Altogether, considering the significant disadvantages of other two types of small business in a low demand market, to be a sole trader is the most appropriate form of Joe’s organic business. However, the conclusion will be entirely different under the second assumption. That is, to assume that Joe Bloggs’ business is located in a big city where the market demand of organic fruit and vegetables is high, for example, an area with large amount of ABC1 families which are proved to be the major consumers of organic food.
Survival will be much easier under this assumption. Thus, the advantages that assists business growth should be considered firstly while the selecting the forms the business. The growth of Joe’s business requires sufficient capital, security of personal property, high business efficiency and nice personnel structure. Being able to meet all these conditions, a private limited company is likely to provide most opportunities for the business growth.
When the business is expanding, a bigger shop, more staffs and larger amount of equipment are required. In other words, it needs a lot of money. Consequently, gathering enough money will be his essential problem if Joe starts his business as a sole trader. Personal saving, reinvest from the previous profit or the loans from the bank are all restricted and therefore hard to provide enough money to support the business growth.
The only possibility is that Mr. Blog is rather rich or he would like to mortgage all his private possessions to get a relatively large amount of loans from the bank. But this is always be considered as worthless and risky since nobody can guarantee the success of a business, especially in such a high demand market that tends to attract more competitors. Once the business is failed unfortunately, the unlimited liability will take all Joe’s personal assets away such as cars and houses until all his debts are paid.
This also exists in a partnership business. Though the joint partner might bring in certain amount of capital, the key problem of the unlimited liability is still not solved. Though the risk could be shared by the increased number of partners, few people would like to lose their personal assets for business no matter how much it will be.
A private limited company can solve both the problems of capital and the personal property security at the same time. The shares of the company can be sold to friends, relatives or other rational investors in order to gather a comparatively large amount of capital quickly. Also thanks to the limited liability, threat to the investor from the bankrupt will be limited only in the scope of invested capital. Personal possession is therefore protected. This character of a Ltd. is rather important for Joe’s organic food trading business since the turnover will become larger and larger during the expansion period. The limited liability not only protects Joe’s own personal assets but also helps him to attract more investors.
On the other hand, Joe’s business can enjoy the high business efficiency easily under the structure of private limited company. The production efficiency will be largely increased by the employed specialised workers. Though specialisation also exists in a partnership business, it is always restricted among certain amount of the partners and therefore be at a low level. Things become even worse in a sole trader business, illness or other disruptions will easily bring an end to the business unless more managers are employed. However, well educated and experienced managers are always too expensive for a sole trader to afford.
Some may doubt about the decision efficiency of a Ltd because of its spread ownership. However, a company is actually run by its directors rather than its owners. Accordingly, the ownership of the company will not affect to the decision efficiency. Joe Bloggs can appoint himself as a director by controlling more than 50 percent of the shares. Otherwise he could hire a professional director to work for him, and this is popular in nowadays business since the divorce of ownership and control is generally considered to be more efficient.
Another unique and irreplaceable advantage of a private limited company is its outstanding personnel structure. Without scientific management, the large number of new employed staffs can still be inefficient even though they are skilled and specialised. In a Ltd, a series of scientific managerial method will be used to maximize the human resources’ efficiency such as building a more efficient communication system and a challenging promotion system. The larger the business is, the more important this structure will be.
However, private limited companies do have their constraints as the business are growing. The most significant one is ‘alienation’ that means losing motivation of the work. The jobs inside a Ltd. tend to specialise as much as they can in order to achieve the efficiency. Nevertheless it makes the works repetitive and boring. On the other hand, not like sole trader or partnership business, staffs will not benefit directly from the business since they are not owners. Therefore, it is necessary for workers to lose their enthusiasm and finally lower the efficiency and quality. This is especially harmful for Joe’s business based on the high quality and personal customer service. However this problem can be solved basically by introducing team-working and selling shares to the workers. In a efficient team, individuals will still be specialised but having a common goal of what exactly they are working for. Together with parts of the ownership, there will be enough motivation for everyone to work hard.
To conclude, it is shown that when the organic food market of the business location is critical, being a sole trader is cheaper, more flexible and private and therefore becomes the easiest way to survive; Private limited company can provide most opportunities for business expansion, thanks to its advantages in capital, limited liability, efficiency and structure, but all of these depend on a good location with a high demand market. In other words, market condition of the business location is the determinant of the business’ form.
Danks, S. (1996) A-Level Business Studies 3rded., London, Letts Educational Ltd Glew, M. et al (2000) Business for Vocational A Level 2nd ed., London, Collins Marcouse, I. et al (2003) Business Studies 2nd ed., London, Hodder & Stoughton
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