Businesses differ in who owns them, who is responsible for their debts, and what they are trying to achieve. The type of entity affects how a business raises finance, how decisions are made and how much risk the owners take.

Private sector and public sector

The private sector is made up of businesses owned by private individuals or groups, usually aiming to make a profit. The public sector is made up of organizations owned and controlled by the government, such as state schools, public hospitals or a national railway. Public sector organizations usually aim to provide a service to the public rather than to maximize profit.

The two sectors overlap. In a public-private partnership (PPP), the government and a private business work together on a public project, sharing the cost and the risk. Usually a private firm pays for, builds and runs something like a hospital, school or toll road, and in return the government pays it over a long contract (often 25 to 30 years), or lets it charge users. The government gets the project now without paying everything up front, and the private firm gets a steady income. Critics say PPPs can cost taxpayers more in the long run, because the private firm needs to make a profit and borrows at higher interest rates than the government.

For-profit commercial organizations

A key idea is liability. With unlimited liability, owners are personally responsible for all the business's debts, so they can lose personal assets like their house or savings. With limited liability, owners can lose only the money they invested in the business. Limited liability exists because a company is a separate legal entity from its owners (it is incorporated).

	Sole trader	Partnership	Privately held company	Publicly held company
Owned by	One person	2 or more partners (often up to 20)	Shareholders, often family and friends	Shareholders, anyone can buy shares
Liability	Unlimited	Usually unlimited	Limited	Limited
Shares	None	None	Sold privately, not on a stock exchange	Traded on a stock exchange
Finance	Owner's savings, loans	Partners' capital, loans	Private share sales, loans	Public share issues, large loans
Control	Owner decides everything	Shared by partners	Shareholders keep close control	Risk of losing control (takeover)
Privacy	Accounts private	Accounts private	Some accounts must be filed	Accounts must be published

Sole trader: why choose it

Easy and cheap to set up
Owner keeps all profit
Fast decisions, full control

Sole trader: drawbacks

Unlimited liability
Limited finance
Long hours, no one to share workload or skills
Business may end when the owner stops

A partnership brings in more capital and skills, and partners share the workload. The downsides are shared profits, possible disagreements and (usually) unlimited liability. A deed of partnership is a contract that sets out how profits are split and how disputes are resolved.

A privately held company can raise more finance by selling shares to people the owners choose, while keeping control within a small group. A publicly held company can raise very large amounts by selling shares to the public through a stock exchange. It gains status and access to finance, but it is expensive to set up, must publish its accounts, faces pressure for short term profit, and can be taken over by anyone who buys enough shares.

Social enterprises

A social enterprise trades to achieve a social or environmental aim. Any surplus is mostly reinvested in that aim rather than paid out to owners.

Private sector company (for-profit): A privately owned company whose core purpose is social, for example a bakery that trains and employs former prisoners. It earns revenue like any business.
Public sector company (for-profit): A government owned business that earns revenue while serving the public, such as a state owned postal service or water company.
Cooperative (for-profit): Owned and run by its members, who may be workers, customers or producers. Each member has one vote, whatever their investment. Profits are shared among members or reinvested.
NGO (non-profit): A non-governmental organization pursuing a social cause, such as a charity. It is funded by donations, grants and some trading, and any surplus goes back into the cause.

Here is every type side by side, with its advantages, disadvantages and real examples:

Sole trader: One owner runs the business and keeps all the profit. Unlimited liability.

Advantages

Easy and cheap to set up
Owner keeps all the profit
Fast decisions and full control
Close contact with customers

Disadvantages

Unlimited liability: personal assets at risk
Hard to raise finance
Long hours, nobody to share the work or skills
May close if the owner is ill or stops

Real examples: A local hairdresser, plumber or market stall.

Exam tip

In Paper 2 these often appear as "State two features of…" questions. Features are characteristics, not advantages. For example, "owners have limited liability" is a feature, "it is less risky" is an advantage.

Common mistakes

Using "charity" and "NGO" as if they were the same. Both are non-profit, but a charity must be officially registered as one, and not every NGO is.
Confusing a publicly held company (shares sold to anyone on a stock exchange) with the public sector (owned by the government).
Saying a sole trader "has limited liability". Unincorporated owners have unlimited liability. Their personal assets are at risk.

1.2 Types of business entities