Edexcel GCSE Business: Limited liability and business location (1BS0) – Revision Notes

These notes condense Theme 1, Topic 1.4 items 1.4.1 and 1.4.2 of the Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0) specification, Issue 2, July 2022. General points (partner liability, fee and royalty structure, share rules) are general knowledge, not specification text. For full explanations and worked examples, read the study guide. When you are ready to test yourself, use the practice questions, the Business hub, the printable checklist and the free diagnostics.

1.4.1 Liability: the core definitions

Term	Meaning	Who it affects
Unlimited liability	The owner is personally responsible for every business debt	Sole traders, and (in general) partners in an ordinary partnership
Limited liability	The owner can lose only the amount invested in the business	Shareholders in a private limited company

Implication in one line each:

• Unlimited: personal savings and property can be used to settle debts, so failure can be a personal disaster.
• Limited: personal wealth is protected, so the owner can take bigger risks, but creditors carry the loss.

Method: a liability calculation

1. Add up the total owed.
2. Subtract what the business assets raise when sold.
3. The result is the shortfall.
4. Unlimited liability: the owner funds the shortfall. Limited liability: the owner’s loss stops at the sum invested.

Reminder: a business owes £27,500 and its assets raise £19,000. Shortfall = 27,500 - 19,000 = £8,500.

1.4.1 Ownership types at a glance

	Sole trader	Partnership	Private limited company
Who owns it	One person	Two or more people	Shareholders
Liability	Unlimited	Unlimited in an ordinary partnership (general)	Limited
Main strengths	Full control, keeps all profit, easy start	Pooled money, skills and workload	Owner protection, can sell shares to raise funds, continues if an owner leaves
Main weaknesses	Personal risk, little capital, heavy workload	Disagreements, shared profit, personal risk	More rules and paperwork, shared control, shares generally not sold to the public
Typical fit	Hairdresser, tradesperson, market stall	Two dentists, a small design firm	A growing firm that wants outside investors

Profit sharing reminder: three partners agree to share equally and make £45,000. Each receives 45,000 / 3 = £15,000. If they share in the ratio of capital instead, add the parts first, then divide.

1.4.1 Franchising

Role	Who	Receives	Pays or provides
Franchisor	Owner of the brand and business method	Usually an initial fee and a royalty	Brand, method, often training and support
Franchisee	Person who runs the outlet	The profit left after paying	Initial fee, royalty, running costs

Advantages and disadvantages, sorted by who they affect:

• Franchisee gains: a recognised brand, a tested system, less risk, support.
• Franchisee loses: fees and royalties, little freedom over products and prices, shared reputation.
• Franchisor gains: faster growth using the franchisee’s money, a committed local manager, royalty income.
• Franchisor loses: some control over day-to-day quality, and part of the revenue.

Reminder calculation: initial fee £15,000, royalty 4% of sales revenue of £225,000. Royalty = 0.04 x 225,000 = £9,000. First-year payments = 15,000 + 9,000 = £24,000.

1.4.2 Location factors

Factor	Pulls the business toward	Gain	Risk
Market	Customers	More sales, lower delivery cost	High rent in popular places
Labour	Pools of the right workers	Easy recruitment, suitable skills	Competition for workers may raise wages
Materials	Suppliers and sources	Lower transport cost, less waste	Remote areas may lack customers
Competitors	Rivals, or away from them	Shared footfall, or a local monopoly	Shared customers, or low passing trade

Nature of the business activity

• Retail and personal services: market first, since trade depends on passing customers.
• Manufacturing with heavy or bulky inputs: materials, and often cheaper land.
• Skill-based work: labour.
• Perishable goods: speed to market or to the source.

Method for a “which site?” question: pick the factor that matters most for this activity, use figures from the stem, compare costs and likely sales revenue, then reach a judgement.

Reminder calculation: a shop pays £9,000 rent on total costs of £60,000. Rent share = 9,000 / 60,000 x 100 = 15%. One site has expected sales of £82,000 and another £64,000. The first is (82,000 - 64,000) / 64,000 x 100 = 28.1% higher.

The internet and location

• E-commerce: customers can be anywhere, so market proximity matters less.
• Cheaper premises become possible because customers do not visit.
• Fixed premises still matter for storage, dispatch, trying goods and services delivered in person.
• Click-and-collect or delivery adds new costs to weigh.
• Many firms mix an online presence with a shop or depot.

Building a strong written answer

Use a short chain for any “explain” or “analyse” point: point, because, which leads to, so.

