Advantages and disadvantages of small businesses

The basic economic institution in different economics systems is the business, Businesses determine much of how the economy operates. Businesses produce goods and services, and they come in every shape and size. Although the vast majority of the world’s companies are small, in many countries the economy is dominated by large firms. Large business differ from small ones in a wide variety of ways. In many countries there are nationalized companies belonging to the state, as well as private companies. A private company might be a small firm with just one owner or a very large firm with thousands of shareholders “ownig” he firm.

We can say that sole proprietorships and partnerships are small businesses.

Starting a business requires more than natural resources, labor, and capital. An entrepreneur must organize these resources. Many entrepreneurs start their own business as sole proprietorships. A sole proprietorship is a one –owner business. The advantages of sole proprietorships (they are easy to organize, decisions can be made quickly, owners receive all profits, etc.) explain why so many people start business and try to run them alone. However, a sole proprietor sometimes encounters difficult problems in starting a business. One person has limited resources to start and operate a business. The owner has only personal savings and funds that can be borrowed. Because capital is lacking, most sole proprietors begin small and fill. Even those that succeed often stay small.

A sole proprietorship also must deal with the problem of unlimited liability. According to the law, the owner and the business are one and the same. If the business fails, the owner must pay the debts. The personal property of the owner, such as a home or a car, can be taken to pay the debts of the business. No limit is placed on the amount the owner can lose. High profits can make an owner wealthy, but high losses can ruin an individual.

Still another problem occurs because of the limited life of the business. If the owner of a sole proprietorship dies, an entirely new enterprise must be started. Of all new proprietorships begun each year, 70 per cent fail within five years. To increase their chances of success entrepreneurs often choose partnership is an association of two or more people in order to run a business. Partners generally contribute equal capital, have equal authority in management, and share profits or losses. In many countries, lawyers, doctors and accountants are not allowed to form companies, but only partnerships with unlimited liability for debts – which should make them act responsibly. A partnership has many of the characteristics of the sole proprietorship. Partnerships are easy to organize, decisions can be made quickly, profits are shared with only a few people, and the owners are responsible for success or failure of the business.

Like proprietorships, partnerships are not free of problems. Liability is still unlimited. Like sole proprietors, partners are responsible for the debts of the business, Liability then can actually be greater in a partnership than in a sole proprietorship, since each partner is responsible for all the business debts. Partnerships also have limited life. If one partner dies, the business must be dissolved.

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