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Choice of Form of Business Organization

Till now, we had discussed about the different forms of organizations along with it advantages and disadvantages. There are certain considerations that are to be kept in mind while choosing the suitable form of organization. The important factors are shown in the table and explained below

 

Form of Organization

Factor

Maximum Advantages

Minimum Advantages

Capital available

company

Sole proprietorship

Cost of formation

Sole proprietorship

company

Ease of formation

Sole proprietorship

company

Transfer of ownership

Company (except Private company)

Partnership

Managerial skills

company

Sole proprietorship

Regulations

Sole proprietorship

company

Flexibility

Sole proprietorship

company

Continuity

company

Sole proprietorship

Liability

company

Sole proprietorship

  1. Cost and Ease at Setting up the Organization: According to the cost of setting up, sole proprietorship is the most inexpensive of all. But, the legal requirements are minimum an the sale of operations are also small. In a partnership firm, the legal requirements and the cost is minimum due to the limited scale of operations. Registrations for co-operative stores and companies are mandatory an the formation of a company is lengthy and expensive as well. Looking at the initial cost factor, sole proprietorship is the most economical. There is more cost involved in the formation of a company.
  2. Liability: The liability o owner/partner I unlimited in the case of sole proprietorship and partnership. The owners are liable to pay the debt from their personal assets. In a Joint Hindu undivided family, the Karta has unlimited liability. In the case of companies an o-operative societies, the creditor can limit their debt only to the extent of the assets of the company. From the investors point of view, company form of organization is best suited.
  3. Continuity: Death, insolvency or insanity affects the sole proprietorship and partnership. This is not so in the case of a Joint Hindu Undivided family, co-operative societies and companies. For short term project, sole proprietorship or partnership is preferred.
  4. Management Ability: A sole proprietor might not be well versed in all the activities. There is no such problem in forms like partnership or companies. But there is a drawback of conflict or difference in opinion. Complexity of organizational structure also requires professional handling an for this, company form is best. Proprietorship or partnership is recommended when the operations are simple and requires less skills to run the show. Thus, the nature of operations and professional management decides the form of organization to be chosen.
  5. Capital Consideration: Companies collect huge amount of capital from investors in the form of shares. The combined resources of all partners is available in partnership, whereas the resource of sole proprietors is limited. Depending upon the scale of operations, company form can be opted and for small or medium sized business, one can choose sole proprietorship or partnership business. In terms of expansion, company form is preferred due to the capacity to raise funds and invest them in the infrastructure.
  6. Degree of Control: For direct control over the operations, sole proprietorship may be chosen. When the partners do not mind sharing the decision making, partnership may be the one suitable. In the company form of organization, there is total separation of opening the management because there are specialized personnel to handle the company affairs.
  7. Nature of Business: For direct contact with customers, sole proprietorship is preferred. In case of large scale operation and the contact with customers is not mandatory, then company form is preferred.
Apart from this, factors like the capital employed, risk change with the nature of the business. So there are factors like sunning a mall scale operation will not be similar to running business with large scale operations. So all the relavant factor should be taken into account while deciding on the form of organization.




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