Question

What are different options to expand sole proprietorship business?

Answer 1

A sole trade business has a limited scope because of the limitations of the owner. Since only one person invests his funds, so the funds may certainly be limited. The managerial capacities of the proprietor are also limited. He has to take all the decisions himself. He will try to keep the business only to that scale which can remain in his personal supervision.The liability of the sole trader is unlimited so he will not do anything which may be risky. When a business is expanded, then the risk is bound to be there so the sole trader will be hesitant of increasing his scale of operations.Despite various difficulties and limitations, the sole trader will certainly try to expand his business.

There are two alternatives before him:

1. Adding a partner

2. Employing a servant.

The pros and cons of both the alternatives are discussed as under:

I. Adding a Partner:

When a new person is added as partner, then it becomes a partnership firm instead of remaining a sole trader concern. The new partner brings in his resources and experience which can help in the expansion of business.

Advantages:

(i) More Capital: The partner brings in capital which can remain permanently in the business. In a sole trade concern the investments are limited to the resources of one person only and on the admission of a partner the resources of two persons are combined. Additional funds can also be raised through loans but this will be a temporary source and interest liability of the business will also increase. So it will be better to add a new partner when more funds are needed.

(ii) Managerial Ability: The managerial ability of one person is limited. The sole trader is the final authority in every decision; so he will personally decide everything. If the business needs to be expanded then there must be sharing of managerial responsibility. This can be possible by employing a manager too but his role will be limited because the final decisions will have to be taken by the proprietor. If managerial needs are more, then the addition of a partner will be more suitable. The partner will be able to take final decisions; so the managerial responsibility can be shared by taking a new partner.

(iii) Sharing of Risk: The liability of a sole trader is unlimited: so he will have to face all business risks himself. When a partner is added; then the risk is shared by both the partners. The fear of risk does not, sometimes, allow the sole trader to expand his business because it will bring more risk. When expansion is done by adding a partner, then business risk will be shared among two persons.

Disadvantages:

(i) Division of Profit: When a partner is added, then business profit will be shared by two persons. In sole proprietorship, all profits belong to the owner and he takes more interest in the business. On the other hand, if a manager is added instead of a partner, then the question of sharing profits does not arise. The sharing of profits will certainly reduce the interest of proprietors.

(ii) No Retention of Business Secrets: A sole trader can keep all business secrets to himself. When a partner is added, then all secrets have to be shared with him. There may be a situation when relations with partners become strained; then the secrets can be passed out. On the other hand, if an assistant is employed, then business secrets are not shared with him and there is no fear of passing them out.

(iii) Delay in Decision taking: When a partner is added in a business, then decisions are taken with his consent. All business decisions have to be taken with consensus among partners. If the decisions are not taken with the consent of a partner, then there is a fear of business being dissolved. Any partner can take decision for the dissolution of a firm. The decision taking process is delayed because it may take time to come together and then agreeing for a particular decision.

II. Employing a Servant:

The employment of a servant is the other alternative in expanding sole trade business. One person cannot supervise each and everything. The owners need the help of other persons for controlling and managing the business properly. A manager or assistant will share some of the burden of the proprietor. The assistant works in the sphere assigned to him and final authority is retained by the proprietor. This alternative too has some pros and cons.

Advantages:

A sole trade business can be expanded by employing some person and some of the advantages of this system are discussed as follows:

(i) The sole trader is able to shift some of his responsibilities to his assistant. The assistant will look after the work assigned to him and will work under the overall control of the owner.

(ii) The assistant will be paid a salary and the profits belong to the owner. If partner is added then he will have a share in profits. It will be better to get the help of a paid employee instead of taking a partner who will share profits of the business.

(iii) The proprietor will be able to retain business secrets because he will not be required to share them with his employer. In some concerns the secrecy of trade or business practices is very important. In such cases the employment of an assistant will be useful.

(iv) There will not be any delay in taking decisions because one person is the final authority in the business. The proprietor can take suggestions of his employees but final decisions will remain with him.

Disadvantages:

(i) The employment of a servant will not help in bringing more funds to the business as can be possible when a partner is added.

(ii) A servant will not take as much interest as can be taken by the proprietor or a partner. The servant will be paid a salary; so he will not be much interested in increasing the profitability of the concern. A partner, on the other hand, will share the profits of the business; so he will certainly take keen interest in the working of the business.

(iii) Sometimes the employees set up their own units after taking some experience and understanding the working of the business. The sole trader will face competition from his former employee.

(iv) There is also a difficulty in finding a suitable person for employment. If a wrong person is employed, then it will create problems instead of solving them.

A sole trader has to consider many factors while taking a decision about adding a partner or employing a servant. Both the alternatives have advantages as well as disadvantages. The type of business, need for expansion, capital and managerial requirements of the expansion, state regulations, tax liability etc. will also be considered while taking this type of decision.