1.4.1 The options for start-up and small businesses — Edexcel GCSE Business revision notes

The concept of limited liability

Liability means legal responsibility for the debts of a business. It is the single most important idea in this sub-topic, because it decides what an owner stands to lose if the business fails.

Unlimited liability means the owner and the business are legally the same thing. If the business cannot pay its debts, the owner must pay them from their own money — and if that is not enough, personal possessions such as a car or a house can be taken.

Limited liability means the business is a separate legal entity from its owners. If it fails, the owners lose only the money they put in. Their personal possessions are protected.

Figure: What each means for the owner

	Unlimited liability	Limited liability
Legal position	Owner and business are the same	The business is a separate legal entity
If the business fails	The owner is personally responsible for all debts	The owner loses only what they invested
Personal possessions	At risk	Protected
Which types	Sole trader, partnership	Private limited company (ltd), public limited company (plc)
Trade-off	Simple to set up, private accounts	More paperwork, accounts must be published

Common mistake

Limited liability limits what the owner can lose, not what the business owes. The business is still fully responsible for its debts — it is the owner's personal assets that are protected.

Liability: legal responsibility for the debts of a business
Unlimited liability: the owner and the business are legally the same, so if the business cannot pay its debts the owner's personal possessions can be taken
Limited liability: the business is a separate legal entity from its owners, so the most they can lose is the money they invested
Sole trader: a business owned by one person, who keeps all the profit but has unlimited liability
Partnership: a business owned by two or more people who share the profits, usually with unlimited liability

Types of business ownership for start-ups

Figure: The three types named in the specification

Type	What it is	Advantages	Disadvantages
Sole trader	One person owns and runs the business	Quick and cheap to set up; the owner keeps all the profit and makes all decisions; accounts stay private	Unlimited liability; hard to raise finance; no one to share the workload or the risk; the business stops if the owner is ill
Partnership	Two or more people own the business together	More capital and more skills than one person; the workload and decisions are shared; still fairly simple to set up	Unlimited liability; profits are shared; partners can disagree; each partner is bound by the others' decisions
Private limited company (ltd)	A company owned by shareholders, whose shares cannot be sold to the public	Limited liability; easier to raise finance by selling shares; the business continues even if an owner leaves	More paperwork and legal requirements; accounts must be published; profits shared as dividends; some loss of control

Worked example

A plumber working alone is considering becoming a private limited company. Explain one advantage and one disadvantage.

Identify what changes legally: as a sole trader he has unlimited liability; as a company he would have limited liability.
The advantage follows directly — if the business failed, his house and savings would be protected, and he only risks what he invested.
Identify the cost of that protection: a company must file accounts publicly and meet more legal requirements.
That means more paperwork and probably an accountant's fee.
Judge it against his circumstances, since a good answer weighs rather than lists.

Answer: The advantage is limited liability: if the business failed he would lose only what he had invested, not his personal possessions. The disadvantage is the extra paperwork and cost — accounts must be published and legal requirements met, which for a one-person business may outweigh the protection unless he is taking on significant debt.

Franchising

A franchise is an arrangement where one business, the franchisor, allows another person, the franchisee, to trade under its name and sell its products, usually in return for an initial fee and a share of the revenue.

The franchisee is running their own business, but within rules set by the franchisor — which is what produces both the advantages and the disadvantages.

Figure: Franchising, from the franchisee's point of view

Advantages	Disadvantages
An established brand customers already recognise and trust	An initial fee to buy the franchise, which can be substantial
A proven business idea, so the risk of failure is lower	A share of revenue or profit must be paid to the franchisor every year
Training and ongoing support from the franchisor	Little freedom — products, prices, layout and suppliers are usually set by the franchisor
National advertising paid for by the franchisor	The reputation of the whole chain affects this branch, even if it is run well
Easier to obtain finance, because banks see less risk	The franchisor can refuse to renew the agreement

The pattern: a franchisee trades independence for a lower risk of failure — which is 1.1.2's risk and reward trade-off in a specific form.

Common mistake

A franchisee owns their own business — they are not an employee of the franchisor. What they give up is freedom over how it is run, not ownership of it.

Franchise: an arrangement where one business, the franchisor, allows another person, the franchisee, to trade under its name and sell its products, usually for an initial fee and a share of the revenue

Before you practise

Unlimited liability: owner and business are the same, so personal possessions are at risk.
Limited liability: the business is a separate legal entity, so owners lose only what they invested.
Sole trader and partnership have unlimited liability; private limited companies have limited liability.
Sole trader: easy to set up and keeps all profit, but unlimited liability and hard to raise finance.
Partnership: more capital and shared workload, but shared profit and unlimited liability.
Private limited company: limited liability and easier finance, but more paperwork and published accounts.
A franchisee gets an established brand, a proven idea and support, but pays fees and has little freedom.
Franchising trades independence for a lower risk of failure.

The concept of limited liability

Types of business ownership for start-ups

Franchising

Before you practise

Now practise it