Ccondition of capital, labour, technology and market
It will be difficult and unreliable to identify the most appropriate form of a business without a good awareness of the existing constrains such as the condition of capital, labour, technology and market etc. In the given case of Joe Bloggs’ business, ‘small’ is far from enough to determine the business form. Therefore, during the essay, two assumptions of locating business in different area with different market conditions will be made respectively, in order to find out the optimal solution of Joe’s business from the view of location.
Firstly, assuming that Joe Bloggs’ business is started up where the population density is comparatively lower, such as a small town or a relatively poorer place where the majority of consumers prefer cheaper GM food. The market demand of organic food is low because of its relatively higher price. Therefore, survival becomes the most pressing problem that Joe’s business is facing. In this case, to be a sole trader is considered as the best way to help a small business to survive.
Under such kind of market condition, business will try to be as small as it can. Set up cost will be minimized since the sales will not be big enough to spread it. The smaller turnover also turns down the requirement of cash flow and therefore make it possible for a sole trader to afford. Thus, the capital advantage of partnership business and private limited company will be less important. What’s more, because of the relatively smaller investment, the business will be running with low risk while threats from the unlimited liability will be minimized. Thus, it is also not necessary to set up a private limited company especially to protect the personal assets..
From the perspective of efficiency, sole trader is a better form rather than partnership in this situation. Due to the smaller sales of business, Joe Bloggs may probably manage the whole business by himself. Therefore, extra workers or new partners became unnecessary since the business’ productivity will not benefit a lot from the specialisation of labour.
On the contrary, another type of business efficiency – decision efficiency, is becoming vital. As a small business trading organic fruit and vegetable, great pressure is given from the supermarkets’ aggressive pricing policy. Accounting for more than 80 percent of the organic market in UK, supermarkets are offering organic foods at much lower prices by achieving the economies of scale. Consequently, to provide services which are close to the consumer’s need and could not be provided by the big firms becomes the only way for Joe’s small business to survive.
To do this, a high decision efficiency, which means quick response to the market and clear awareness of the customer needs, must be achieved. However, one of the major problems of the partnership business is the unavoidable dispute among its owners. For example, one would like to purchase a lot more organic pine apples since he thinks they will be popular in the coming months while other partners think it is too risky;
One may think its worthwhile to offer a whole series of organic diet to Mrs. Johns personally whereas others are thinking its too costly and tending to use the scare resource to put some advertisement on the local newspaper. All of these could delay making the correct decision and finally lead to the decision inefficiency. This is especially harmful for a new small business’s survival. Therefore, a sole trader tend to be more efficient rather than a partnership business.
Another reason for being a sole trader rather than setting up a private limited company is because of the weakness of the leaked commercial privacy in a Ltd. One most important character of a Ltd. is its account detail will be recorded and turn to public annually. This will be fatal to a new born small business since its survive is relying on the special and personal service. Once the large firms notice the market gap by looking into Joe’s company account, they will produce the relevant product or services as soon as possible to fill in the gap. In that case, it is hard to see that the small business can make a profit for any longer.