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Manager Versus Partner

A sole proprietor who is willing to expand his business may either appoint a salaried manager or assistant or may take one or more partners. He should analyse the merits and demerits of these alternatives in the light of the following factors:

(i)    Reorganization. If a manger is appointed, there is no change in the form of ownership organization. Only a contract of service is to be entered into with the manager. But if a partner is to be taken, partnership agreement must be entered into and a partnership deed must be drafted to lay down the terms and conditions of the partnership agreement. In addition, finding a suitable person who may be taken as a partner is a very difficult job. But it is relatively easier to appoint a manager.

(ii)    Capital. A manager is an employee of the proprietor and he is not bothered with the procurement of capital for the business. The proprietor has to raise funds form his own resources or form his friends and relatives for the purpose of investment in the business. But if he takes a partner, the new partner will bring in additional capital. The sole proprietor will be saved form the trouble of raising the amount of capital which has been brought in by the new partner.

(iii)    Control and Management. When a manager is appointed, the ultimate control remains with the sole proprietor. But if he takes a partner; he will have to share the control of the business with him unless the partner is a sleeping partner who contributes capital but does not take part in management. Since a manager is paid employee and is concerned with the security of his job, he will show grater interest in his job. But a partner may not take full interest in the partnership business or may not have the required knowledge and skills. In order to secure greater interest of the partners, they are generally paid salary and a commission on the profit of the firm.

(iv)    Risk. When a manager is employed, the proprietor bears all the risks of the business himself. But in case of partnership firm, risks are shared by all the partners. Every partner is jointly and severally liable for the acts of other partners and for the entire debts of the firm.

(v)    Secrecy. The proprietor can keep all the important business secrets with himself by appointing a manager. He is expected to disclose the business secrets in case he takes one or more partners. These secrets will remain safe so long as partners act in good faith and have good relations among them.

(vi)    Continuity. A sole proprietorship business comes to an end with the death, insolvency or insanity of the proprietor. But a partnership firm can be carried on by the remaining partners in case of death, insolvency or insanity of a partner. Moreover, the chances of survival and growth of a partnership firm are higher because it has more funds and greater capacity to undertake business risks.

(vii)    State Regulation. Employment of manager involves no compliance with any legal regulation. In case of a partnership also, the amount of state regulation is minimum. Thus, no alternative is better on this count.

(viii)    Tax Burden. The salary paid to the manager is a charge against profit. That means the proprietor saves income tax on the amount of salary paid to the manager. But in case of partnership, the share of profit payable to the partners is liable to tax in the hands of the firm if the firm is not registered under the Income Tax Act.

From the above discussion, it can be concluded that a sole proprietor will find it better to appoint a manager rather than take a partner. If he wants to share the risks and profits and expand his business which is beyond his capacity, he will have to join hands with one or more partners.

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