Text 3 Limitations to the Size of Proprietorship

Its simplicity makes the proprietorship especially well adapted to small-scale business. However, there are several limitations to its size. First, the proprietorship can grow no larger than the wealth of a single person will permit. In an age of large-scale operations that often require expensive, specialized equipment, few people can accumulate enough capital to finance efficient production.

Of course, the proprietor can supplement his own wealth by borrowing from other people, but his resources limit even this technique. The reason is, of course, the ever-present risk of losses. A firm that loses can still repay its debts as long as the loss is no larger than the owner’s own investment in the business, for the owner's share of the total wealth of the firm, the owner's equity, provides a cushion to protect the creditors. When a $1 million firm is financed by $750,000 invested by the owner and $250,000 borrowed from the creditors, the owner's equity is $750,000. If the firm has to be liquidated, the assets can lose this much value and creditors will still receive 100 cents on the dollar. If the owner's equity were only $250,000 and $750 000 were borrowed, however any loss in asset value exceeding $250,000 would involve losses to creditors.

A second limitation to the size of a sole proprietorship is the difficulty of changing ownership. Investment in a personal business is necessarily a long-term proposition. To get out for any reason - perhaps to follow a more profitable venture in another line - requires sale of the physical assets of the business to a new owner, which is a slow process. It takes more enterprising talent and organising skills to start a successful business than it does to keep one going after it has been set up. So, the owner must find another man who combines the ability to run the business with the desire to enter it, and who has the money to buy out the owner's equity. It may take months in the USA to find the right man, and if the owner is in a hurry to sell out he may have to sacrifice a substantial part of the value of the firm.

The difficulties involved in selling a sole proprietorship are connected to some extent with the fact that this type of business tends to tie down those with the greatest talent for business organization. Economic growth will be most rapid when those with the greatest initiative and talent can specialize in setting up new firms to exploit new opportunities. This is impossible if, once the firm is established, the organizer cannot sell it to somebody else to run, and move on to new fields. This fact becomes a serious limitation to an economic system that depends on private enterprise to get things done in the best way.

Assignments to text 4:

1. Read the text and make a plan of it. Isn't it similar to the plan you've made for your report about sole proprietorship?

2. Find the definition of a partnership.

3. Are there any similarities between sole proprietorships and partnerships? Prove your answer by the sentences from the text.

4. Is there any information about limitations to the size of partnerships? Prove your answer by the sentences from the text.

5. Translate the text and check again if you’ve missed any information before translation.

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