Question

Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighborhood corner shop selling accessories such as artificial jewelry 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 for better management of 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 it 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?

Answer 1

(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.