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.

Text 4 The Partnership

A logical way to increase to capital available to a firm is to increase the number of owners. A partnership is a legal relation existing between two or more persons contractually associated as joint principals, or persons entitled to the profits and liable for the debts of a business. The key elements of a partnership are community of interest and sharing of profit.

A partnership is usually based upon a partnership agreement (i.e., a contract). In the US, a written agreement is usually required only if the partnership must continue for more than one year, or deals with third persons in real estate. A partnership is composed of several owners who pool their resources together to form the firm. The partners agree among themselves about how much capital each is to contribute, what role each will play in the management, and how much each will share in the profits. In the US, partners can be divided into general partners, i.e. persons who have management responsibilities and full liability for the partnership debts, and limited partner who make contributions of cash or other property but are not involved in the daily management of the business, and whose liability is limited to the amount of their contribution. Hence, there are “general” and “limited” partnerships. Note that the limited partnership must have at least one general partner.

The partnership contract legally defines the duties and the responsibilities of the partners to each other. A partner’s rights are: rights in specific partnership property, interest in partnership, right to participate in management. Each partner is an agent of the partnership for the purposes of its business, and each partner may execute transactions which bind the partnership. Partners are jointly liable for partnership debts and contracts. Between themselves, partners are fiduciaries (i.e. persons, whose relations are based on trust). Thus partners must account to each other for profits, refrain from engaging in competitive business without other partners’ concert and hold partnership assets in their own name. Books and records must be made accessible to all partners. Profits are divided per agreement (with losses in the like proportion).

As far as the public is concerned, however, each of the partners has the legal status of a sole proprietor. Each partner can sign contracts for the firm, can buy or sell goods or assets belonging to the firm, can borrow or lend, on the firm's behalf, and can commit the firm just as a sole proprietor could. Such a commitment is legally binding on the firm and on all the other partners as owners of the firm, whether they agree to it or not. Moreover, each partner is fully liable for all the firm's debts, just as if he were the sole owner. If the firm fails, leaving assets inadequate to cover its debts, creditors can sue any partner individually to collect the balance due. The legal responsibility of partners for each other’s acts necessarily confines partnerships to small groups of people with complete confidence in one another. For this reason partnerships rarely grow large enough to apply modern production methods.

A partnership is doomed to failure when partners have very different ideas about what constitutes ethical business behaviour.

Changing ownership of a partnership is even more of a problem than it is for a sole proprietorship. Unless otherwise provided by the agreement of partners, a partnership can be dissolved upon the expiration of the partnership term, expulsion, withdrawal or admission of a partner and death or bankruptcy of a partner. Any or all partners can affect its dissolution merely by expressing their will to do so. If a partner demands an early dissolution of a partnership for fixed term he may be liable for losses caused by the dissolution.

The dissolution doesn’t terminate partnership immediately, partnership relationship continues until the business is wound up. Conversely, a new partnership can be formed to carry on the business of the previous partnership. Still, since partnerships are formed by a legal contract among the owners, the withdrawal of any partner requires that the business be completely reorganized.

A partnership is automatically terminated by the death of a partner, and must be reorganized as a new firm.

Assignments to text 5:

1. Read the following and add some ideas about how to become a small business owner.

2. Do you agree that information is power?

3. What information sources can help a small business owner in Russia?

Text 5 How to Become a Small Business Owner

A person becomes a small business owner in one of three ways: taking over the family business; buying an existing business; or staring a new firm.

a. Taking over the family’s Business – Those with experience in the business have a good chance to succeed. Those with no experience have a good chance of failing.

b. Buying an Existing Firm- It is critical that you find out why the owner is selling and how profitable the firm has been in recent years.

c. Starting a New Firm –It is a fresh start with no bad reputation to overcome or obsolete plant or materials, but you also have no customer base to begin bringing money.

