AQA A Level Accounting: Types of Business Organisation — Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Types of Business Organisation study guide | Types of Business Organisation revision notes

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Section A

1. State the four business ownership types named in the specification. [4]

2. State two sources of finance available to a public limited company that are not available to a sole trader. [2]

Section B

3. Explain the difference between unlimited and limited liability, naming one ownership type that has each. [4]

4. Compare the statutory reporting requirements of a sole trader with those of a public limited company, and explain why they differ. [6]

5. Two partners have not drawn up a written partnership agreement. Explain what governs their partnership as a result, and state two of its default terms. [3]

6. A private limited company wants to raise a large amount of finance and is considering issuing ordinary shares to the general public. Explain what change of legal structure this would require, and two risks the original owners should consider. [6]

7. Explain two named finance sources realistically available to a partnership, and one risk attached to each. [6]

8. Evaluate whether a profitable sole trader who wants to expand significantly should convert to a private limited company. [10]

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Answers

1. Sole trader, partnership, private limited company (Ltd), public limited company (plc) [1 each].

2. Any two: ordinary shares, debentures [1 each].

3. Unlimited liability means the owner’s personal assets can be used to settle business debts — applying to a sole trader (or ordinary partner) [1] [1]. Limited liability means the owner’s loss is restricted to the amount invested — applying to shareholders in a private or public limited company [1] [1].

4. A sole trader has no statutory filing requirement for their accounts [1], whereas a plc must file accounts under company law and meet extensive public disclosure and audit requirements [1]. This differs because the plc’s shares are publicly tradable, so a wider group of stakeholders — shareholders who are not involved in day-to-day management, potential investors, and regulators — need reliable, verified information to make decisions [1] [1], while a sole trader’s finance and risk are personal, with no outside shareholders to protect [1] [1].

5. In the absence of a written agreement, the Partnership Act 1890 applies by default [1]. Any two default terms: profits are shared equally, regardless of unequal capital contributions [1]; no partner is entitled to a salary [1]; (also acceptable: no interest on capital; no interest charged on drawings; interest is allowed on a partner’s loan to the partnership).

6. The company would need to convert from a private limited company (Ltd) to a public limited company (plc) in order to offer shares to the general public [1] [1]. Risks: issuing shares dilutes the original owners’ ownership and control, since new shareholders gain voting rights [1] [1]; becoming a plc brings more extensive statutory reporting and audit requirements, increasing compliance cost [1] [1].

7. Partners’ capital — each partner contributes capital on formation or later; risk: this directly reduces each partner’s personal wealth available elsewhere, and unlike a loan, does not have to be repaid on a fixed schedule but does dilute individual ownership of profits [1] [1] [1]. Bank loan — a fixed-term loan the partnership repays with interest; risk: regular repayments are required regardless of the partnership’s trading performance, and since ordinary partners have unlimited liability, a default can put personal assets at risk [1] [1] [1].

8. Arguments for converting: limited liability protects the owner’s personal assets if the expansion increases risk of default [1]; access to new sources of finance, such as loans secured more easily against the company’s own assets or, in future, share issues [1]; a company structure can appear more credible and stable to lenders, suppliers and larger customers [1]; as a separate legal entity the company continues regardless of changes in ownership, which eases long-term contracts and eventual succession or sale [1]. Arguments against: the business takes on statutory accounts filing for the first time, increasing compliance cost and administrative burden [1]; incorporation involves legal and administrative set-up costs and formalities not required for a sole trader [1]; the owner loses some flexibility and privacy, since filed accounts become a matter of public record [1]; the owner can no longer take drawings freely, since money is withdrawn as directors’ remuneration or as dividends, which company law restricts to distributable profits [1]. Judgement: the right decision depends on how much the expansion increases financial risk, and how much additional finance is genuinely needed [1]; a modest, self-funded expansion may not justify the extra compliance burden of incorporation, but a large expansion requiring external finance and carrying meaningful risk of debt makes limited liability status considerably more valuable [1].

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Where marks are usually lost

• Naming ownership types without linking benefits, risks and reporting differences when a question asks for comparison.
• Stating the Partnership Act 1890 applies without giving any of its actual default terms.
• Treating incorporation as risk-free, ignoring the new compliance burden it brings.
• Naming a finance source without a specific, named risk attached to it.

Approaching types of business organisation questions

Build every answer around the specification’s own three comparison dimensions — formation/ownership, benefits and risks, and reporting requirements — rather than describing one ownership type in isolation, since AQA consistently frames this topic through direct comparison or a business facing a growth decision. When a question describes a scenario, identify which specific ownership types are realistic options before evaluating them, and always attach a named, specific risk to any finance source rather than simply listing it — a source of finance without its associated risk rarely earns full marks on this content.