Expansion of Sole Proprietorship: Various Options and Merits

A sole trading business is started on a small scale. With the passage of time, the business expands and faces additional problems of capital and management of business. Under such circumstances two alternative options are open to him, which are as follows: (a) To take a partner (b) To engage an assistant or servant.

Option # 1. Taking a Partner:

Merits:

The merits of taking a partner are as follows:

1. Additional Capital:

The main advantage of taking a partner is that he will bring additional capital in the business. And incoming partner solves the problem of finance by bringing additional capital.

2. Effective Management:

The expanding business requires additional hands to manage and to control. Taking a partner will result into effective management. A partner feels more concerned than an employee about the management of business as he is directly affected by its prosperity and adversity. A partner works more devotedly than a servant which results into better management.

3. Sharing of Risk:

The sharing of business risks is possible when a partner is taken. In case there are losses, the partner will also share them. This lightens the burden of business risks and acts as a stimulus to the spirit of adventure. This is not possible in case of engaging a servant.

Demerits:

The demerits of taking a partner are as follows:

1. Diminution of Control:

As the partner is entitled to claim equal right to take part in business affairs, the attraction of sole trader being supreme judge disappears. Thus, the sole trader has to share management and control with the partner. The joy of ‘One man show’ goes with the taking of a partner.

2. Division of Profit:

The partner gets the share in the profit of the business. There remains no sole claim on the profits of the then proprietor. The profits get divided due to the share of the partner in the business.

3. Delayed Decisions:

In case of partner, the business will have to take his approval before taking any decision. This may result in delayed decisions. There may also be loss of business opportunities.

4. Sharing of Secrets:

In case the partner has been taken, business secrets will have to be shared. The secrets are maintained so long as there are good relations with the partner.

5. Change in the Form of Organisation:

Taking of a partner means change in the form of business organisation, i.e., from sole proprietorship to partnership. By opting for a partner, the business will deprive himself of the merits of sole proprietorship and may suffer the demerits of partnership.

Option # 2. Engaging an Assistant or a Servant:

Advantages/Merits:

Following are the advantages of engaging a servant:

1. Sole Claim on Profits:

If a servant is engaged, the proprietor will enjoy full claim on the profits. The sole proprietor pays a fixed salary to the servant or assistant and, sometimes, some commission. He will have the sole claim on remaining profits.

2. Complete Control:

If a servant is engaged, the sole proprietor continues to be the supreme authority in the conduct of the business affairs. Thus, the business will remain under his sole control as before.

3. Maintenance of Secrecy:

A sole proprietor is under no obligation to disclose business secrets with the servant. The sole trader can keep all the secrets to himself and maintains utmost secrecy.

4. Quick Decisions:

The sole trader is not bound to get the approval of servant while taking business decisions. This avoids delay in taking decisions as the sole trader himself can decide everything. This makes for prompt decisions.

5. No change in Form of Organisation:

Taking of a servant will not involve any change in the form of business organisation. This is to say, the form of organisation will remain sole proprietorship. The outstanding merits of sole proprietorship will remain intact.

Disadvantages/Demerits:

Following are the disadvantages of engaging a servant:

1. No additional Capital:

As the servant will not contribute any additional capital, the problem of finance will remain as before. An expanding business demands additional capital to permit growth and expansion. Taking a servant will be disadvantageous because he will not bring any additional capital to the business.

2. Lack of Interest:

The servant will not take any interest in the betterment of the business. Because the servant receives no share in the profits, he will not devote himself wholeheartedly to the business affairs.

3. Fear of Competition:

Mostly, the servants set up their separate personal business after knowing the secrets of the trade. Thus, there remains a constant fear of competition in the case of taking a servant.

4. No share in Business Risks:

The servant will not share the risks of the business. The entire risk of the business have to be borne by the proprietor himself as before. This may breed carelessness in the conduct of the servant.

Conclusion:

After having studied the relative merits and demerits of both the alternatives, one may simply say that their suitability depends upon the requirements of expansion. If expansion demands additional capital and sharing of risks, a partner may prove more appropriate.

In case of taking servant, the form of organisation remains unchanged. Partnership has its own problems while sole proprietorship has definite basic merits. Now a days the nationalised banks and other financial institutions provide necessary funds.

The problem of additional capital can be solved by approaching these financial institutions. But if the nature of expansion is uncertain and risky, partner should be preferred to a servant.