(a) Explain five reasons why many small business turn into private limited liability companies.
(b) What are the disadvantages of such a decision?
Explanation
(a)Reasons why many small scale businesses turn into private limited liability companies are:
(I) Capital: It is possible to raise capital for a limited company than a sole proprietor.
(ii) Limited liability: The liability of the company will be limited to the amount invested.
(iii) Legal entity: The company is distinct from its owners. It can sue and be sued.
(iv) Ability to raise loan: The company has a greater ability to raise loan from the bank.
(v) There is no limit to expansion as a result of large capital.
(vi) The private company enjoys the advantage of large scale production.
(vii) Continuity: This type of business unit has an element of continuity because the death of a member may not bring the company to an end.
(b) Disadvantages of such decision are:
(i) Ownership of companies is separated from management.
(ii) Decisions are delayed because more people are involved in the company.
(iii)The company can not easily change the object of the business as stipulated in the Companies Act.
(iv) It is hard to establish a company and it involves a lot of formalities which cost a lot of money.
(v) The zeal, interest and enthusiasm found in the small business unit may be absent in companies.