Question

Why do most firms form as proprietorships and partnerships when they first start doing business and then change to the corporate form of business when they grow larger?

Answer 1

In the initial stage of starting a business, the person is not sure whether the business will grow in future or not. The requirement of capital and manpower is also less in initial stage.

Proprietorship and partnership give management authority to the propritor and partners and the profits and losses are shared with proprietor and partners themselves.

Thus, in the initial stage, since the future of business is not known and requirement of funds and manpower is also small thats why firms form as proprietor and partnership form.

When, the firm grows and expands, the requirement of funds and manpower also increase. These funds can not be arranged by the proprietors or partners themselves. This is the reason why firms convert to company so that funds in large amount could be arranged through IPO.

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