Business ownership and sources of finance — common mistakes

In your analysis, always link the ownership structure to the specific source of finance and explain why that source is suitable or available. For example, 'A PLC can fund a takeover by issuing new shares on the stock market, a source unavailable to an Ltd, which is restricted to selling shares privately. This allows the PLC to raise the substantial capital required for such an acquisition.'

This is a common misconception. 'Limited liability' means the owners' (shareholders') personal assets are protected if the company fails; they are only liable for the amount they invested. This protection for owners actually increases the business's access to finance, as it makes investment less risky and makes the company a more secure and formal proposition for lenders like banks.

Yes. While owner's capital is the primary internal source, sole traders can access external finance. Common sources include bank loans (often secured against personal assets like a house), overdrafts, trade credit from suppliers, and sometimes government grants. However, the scale of this finance is typically much smaller than that available to an incorporated company.

Not necessarily. Selling shares (equity finance) means diluting ownership and control, and future profits must be shared with new shareholders via dividends. A bank loan (debt finance) must be repaid with interest, but ownership and control are fully retained. The 'better' option depends on the business's objectives, its attitude to risk and control, and the relative cost of each option.