Sole Trader vs Partnership vs Company: IB Business 1.2 Forms of Business Compared
Ask a student to compare a sole trader and a private limited company and most will reach for one fact: “a company has limited liability and a sole trader doesn’t.” That’s true, and it’s worth a mark — but a question asking you to compare or recommend a legal structure is rarely satisfied by one fact repeated across two paragraphs. The mark scheme is built around four dimensions that interact with each other, and the strongest answers show that interaction rather than listing structures in isolation.
This post works through IB Business 1.2 the way I mark it: structure by structure, then the four comparison dimensions that actually earn marks, a worked recommendation, a named common mistake, and a command-term technique for turning the knowledge into application marks.
The structures, precisely defined
Sole trader
A business owned and run by one person, who is legally indistinguishable from the business itself. There is no separate legal identity — the owner is the business in the eyes of the law.
Partnership
Two or more people co-owning a business, typically formalised through a partnership agreement covering profit-sharing, decision-making, and what happens if a partner leaves. Like a sole trader, an ordinary partnership has no separate legal identity from its owners.
Private limited company (Ltd)
A company with separate legal personality from its owners (shareholders), meaning the business can own assets, sign contracts, and be sued in its own name. Shares cannot be sold to the general public — transfers typically require the agreement of existing shareholders, which keeps ownership within a known group (often family or founders).
Public limited company (plc)
Also a separate legal entity, but shares can be sold on a public stock exchange to anyone willing to buy them. This unlocks much larger capital-raising potential but comes with heavier regulatory and disclosure requirements, and dilutes founder control as ownership spreads.
The separate-legal-personality line is the single most examinable distinction in this sub-topic, because it is what drives the liability difference discussed next — not an unrelated fact sitting next to it.
The four dimensions examiners actually want compared
1. Liability
Sole traders and partners have unlimited liability: if the business cannot pay its debts, personal assets — a house, savings, a car — can be claimed to cover them. Shareholders in a Ltd or plc have limited liability: they can lose the value of their shares, but personal assets are protected, because the company (not the shareholder) legally owes the debt.
Command a precise link here: limited liability exists because the company has separate legal personality. If your answer states limited liability without connecting it to separate legal identity, you have the right fact without the reasoning that earns the higher mark band on an “explain” question.
2. Control and decision-making speed
Sole traders have complete, immediate control — no need to consult anyone. Partnerships require agreement among partners, which slows decisions but distributes the workload and expertise. Companies introduce a further layer: shareholders elect directors, and in a plc, a large and dispersed shareholder base means the founder may no longer hold majority control at all — a real trade-off often missed in weaker answers, which assume “company” always means “founder still in charge.”
3. Access to finance
This dimension scales directly with legal structure. Sole traders are limited to personal savings, retained profit, and loans secured against personal assets — lenders see the unlimited liability as their security. Partnerships can pool more capital across partners. A Ltd can issue shares to a defined group of investors, widening the pool further. A plc can raise substantial capital by selling shares publicly, which is precisely why fast-scaling businesses often convert from Ltd to plc status — a point worth having ready for an “examine the reasons a business might change its legal structure” question.
4. Continuity and legal formalities
A sole trader’s business legally ends if the owner dies or stops trading — there’s no separation between owner and entity to persist. A partnership can face similar disruption unless the partnership agreement specifies otherwise. A company, having separate legal personality, has perpetual succession: it continues to exist regardless of changes in shareholders or directors, which is a real (if less obviously “exciting”) advantage worth naming on a full evaluation.
A worked example: recommending a structure, not just describing one
Suppose a case gives you Tomás, who has been running a graphic design business alone for three years, funded from savings, and is now considering bringing in a former colleague as a co-owner and taking out a larger loan to buy specialist equipment.
A weak answer: “Tomás could become a partnership because he now has two people.”
A strong answer applies the four dimensions to the specific numbers and risk in the case:
Moving to a partnership would let Tomás share the capital burden of the equipment purchase and split expertise, but both partners would retain unlimited liability on a now-larger loan, meaning personal assets are at greater risk than under the sole trader status quo. If the equipment cost is large relative to Tomás’s personal assets, converting to a private limited company with both individuals as shareholders would cap that specific risk at the value of their shareholding, at the cost of the administrative formality of incorporation — a trade-off Tomás needs to weigh against how much personal risk he is willing to carry for the equipment investment.
Notice this doesn’t just name a structure — it applies the liability dimension specifically to the loan amount mentioned in the case, which is what separates knowledge from application marks.
The mistake I mark down most often
Specifically: students treat “unlimited liability” as a standalone negative and “limited liability” as a standalone positive, without linking either to the specific numbers or risk level in the case. A case where the loan is small relative to the owner’s assets might not make limited liability the deciding factor at all — access to finance or control might matter more for that specific scenario. Reciting the liability point as though it always wins the argument, regardless of context, is treated by mark schemes as generic knowledge rather than application, and it caps your band on “recommend” or “justify” questions even when every fact you’ve stated is correct.
Exam technique: what “recommend” and “justify” actually require
“Compare” wants similarities and differences stated explicitly, ideally dimension by dimension rather than structure by structure — go through liability, then control, then finance, across both options, rather than describing structure A fully and then structure B fully with no direct link between them. “Recommend” and “justify” go further: they require you to reach a conclusion and defend it using evidence from the case, which means at least one dimension has to be weighed as more important than the others for this specific business, with a stated reason why. A recommendation that just repeats the definitions of two structures without ever saying which one wins, and why, for this case, will not reach the top mark band regardless of how accurate the underlying content is. It’s worth being precise about which command term you’re answering to, since “compare” and “recommend” reward genuinely different things even when the underlying content overlaps heavily.
A practice question in this style
Priya has run a small pottery studio as a sole trader for two years, funded entirely from her own savings. A local homeware retailer has offered to place a large wholesale order, but fulfilling it would require Priya to take out a loan roughly three times the current value of her studio’s equipment and stock.
Recommend, with justification, whether Priya should remain a sole trader or convert to a private limited company to fulfil this order.
Work through liability, control, finance access, and continuity against the specific numbers in the case before checking your reasoning — that’s more useful revision than reading a model answer cold.
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