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Trace the stages by which a small sole proprietorship might develop into a public limited company.

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Introduction

Commerce -Radhika Poduval Sr. 3C Trace the stages by which a small sole proprietorship might develop into a public limited company. Stage 1- The sole proprietorship The small sole proprietor wishes to expand his small business but cannot do so, for the following reasons: Unlimited Liability The sole trader is liable for the debts of his business to the full extent of his private assets, and may even be forced to sell his or her own home in order to pay off creditors Lack of Continuity Legally no distinction is made between the owner and the business so there is often a lack of continuity in the event of the owner's death. The business may have to be sold in order to meet inheritance tax liabilities. Difficulty in Raising Capital Sole traders may initially have to use their own savings and can later expand by ploughing back profits. However, there is a limit to the amount of capital that can be obtained by ploughing back profits. ...read more.

Middle

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. ...read more.

Conclusion

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! ...read more.

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