Starting a small business takes a lot of planning and know-how. At the very least you should consult an accountant, an insurance agent, a lawyer, and a banker for the following:

1.Conducting a Situation Assessment

In a situation assessment you take an in-depth look at both yourself and the business environment.

2. Developing an Overall Business Plan

A business plan is a document that spells out in detail a firm's objectives, form of ownership, and actions needed to achieve the objectives.

3. Projecting Financing Needs

Projecting financing needs requires (1) setting up a capital budget, (2) preparing month-by-month projected income statements, (3) preparing month-by-month projected cash flow statements, and (4) preparing a projected balance sheet.

4. Securing the Needed Resources and Permits

A new firm secures the needed capital through equity or debt financing. Equity capital is funds provided by the owner. 'Debt funds are borrowed funds. Venture capitalists are individuals and businesses willing to provide money to entrepreneurs who have new products or new-product ideas that are as yet unproven on the market but have a good chance of becoming successful.

5. Establishing Internal Control Procedures

Internal controls include an accounting system and a security system.

6. Starting to Serve Customers

Your firm will not be profitable if its costs are greater than its sales revenues. Keeping track of costs and measuring progress against the firm's objectives is called control.

Successful small business expansions and new formations lead the way in creating new markets, innovations, and jobs that fuel economic growth and prosperity. Your success in business depends on what you know and how well you can apply what you have learned.

In recognition of the importance of small business to a strong economy, Apple Computer, Inc. has joined with the U.S. Small Business Administration (SBA) to help meet the information needs of existing business owners and aspiring entrepreneurs by providing the necessary information.

The Importance of Information

Information is power. It is an asset that can help overcome uncertainty and open new avenues for opportunity. With the right information, your business gains an important edge in today's competitive world. Learn to use information sources. They are the key to unlocking your business's full potential.

The Small Business Administration

The SBA is an independent government agency created by Congress to help small businesses grow and prosper. The SBA has over 100 offices that offer small firms financial assistance through guaranteed loans, management assistance, help in obtaining government contracts, counselling services, and many low-cost publications. The SBA is an excellent source of information.

Assignments to text 6:

1. Read the following descriptions given in a jumble order. Match the following factors with the sentences which explain and clarify them.

· Greater flexibility

· More personal attention to customers and employees

· Lower fixed costs

· Greater motivation of the owners

· Poor management

· Inadequate financing

· Ethical issues in partnership

2. Now write them out in two separate paragraphs, one including factors in small business success, the other – factors in small business failure.

Text 6 Success and Failure in Small Businesses

1. An entrepreneur is a risk taker who starts and operates a business in the hope of making a profit.

2. Researchers who study small business failures agree that the number one cause of business failure is poor management.

3. The same is true in the relationship they have with employees.

4. Fixed costs are costs that don’t vary in total as the volume of business varies.

5. This includes little preparation to run a business, failure to learn from experience, and unbridled optimism.

6. Small business owners have more direct contact with their customers and have a better feel for what they wan.

7. Over all, the two main causes of small business failures are poor management and inadequate financing.

8. Small firms tend to be more flexible than large firms.

9. Many small businesses are partnerships.

10. They can adapt to environmental and customer demands quickly.

11. For example, prospective partners should make sure that their work habits and ethics are compatible.

12. Many small business owners start out with too little capital and too few sources of funds.

13. Since small business owners have personal risk, they are motivated to work harder. Roughly 50 percent of new start-ups fail within the first five years.

14. A secondary source is lending institutions, but they are reluctant to lend to start-ups because of the small company’s lack of assets for collateral.

15. Lawyers, psychologists, and business consultants know that problems among partners are common.

16. Dun&Bradstreet Corporation lists the reasons for such failure as neglect, disaster, fraud, economic factors, lack of experience, sales, expenses, customers, assets, and capital needs.

17. The main source for new firms are friends, families, and savings.

18. The best way to avoid difficulties is to exercise extreme care in selecting partners.

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