How a business is legally set up decides who owns it, who gets the profit, and — the part that matters most — who pays if it all goes wrong.
There are four structures you need to know, and they sit on a ladder from simplest to most complex.
Sole trader is one person trading in their own name. No registration beyond telling HMRC, all the profit is theirs, and all the decisions are theirs. Partnership is two or more people doing the same thing together, usually under a partnership agreement setting out who puts in what and who takes what out.
Private limited company (Ltd) is a separate legal person, registered at Companies House, owned by shareholders whose shares cannot be offered to the public. Public limited company (plc) is the same idea but its shares can be sold to anyone, usually on a stock exchange, which is how it raises large amounts of money.
A sole trader and an ordinary partner have unlimited liability. The business is not separate from them in law, so if it owes money that it cannot pay, the people it owes can pursue the owner's own house, car and savings.
A limited company has limited liability. The company is a separate legal person; it owes the money, not the shareholders. If it fails, a shareholder loses what they put in and no more. That single feature is why most businesses of any size incorporate, and it is the answer an examiner is nearly always looking for.
Limited liability does not mean nobody is ever personally on the hook. Directors who give a personal guarantee to a lender or landlord have signed that protection away for that debt, which is extremely common for small companies.
Nearly every ownership question is really a limited liability question. Say who bears the loss, and give the consequence for the specific business in the case study.