• The business is not separate from its owner (no distinct legal identity)
• The owner takes all profits and is responsible for all losses
• The owner makes all decisions alone
• Registration requirements are minimal

Key Term: Sole trader
A business owned and operated by one person, who is entitled to all profits and liable for all debts.

Sole Trader Advantages

• Full control for the owner
• Simple set-up and minimal regulation
• Direct access to profits

Sole Trader Disadvantages

• Unlimited personal liability: if the business owes money, the owner is personally responsible
• Difficulty raising large amounts of capital
• Business ceases on death of the owner

Worked Example 1.1

Maria opens a bakery as a sole trader. She borrows £7,000 to buy equipment. After a year, the business cannot pay the loan. Who is responsible?

Answer:
Maria is liable. As a sole trader, she must repay the debt, even if it means selling personal assets.

Partnership

A partnership exists when two or more people operate a business together for profit.

Partnership Characteristics

• Usually created by an agreement between the partners (written or oral)
• Each partner shares in profits and has management powers
• No separate legal personality

Key Term: Partnership
An arrangement where two or more individuals carry on business together with the aim of making a profit, jointly sharing liabilities and profits.

Partnership Liability

• In a general partnership, partners have unlimited joint and several liability for partnership debts
• Each partner can bind the firm and the other partners

Partnership Advantages

• Shared decision-making and responsibilities
• Pooled skills and resources
• Straightforward to form

Partnership Disadvantages

• Unlimited liability for all partners
• Disagreement may lead to conflict
• Partnership dissolves on death, bankruptcy, or resignation of a partner (unless otherwise agreed)

Worked Example 1.2

Ali and Yvonne run a design consultancy partnership. The business acquires a debt of £24,000 it cannot pay. What is Yvonne’s liability?

Answer:
Yvonne is fully liable for the entire £24,000, even if Ali cannot contribute.

Exam Warning

Remember: In general partnerships, each partner is liable for the whole debt, not just their share.

Limited Liability Partnership (LLP)

An LLP combines features of a partnership and a company. This business form is a separate legal entity.

LLP Characteristics

• Separate legal personality distinct from its members
• Partners are called 'members'
• Must register with Companies House (or relevant authority)

Key Term: Limited liability partnership (LLP)
A business structure where partners (members) have limited liability and the entity is legally separate from its owners.

Key Term: Separate legal personality
The capacity of a business entity (such as a company or LLP) to exist independently of its owners or members, possessing rights and liabilities in its own name.

LLP Liability

• Members' liability is generally limited to the amount they have agreed to contribute
• The LLP itself is liable for its own debts

LLP Advantages

• Limited liability protection for members
• Flexible management like a partnership
• Continuity not affected by changes of membership

LLP Disadvantages

• Must comply with filing and disclosure requirements
• Not suitable for all professions or businesses
• Publicly available accounts

Worked Example 1.3

M, J, and K form an LLP that becomes insolvent with debts of £40,000. Each had agreed to invest £5,000 but had not contributed further. What is the maximum each is liable for?

Answer:
Each member’s maximum liability is £5,000 (the amount they agreed to contribute).

Limited Companies

A company is a separate legal person from its shareholders. Companies can be private (Ltd) or public (plc).

Limited Company Characteristics

• Must register with Companies House (or equivalent)
• Owned by shareholders, run by directors
• Separate legal personality

Key Term: Limited company
A business with a legal existence separate from its owners, whose liability is limited to their investment in the company’s shares.

Shareholder Liability

• Shareholders have limited liability — they are responsible only up to the unpaid amount on their shares

Private Company (Ltd)

• Shares cannot be offered to the public
• Usually smaller businesses

Public Limited Company (plc)

• Can offer shares to the public (normally on a stock exchange)
• Subject to stricter regulation and disclosure

Limited Company Advantages

• Shareholder liability is limited
• Easier access to finance
• Perpetual succession (company continues even if shareholders change)

Limited Company Disadvantages

• More regulatory requirements and costs
• Accounts and information are public
• Loss of direct control for small shareholders

Comparison Table: Business Legal Forms

Key Point Checklist

This article has covered the following key knowledge points:

• Identify the features of sole traders, partnerships, LLPs, and limited companies
• Explain the meaning and consequences of limited liability and separate legal personality
• Recognise differences in ownership, liability, and disclosure
• Apply the legal form differences to practical business scenarios
• Know the registration and regulatory requirements for each business form

Key Terms and Concepts

• Legal form of business
• Sole trader
• Partnership
• Limited liability partnership (LLP)
• Separate legal personality
• Limited company