Success demands hard work, long hours and considerable worry, and the sole trader must bear these burdens alone, which does not have to be done in other forms of business.
Technological Progress
This is often difficult for the sole proprietor as it is often too expensive for such businesses to afford. However, it is often this progress, which increases efficiency and so, the gap between smaller and larger firms widens and the sole proprietor’s market shrinks as customers patronize the more efficient larger firms where goods and services are cheaper and can be obtained faster.
Social Security Payments
They are available to employees while they are in work, but are not available to self-employed people. Sole proprietors have to make independent agreements about things such as sick pay, pensions, etc and this can be expensive.
In order to overcome these problems, the sole trader forms a partnership with other interested parties.
Stage 2- The Partnership
The partnership allows the sole trader to expand, and also gives him/her other benefits, due to the following advantages:
Shared Responsibilities
The partnership still does carry the burdens of hard work, long hours and considerable worry, but the proprietor need not bear these burdens alone for he can share the business’ responsibilities with his partners.
More Available Capital
More capital is available, because more people are involved.
Specialization
The introduction of new partners allows specialization, and can add a new dimension to a business. A firm may take someone into partnership simply to benefit from his or her particular expertise.
Privacy
Unlike a company, a partnership can keep its affairs to itself. Its annual accounts do not have to be submitted to anyone other than the Internal Revenue.
However, a partnership suffers from the following disadvantages:
Unlimited Liability
There is no distinction between the owners and the business. They, like the sole proprietor, face unlimited liability
Lack of continuity
Because the business is identified with its owners, the partnership also suffers from a lack of continuity. If one of the partners dies, or has to leave the partnership for some reason the whole partnership is at an end, and a new one must be formed.
Improper Partners
Since any undertaking of one partner binds the others, it is important not to enter a partnership with someone whose business judgement is suspect.
Disagreements
Since each partner is entitled to a say in the management of the firm, there may well be disagreements, thus causing delays damaging to the business.
Shortage of capital
As the business grows, the partnership may well face the same shortage of capital as the sole proprietor. There is a limit to the amount of capital that can be obtained from the partners or by ploughing back profits.
Due to these disadvantages, further expansion may not be possible in this form of business and will thus require the establishment of a private limited company.
Stage 3- The private limited company
The private limited allows the sole trader to expand, and also gives him/her other benefits, due to the following advantages:
Limited Liability
The main advantage of a limited company is its independent legal status and hence the limited liability enjoyed by its shareholders.
More Capital
With limited liability the company is able to attract capital from people who would not otherwise be prepared to invest.
Control
In a private company, the founders of the business can usually keep control of it, by holding a majority of the shares.
However, private limited companies suffer from the following disadvantages:
Difficulty in transferring shares
The shareholder in a private limited company may be able to transfer his or her shares to someone else only with the consent of the share-holders.
Difficulty in raising capital
The company is not allowed to appeal to the public for extra capital, so it may find it difficult to raise money for expansion.
Limited privacy
The accounts of the company must be filed annually with the Registrar Companies. They are then available to anyone on payment of a nominal fee.
Due to these disadvantages, further expansion may not be possible in this form of business and will thus require the establishment of a public limited company.
Stage 4- The Public Limited Company
The public limited company allows the sole trader to expand, and also gives him/her other benefits, due to the following advantages:
Limited Liability
The public limited company has independent legal existence, limited liability for shareholders and continuity of the business.
Advertising for Capital
It is allowed to appeal to the public for funds, whereas the promoters of a private company have to rely on friends and relations for capital.
Transfer of Shares
There is no restriction on the transfer of shares.
Economies of Scale
Public companies are normally larger than most other businesses. As such they often benefit from economies of scale. These result in the cost per unit of output falling as the level of output rises and further result in more capital, thus allowing for further expansion.
This is how a small sole proprietorship progresses from such a small business, to a much more profitable enterprise such as a public limited company!