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, 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 organization? 

(d) What legal formalities will she have to undergo to operate business as a 1 company?

Answer 1

(a) Kiran may have the following two benefits of remaining a sole proprietor.

1. Being the sole proprietor Kiran can enjoy all the profit earned from the business without having the need to share it with anyone. 

2. She does not have to publish accounts or be regulated under any law governing sole proprietorship which maintains secrecy of the business activities.

(b) Kiran may have the following two benefits of converting to a Joint Stock Company.

1. She will be able to acquire the funds required for expansion of her retail chain branches countrywide through share capital in a Joint Stock Company. 

2. Public has more faith in a Joint Stock Company than in a sole proprietorship firm which will help in increasing the customer base for Kiran’s business.

(c) Her decision to go nationwide involves an increase in her scale of operation, requirement of capital and management abilities. As a sole proprietor, she may face limitations of resources and her limited managerial ability. She may not be good in all managerial tasks such as purchasing, selling, financing, etc.

Thus, her decision making may not be effective in all the situations especially when there are complexities of large scale operation. Besides, she will have to bear more risk individually if she remains a sole proprietor and her liability will increase to a large extent. All these factors will definitely play a role in her choice of form of organization and she will have much stronger reasons to form a Joint Stock Company in this case.

(d) The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved. To operate her business as a company, first of all, Kiran will have to prepare several documents and will have to ensure compliance with several legal requirements before it can start functioning. She will have to register her company. Registration of the company is compulsory as provided under the Indian Companies Act, 1956.

The Companies Act requires each public company to provide a lot of information to the office of the registrar of companies from time to-time which Kiran will have to provide. The functioning of a company is subject to many legal provisions and compulsions. A company has to comply with various restrictions including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies such as registrar, SEBI, etc.