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

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — 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. Name the four business ownership types identified in the specification, and state which of them have unlimited liability. [4]

2. Explain what “limited liability” actually caps for a shareholder in a private or public limited company. [3]

Section B

3. Explain why the reporting requirements of a public limited company are more extensive than those of a sole trader. [6]

4. State three sources of finance that are realistically available to a private limited company but not to a sole trader, and explain why each is out of reach for a sole trader. [6]

5. A private limited company is deciding between raising finance through a bank loan and issuing shares to its existing shareholders. Explain one risk of each option. [4]

6. Explain why incorporating a business as a limited company changes the liability of its owners. [5]

7. Evaluate the view that a public limited company is always the best ownership structure for a growing business. [10]

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Answers

1. The four ownership types are sole trader, partnership, private limited company (Ltd) and public limited company (plc) [1] [1]. Sole traders and partnerships (for ordinary partners) have unlimited liability; private and public limited companies have limited liability [1] [1].

2. Limited liability caps a shareholder’s maximum possible loss at the value of their investment in the company [1]. If the company becomes insolvent, the shareholder’s personal assets beyond that investment cannot be used to settle the company’s debts [1], unlike a sole trader or ordinary partner, whose personal assets remain at risk [1].

3. Reporting requirements exist to protect people who have a financial stake in a business but no direct control over its day-to-day running [1]. A sole trader has no outside shareholders, so this protective function is largely absent and reporting obligations are minimal [1]. A plc’s shares are openly traded and can be held by potentially thousands of investors, none of whom manage the business directly [1], so company law requires it to file audited annual accounts and publish financial statements that meet statutory disclosure requirements [1] [1]. The scale of public investment, not simply the size of the business, is what drives the heavier reporting burden [1].

4. Ordinary shares — a sole trader has no share capital structure to sell shares against, since the business is not incorporated [1] [1]. Debentures — realistically require the scale and formal legal structure of an incorporated company to issue [1] [1]. Preference shares — like ordinary shares, these require a share capital structure that only exists once a business is incorporated; a sole trader has no equivalent instrument to offer [1] [1]. (A bank loan or mortgage is not a good answer here: sole traders can and do obtain both, typically secured against personal assets and personal creditworthiness rather than company assets — incorporation changes who is borrowing and what secures the loan, not whether debt finance is available at all.)

5. Bank loan: carries fixed interest and repayment obligations regardless of how profitable the company is, and may require security against company assets, putting those assets at risk if the company defaults [1] [1]. Issuing shares to existing shareholders: dilutes each shareholder’s percentage stake unless all invest proportionally, and commits the company to meeting future dividend expectations from profits, without a fixed repayment schedule to plan against [1] [1].

6. Incorporating as a limited company creates a distinct legal entity separate from its owners [1] — this is the mechanism behind limited liability, not just a label attached to it [1]. Because the company itself, not the shareholder personally, owns its assets and owes its debts [1], a shareholder’s exposure is capped at what they invested even if the company becomes insolvent [1]. A sole trader or ordinary partner has no such separation: the business and the individual are legally the same entity, so business debts are the individual’s debts [1].

7. Case for a plc being the best structure: a plc can raise substantial capital by issuing shares to the public, funding growth at a scale sole traders, partnerships and even private limited companies cannot easily match [1] [1]. Its shareholders benefit from limited liability, making external investment more attractive than in an unlimited-liability structure [1]. Case against: a plc faces the most extensive statutory reporting and disclosure requirements of the four ownership types, imposing significant cost and administrative burden [1] [1]. Public share ownership dilutes control, since existing owners answer to a wider shareholder base and can face pressure for short-term returns [1]. Many growing businesses raise sufficient finance and retain adequate liability protection as a private limited company, without taking on the cost and scrutiny of public listing [1]. Judgement: whether a plc is “best” depends on the scale of capital the business actually needs and the owners’ willingness to accept reduced control and heavier reporting obligations in exchange for that capital [1] [1] — for many growing businesses, a private limited company meets the same liability and financing needs without those costs, so the claim that a plc is always best is not supported [1].

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Where marks are usually lost

• Naming an ownership type’s liability position without explaining why it holds (the legal separation, or its absence).
• Treating “limited liability” as capping the company’s losses rather than the owner’s.
• Listing a source of finance without explaining why it is or is not available to a given ownership type.
• Giving a one-sided evaluation of ownership structure that ignores the reporting and control costs of incorporation.