Describe factors to be considered while expanding a business.

• After continuous expansion over a period of time a business firm may find it difficult and uneconomical to operate in the existing form of ownership.
• It has to change the form in order to operate successfully with increased size and diversified operations.
  

The main problems of expansion requiring a change in the form of ownership are as follows :

1. Need for larger financial resources,
2. Necessity of internal reorganization
3. Need for expert and specialized management
4. Increase in the risk and the liability of the owners
5. Difficulty of retaining direct control
6. Increased liability for taxation.

• The nature and extent of these problems will depend upon the nature and size of business, the programme of expansion and the existing form of ownership.
• The owners attempt to choose a form of ownership which will help in tackling the problems of expansion and growth in the best possible manner.

The various alternatives available to a business firm are as under :

Existing form Immediate Alternatives

1. Sole Proprietorship Manager vs. Partner Partnership
2. More partners vs. Private company
3. Private company vs. Public Company.

• The choice in each case depends upon a number of factors.

Different alternatives can be evaluated on the basis of the following factors :

Manager vs. Partner

• A sole proprietor whose business is expanding very fast may find it difficult to meet the financial and managerial requirements himself.
• Two courses of action are open to him. He may employ a manager or may take in partners.
• The relative merits and demerits of the two alternatives are described below :

Reorganisation

• • If a manager is employed, no change in the organisational setup of business is required.
  • Only a contract of service has to be made with the selected individual.
  • Taking of partner, on the other hand, requires the preparation of partnership agreement, and even registration of the firm may be desired.

Capital

• • The employment of a manager does not solve the problem of finance.
  • The proprietor himself has to procure additional funds of the business.
  • He does not need however, to share the profits with the manager and can repay the loans out of profits.

Risk and liability

• • If a Manager is employed, the proprietor has to bear all the risks and liability of the business himself.
  • He has to pay interest on loans and salary to the manager.
  • In a partnership, risks are shared and salary need not be paid.

Control by Owners

• • By employing a manager, the proprietor retains effective controls of business.
  • But if he takes a partner he has to share the control with him, unless he takes a sleeping partner who contributes capital but does not take part in management. 

State Regulation and Control

• • Employment of an assistant involves no legal formalities.
  • In partnership also, legal formalities are minimum.
  • There are thus little choice in this respect.

Partnership vs. Private Company

• With futher expansion of business, a sole proprietor is unable to meet the requirements of his business by employing a manager.
• He is then faced with a choice between partnership and private company.
• An expanding partnership firm may also have to decide between more partners and private company.

These two forms of ownership may be compared as under :

Reorganisation

• • No legal formalities are necessary to the formation of partnership.
  • Registration of the firm is not compulsory
  • The incorporation of private company, on the other hand, involves a legal process.

Capital

• • The capital requirements of medium sized business can be met equally well through a partnership and a private company.
  • The maximum number of members of private company (50) is larger then those of a partnership (20 or 10).

Liability

• • In case of a medium-size business of a stable nature, partnership is a better choice as risk is not very high.
  • On the other hand, in case of large firms of a speculative nature, a private company is the best because a limited liability of members is preferable.

Control

• • In a partnership, the original owner has to share the control with partners.
  • In a private company, the owner may be able to retain effective control of business by working as managing director or general manager of the company.
  • In a partnership this can be done by taking a sleeping or inactive partner.

Secrecy

• • A private company has to file its audited accounts with the Registrar of Companies.
  • A partnership firm is not required to do so.
  • There may, therefore, be a greater secrecy of affairs in partnership.

Private Company vs. Public Company

Reorganisation

• • A private company enjoys several exemptions and privileges which are not available to a public company. For example, a private company can commence business immediately after incorporation while a public company must raise the minimum subscription and obtain the certificate of commencement of business

Capital

• • A private company can rise limited financial resources due to a limit on its membership and restrictions on issue of prospectus.
  • A public company can, on the other hand, secure vast amount of financial resources.
  • There is no limit on the number of members in a public company and funds can be raised from investors in different parts of the country and from abroad.