A sole proprietorship has become a common form of business in today’s market environment. It is easy to start and manage, as it does not require many rigid procedures and formalities. Due to the ranging economic circumstances where qualified and unskilled professionals do not have jobs, sole proprietorship has become the only remaining alternative to earn a living.
However, the business environment is changing fast, and many organizations are shifting to alliances, production has become automated, and communication has revolutionized. This has opened entrepreneurs’ eyes to the demerits of a sole proprietorship. (Beatty, & Samuelson, 2006)
The following weaknesses make it appropriate for the manager and owner of the manufacturing firm to change from sole trader to a limited liability partnership:
- Sources of capital: A limited liability partnership has extensive sources of capital, including borrowing from large financial institutions, the government, and initial public offers. On the other hand, sole proprietorship has a limited source of funding. This critically puts this form of business in an award position considering the delicate nature of the current environment.
- Shared duties and responsibilities: going through the scenario, one painfully notices that the manager is everything in the business. He performs every duty for the business to continue. In partnership, the partners will share duties and responsibilities according to the deed such that no partner is overburdened.
- Limited liability: The limited liability clause will ensure that in case the company fails to pay its creditors in time, the creditors confiscate no personal property of the partners. In the case of a sole proprietorship, the owner has unlimited liability, which means he stands to lose everything, including personal assets, to the creditors. This is very risky.
- Talents: the sole proprietor has a limited source of rich talents that the current economic market requires. On the other hand, partners can share and learn from each other the talents, skills, knowledge, and experience that one has. This is very important, especially in the current market economy. Not everybody has unique talents, but where others have them in an organization, they can distribute them among others to make a positive transformation.
- Economies of scale: in a limited liability partnership, partners can achieve various economies of scale that includes marketing, transport, communication, warehousing, bulk purchasing, efficient production, management, insurance, and banking. The economies of scale are used to give a business a strong competitive edge. In a sole proprietorship, attaining one economy of scale takes numerous years.
- Risk: limited liability partners will have to share the risks and losses in the business. In this manner, the risk magnitude on an individual is reduced and spread, while in a sole proprietorship, the proprietor bears all the risks and losses. This can be very demoralizing, especially where the risk involved is large.
- Management personnel: limited liability partnership can employ qualified and competent management personnel to run the partnership on behalf of the partners. Sole proprietorship, on the other hand, relies on family labor that though cheaper, is usually unskilled. You can imagine the troubles caused by employees of such caliber in a workplace. Considering the above merits, it is therefore important for a trader to join the partnership.
Reference list
Beatty, J.F. & Samuelson, S.S. (2006). Business Law and the Legal Environment. (4th Ed.); Mason, OH: Thomson West, ISBN 13:9780324303971