The legal form of a business (Topic 1.2.2) strongly limits which sources of finance it can use. The bigger and more established the business, and the more protected its lenders and investors are, the wider its choice.
| Form of ownership | Sources typically available | Main limitation |
|---|---|---|
| Sole trader | Owner's savings, retained profit, bank loans and overdrafts, micro-finance, trade credit, family loans, crowd funding, government grants | Cannot sell shares; banks see high risk and ask for personal security |
| Partnership | As sole trader, plus new partners bringing capital | Still no shares; unlimited liability makes some investors wary |
| Private limited company | Shares sold privately (family, friends, venture capital), plus all loan sources; debentures in some cases | Shares cannot be offered to the general public |
| Public limited company | Shares sold to the public on a stock exchange, debentures, large bank loans, plus all other sources | Flotation is costly; issuing shares dilutes control |
| Social enterprise / co-operative | Members' contributions, grants, crowd funding, social investors, loans | Cannot easily attract profit- seeking shareholders |
Limited liability is the key: lenders and investors are more willing to provide large sums to companies because the company is a separate legal entity with published accounts, while sole traders and partnerships rely heavily on the owners' own wealth and personal guarantees.