Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form a company to better manage the business. She also has plans to open branches countrywide. (a) Explain two benefits of remaining a sole proprietor (b) Explain two benefits of converting to a joint stock company (c) What role will her decision to go nationwide play in her choice of form of the organisation? (d) What legal formalities will she have to undergo to operate business as a company?
Answers
Answer:
(a) Two benefits of remaining a sole proprietor :
(i) Prompt and quick decision making :
Sole trader can take all decisions for his firm This helps him to take quick decisions in all the affairs where he can control the loss of his firm
(ii) Secrecy :
Business secrecy is an important factor in every business. Sole trader is in eminent position to keep his plans to himself. His competitors shall not be able to take advantage of his plans.
(b) Two benefits of converting to a joint stock company :
(i) Limited liability :
In joint stock company the liability of the shareholder is limited to the proportions of the face value of the shares owned by them. Their private properties are not attachable to recover dues of the company.
(ii) Transferability of shares :
The shareholders of a public company are free to transfer their shares to other persons at any time.
(c) The role of her decision to go nationwide play in her choice of form of the organisation will :
(i) EASE in formation :
A Business organisation should be such which may be formed easily. An organisation which involve the least expenses in formation and minimum legal formalities, is the best.
(ii) Limited liability :
Limited liability is an important feature of a good form of organisation. Limited liability means that in case of winding up the owners will be responsible only upto the amount of capital contributed by them.
(d) The legal formalities she will have to undergo to operate business as a company are as follows :
The internal working of the company is subjected to statutory restrictions. Due to complicated legal regulations, the running of a company would prove to be troublesome. The penalties are very heavy. This detracts from the main objectives for which the company has been formed.
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Here are some more questions from this chapter :
Distinguish between a Joint Hindu family business and partnership.
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Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
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Answer:
(a) Advantages of a Sole Proprietorship
A sole proprietor has complete control and decision-making power over the business.
Sale or transfer can take place at the discretion of the sole proprietor.
No corporate tax payments.
Minimum legal costs to forming a sole proprietorship.
Few formal business requirements.
(b) Benefits of converting it to a joint stock-
One of the biggest drawing factors of a joint stock company is the limited liability of its members. Their liability is only limited up to the unpaid amount on their shares. Since their personal wealth is safe, they are encouraged to invest in joint stock companies
The shares of a company are transferable. Also, in the case of a listed public company they can also be sold in the market and be converted to cash. This ease of ownership is an added benefit.
Perpetual succession is another advantage of a joint stock company. The death/retirement/insanity/etc does affect the life of a company. The only liquidation under the Companies Act will shut down a company.
A company hires a board of directors to run all the activities. Very proficient, talented people are elected to the board and this results in effective and efficient management. Also, a company usually has large resources and this allows them to hire the best talent and professionals.
(c) If she plans to go nationwide then she will have to manage her form of business from sole proprietorship to joint stock company.
(d) If she plans to operate as joint stock company, she will have to complete many legal formalities such as:
(i) getting a certificate of incorporation
(ii) getting a certificate of commencement of business if she plans to operate as public ltd. co.
(iii) appoint professional experts, brokers, who charge high fees.
(iv) prepare various documents such as Prospectus, Memorandum of Association, Articles of Association etc.