There are various forms of business organizations. The selection of the most suitable form of business organization is a very crucial decision because each form of organization has its own merits and demerits. Therefore, it is very important to consider these merits and demerits before selecting the form of business organization. The important factors determining the choice of the organization are given below:
1. Cost of formation: As far as the initial set up cost of a business is concerned, the sole proprietorship form of business is the most inexpensive way of starting a business. The legal formalities and the cost is minimum in case of a sole proprietorship and partnership form of business because of the limited scale of operations. Whereas the cooperative societies and companies have to be compulsorily registered. The formation of a company involves a lengthy and expensive legal process. So, from the point of view of the initial cost, the Sole proprietor form of business is the best and least expensive.
2. Liability: The liability of owners/partners is unlimited in the case of Sole proprietorship and partnership firms. They may have to pay the debts from their personal assets. However, in the case of cooperative societies and companies, the liability is limited and the creditors can force payment of their claims to the extent of the company’s assets. Therefore, from the point of view of investors, the Company form of business organization is suitable as the degree of risk involved is less.
3. Continuity: Short term or temporary ventures can be organized as sole proprietorships or partnerships as they are easy to form and dissolved. But they lack continuity and stability because it is affected by the death, insolvency, or insanity of owners. However, such events do not affect the continuity of a company or cooperative societies. Enterprises of a permanent nature can be better organized as companies and cooperatives.
4. Managerial Skills: A sole proprietor may not be an expert in all functional areas of management. So, It will be difficult for him to manage everything on his own. But in the case of partnerships and company, there is no such problem because the work will be divided among the members leading to better decision making. But it may lead to conflicts like situation because of differences in opinion among the people. If the operations of an organization are complex in nature and require professionalized management, the company form of organization is a better option. Proprietorship or partnership may be suitable, where the simplicity of operations allows even people with limited skills to run the business. Therefore, the nature of operations and the need for professionalized management affect the choice of the form of organization.
5. Capital Requirement: The funds required for the formation of a business enterprise have an important impact on the choice of the form of organization. Companies are in a better position to collect a large amount of funds by issuing shares. Partnership firms can also collect funds by combining all the resources of partners. But the resources of a proprietor is limited. Therefore, if the scale of operations is large then the company form of organization is suitable but in the case of small and medium-size business partnerships or sole proprietorship is suitable. From the point of view of the expansion of the business company form of organization is suitable, a company can expand because it has the capability to raise a large amount of funds.
6. Control: If an owner wants direct control over the operations of his business then he may opt for a proprietorship form of organization. but if he doesn’t mind sharing control and decision making then he can go with partnership or company form of organization because there is a separation of ownership and management. Professionals are appointed to manage the affairs of a company.
7. Nature of Business: The nature of business plays a vital role in the selection of a suitable form of business organization. Businesses that provide direct services like a grocery store, salons, tailors, etc depend on their success on personal attention to the customers can be organized as proprietary concerns. Whereas, large manufacturing concerns where personal contact with the customer has not required, the company of organization may be adopted. In cases where services are professional in nature, partnerships are more suitable.
8. Government Regulation and control: Sole proprietorship and partnerships firms have less regulation and control of government as compared to the company and cooperatives. They are subject to strict restrictions and also have to publish their accounts.
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