• Ownership example: “A sole trader has unlimited liability, because business debts become personal debts, which leads to the owner risking their home, so they may avoid borrowing to expand.”
• Franchise example: “A franchisee gets a known brand, because customers already trust the name, which leads to steadier sales in the first months, so the risk of early failure is lower.”
• Location example: “A restaurant near offices has a ready market, because workers eat out at lunchtime, which leads to higher sales revenue, so a higher rent may still be worth paying.”

For a recommendation question, pick the option the evidence supports, then say what would change your mind. For example, a partnership may look attractive because of pooled money, but if the partners disagree about direction, a private limited company with a clear shareholder agreement may suit better.

Quick decision prompts

Which ownership type fits?

• One person, low capital, wants full control: sole trader.
• Two or three people with complementary skills who trust each other: partnership.
• Plans to raise money from outsiders, or the owners want their personal wealth protected: private limited company.
• Wants a tested system and a brand but little experience: franchise.

Which location factor first?

• Customers must walk in: market.
• Highly skilled staff are scarce: labour.
• Inputs are heavy, bulky or perishable: materials.
• Customers compare several suppliers on one street: competitors may be a benefit.

Must-know distinctions

• Limited liability limits the owner’s loss. It does not stop the business losing money.
• Sole trader is one owner. Partnership is two or more. A private limited company is owned by shareholders.
• Franchisor sells the right. Franchisee buys it.
• “Explain” needs a point plus two expansions. “Analyse” needs the context applied.
• “Justify” ends with a recommendation of one of two options. “Evaluate” ends with a supported conclusion.

Quick self-test

1. Define unlimited liability.
2. A sole trader’s business owes £35,000 and its assets raise £22,500. How much must the owner fund personally?
3. Give two types of business ownership for a start-up.
4. Name one advantage of a partnership over a sole trader.
5. Two partners put in £30,000 and £10,000 and share £28,000 profit in the ratio of capital. How much does each receive?
6. State who pays the royalty in a franchise.
7. A franchisee pays a 6% royalty on sales revenue of £150,000. Calculate the royalty.
8. Give one disadvantage of franchising for the franchisee.
9. Name the four proximity factors in the specification.
10. Why might a fresh-fish processor locate near the coast?
11. Give one reason an online-only seller might choose a low-rent unit.
12. Explain why a hairdresser is unlikely to move to a fully online model.

Answers

1. The owner is personally responsible for all the debts of the business.
2. 35,000 - 22,500 = £12,500.
3. Any two of sole trader, partnership, private limited company.
4. More capital, a wider range of skills, or a shared workload.
5. Ratio 3 : 1, four parts. One part = 28,000 / 4 = £7,000. First partner £21,000, second partner £7,000.
6. The franchisee pays it to the franchisor.
7. 0.06 x 150,000 = £9,000.
8. Fees and royalties, less control over products or prices, or a reputation shared with other outlets.
9. Market, labour, materials, competitors.
10. Fish is perishable, so being close to the source cuts transport time and spoilage.
11. Customers do not visit, so premises can be cheap and need only store and dispatch goods.
12. The service is delivered in person, so customers must come to fixed premises.

Where marks are usually lost

• Writing “unlimited liability means unlimited debts”. The point is personal responsibility for the debts.
• Stating that a limited company cannot go out of business.
• Describing a partnership as limited liability without qualification.
• Giving advantages of franchising without saying whether they favour franchisor or franchisee.
• Listing the four location factors without applying one to the business in the question.
• Forgetting the one-off fee when working out the first-year cost of a franchise.
• Rounding percentages carelessly or leaving out units such as the pound sign.
• Ending an “evaluate” or “justify” answer with a summary of points and no decision.
• Saying the internet makes premises unnecessary.

Frequently asked questions

What is the difference between limited and unlimited liability? With unlimited liability, the owner is personally responsible for all the business’s debts, so creditors can claim personal wealth such as savings. With limited liability, the owner’s risk is limited to the money they put in.

Do partners have limited liability? In general, partners in an ordinary partnership have unlimited liability, like a sole trader. Describing every partner as having limited liability is a common error in Edexcel GCSE Business (1BS0) answers.

What are the advantages and disadvantages of a franchise for the franchisee? A franchisee gains a known brand, a proven business format and often training and support. In return it pays fees and royalties, has less freedom over products and prices, and can be harmed by the franchisor’s reputation.

Does the internet mean a business no longer needs premises? No. E-commerce lets a business reach customers anywhere and use cheaper premises, but goods still need storing and sending, some customers want to see items, and services such as hairdressing cannot be delivered online.

Official syllabus

Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0), Specification, Issue 2, July 2022, published by Pearson Education Limited. Theme 1, Topic 1.4 Making the business effective, items 1.4.1 and 1.4.2.