Identify the ownership and control of a business
Classify sole traders, partnerships and limited companies by who owns them, how they are controlled and where liability sits.
Section 1.1 · Types of business entity
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.1 only. The 2029 syllabus has a separate document and is not mapped here. Practice is self-checked, not an official Cambridge grade; full timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- No prior accounting course is assumed. For each business form, compare who owns it, who controls decisions, who supplies finance and who bears risk.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A shop has one owner and six employees. How many owners does this fact establish?
What you will learn
- Identify the three business entities named in the syllabus
- Distinguish owners from managers
- Explain why legal form affects finance and risk
Start with ownership and control
A sole trader is owned by one person. That person may employ other people, but employing staff does not create additional owners. The owner usually makes the main decisions and receives the residual profit after business costs.
A partnership is owned by two or more partners who carry on a business together. Partners can contribute different amounts and skills; they do not have to share every task equally. A partnership agreement can set out how they work together.
A company has a separate legal identity
A limited company is a legal entity separate from its shareholders. Shareholders own shares; directors manage the company. A shareholder can also be a director, but the roles are distinct.
Limited liability generally restricts a shareholder's exposure to the amount unpaid on their shares. A sole trader and ordinary partners generally have unlimited liability, so personal assets may be at risk if business debts cannot be paid. The syllabus excludes limited liability partnerships from questions.
Pause and explain
A company shareholder is not on the board. Which statement is sound?
Worked example
Nhi owns and runs a bicycle-repair shop alone, then registers a company whose shares she owns. What changes if the shop keeps the same customers and staff?
Show the worked solution
- Before incorporation, Nhi is the sole trader and the business has no separate legal identity.
- After incorporation, the company is the legal entity and Nhi is its shareholder; she may also be a director.
- The staff and customers do not determine the legal form. Ownership and legal identity do.
Answer The first business is a sole trader. The second is a limited company owned by Nhi as its shareholder; she can manage it as a director. Its legal identity and liability position have changed even though its daily activity has not.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A studio is owned by two people. Does this alone prove that it is a partnership or a company?
Give me a hint
Ownership count helps, but ask whether the owners formed a company.
Compare my reasoning
- Two people may own a business together as partners.
- They may instead own shares in a limited company.
- The number of owners alone does not establish legal form.
No. It could be a partnership or a company. Identify whether the owners are partners or shareholders in a separate legal entity.
Look for these in your work
- Both possible forms recognised
- Legal form distinguished
- No unsupported conclusion
A company founder owns all its shares and is also its managing director. Identify the founder's two roles.
Give me a hint
Separate the ownership role from the management role.
Compare my reasoning
- Share ownership makes the founder a shareholder.
- Managing the company's operations makes the founder a director.
- One person can hold both roles.
The founder is both a shareholder and a director; the roles remain conceptually distinct.
Look for these in your work
- Shareholder identified
- Director identified
- Roles distinguished
Two friends run a café together, employ four staff and have not formed a company. What further information would help classify their business, and what should you avoid inferring?
Give me a hint
Separate co-ownership from staffing and from incorporation.
Compare my reasoning
- The friends' shared ownership suggests a partnership.
- Check whether they have formed a limited company; company status changes the legal identity.
- The four employees do not count as owners unless they also hold ownership.
It is likely a partnership if the friends co-own and operate it without incorporation. Confirm the legal arrangement; do not count employees as partners or infer company status from the café's size.
Look for these in your work
- Co-ownership considered
- Incorporation checked
- Employees not misclassified
Common mistakes
- Calling a business a partnership merely because it has several employees
- Treating shareholders and directors as identical roles
- Assuming a company must have many shareholders
What can you explain now?
Who owns a limited company?
Compare with the explanation
Its shareholders
Shareholders hold ownership through shares; directors manage the company.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Name the owner group for each entity: sole trader, partnership and limited company.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.