Each business entity offers a different balance of control, finance, liability and purpose. No type is universally best; suitability depends on the organization's objectives, size, risk, capital needs and desired control.
This is IB Business Management subtopic 1.2 Types of business entities, for SL and HL, at AO3.
| Business entity | Advantages | Disadvantages |
|---|---|---|
| Sole trader | Easy to establish; owner keeps profit; rapid decisions | Usually unlimited liability; limited finance; heavy workload; weak continuity |
| Partnership | More capital and expertise; shared workload | Shared profits; possible conflict; partners may have unlimited liability, depending on legal structure |
| Privately held company | Limited liability; separate legal identity; continuity; share capital | More legal administration; possible disclosure; cannot offer shares publicly |
| Publicly held company | Public share sales can raise substantial capital; limited liability | Costly regulation; ownership-control separation; shareholder pressure; takeover risk |
| Cooperative | Member ownership and benefits; democratic control; social purpose | Slower decisions; limited external finance; conflict over priorities |
| Public-sector social enterprise | Provides essential services and prioritizes social objectives | Bureaucracy; political interference; dependence on government funding |
| Private-sector social enterprise | Commercial revenue supports a social mission; responsive to unmet needs | Tension between financial sustainability and social impact |
| NGO | Funds are reinvested in its mission; may attract donations and volunteers | Uncertain grant or donation income; donor restrictions |
The key mechanism is legal identity. Incorporated companies are legally separate from owners, supporting continuity and limited liability. Social enterprises and NGOs are distinguished mainly by purpose and how surpluses are used.
A common misconception is that limited liability prevents losses. It only limits shareholders' personal exposure; the company can still fail, and investors can lose their investment.
Exam technique: For an AO3 question, compare entities throughout rather than listing features. Apply each point to the case organization, then justify a conclusion using its objectives, finance, risk and desired control.
