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CHOICE OF FORM OF BUSINESS ORGANISATION

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After studying various forms ofbusiness organisations, it is evidentthat each form has certain advantagesas well as disadvantages. It, therefore,becomes vital that certain basicconsiderations are kept in mind whilechoosing an appropriate form oforganisation. The important factorsdetermining the choice of organisationare listed in Table 2.4 and are discussedbelow:(i)Cost and ease in setting up theorganisation: As far as initial businesssetting-up costs are concerned, soleproprietorship is the most inexpensiveway of starting a business. However, thelegal requirements are minimum andthe scale of operations is small. In caseof partnership also, the advantage ofless legal formalities and lower cost isthere because of limited scale ofoperations. Cooperative societies andcompanies have to be compulsorilyregistered. Formation of a companyinvolves a lengthy and expensive legalprocedure. From the point of view ofinitial cost, therefore, sole proprietorshipis the preferred form as it involves leastexpenditure. Company form oforganisation, on the other hand, is morecomplex and involves greater costs.After studying various forms ofbusiness organisations, it is evidentthat each form has certain advantagesas well as disadvantages. It, therefore,becomes vital that certain basicconsiderations are kept in mind whilechoosing an appropriate form oforganisation. The important factorsdetermining the choice of organisationare listed in Table 2.4 and are discussedbelow:(i)Cost and ease in setting up theorganisation: As far as initial businesssetting-up costs are concerned, soleproprietorship is the most inexpensiveway of starting a business. However, thelegal requirements are minimum andthe scale of operations is small. In caseof partnership also, the advantage ofless legal formalities and lower cost isthere because of limited scale ofoperations. Cooperative societies andcompanies have to be compulsorilyregistered. Formation of a companyinvolves a lengthy and expensive legalprocedure. From the point of view ofinitial cost, therefore, sole proprietorshipis the preferred form as it involves leastexpenditure. Company form oforganisation, on the other hand, is morecomplex and involves greater costs.(ii) Liability:  In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners. In joint Hindu family business, only the karta  has unlimited liability. In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets. Hence, from the point of view of investors, the company form of organisation is more suitable as the risk involved is limited. (iii) Continuity:  The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like joint Hindu family business, cooperative societies and companies. In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred. (iv) Management ability:  A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem. Division of work among the members in such organisations allows the managers to specialise in specific areas, leading to better decision making. But this may lead to situations of conflicts because of differences of opinion amongst people. Further, if the organisation’s operations are complex BUSINESS STUDIES in nature and require professionalised management, company form of organisation is a better alternative. Proprietorship or partnership may be suitable, where simplicity of operations allow even people with limited skills to run the business. Thus, the nature of operations and the need for professionalised management affect the choice of the form of organisation. (v) Capital  considerations:  Companies are in a better position to collect large amounts of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of combined resources of all partners. But the resources of a sole proprietor are limited. Thus, if the scale of operations is large, company form may be suitable whereas for medium and small sized business one can opt for partnership or sole proprietorship. Further,  from the point of view of expansion, a company is more suitable because of its capability to raise more funds and invest in expansion plans. It is precisely for this purpose that in our opening case Neha’s father suggested she should consider switching over to the company form of organisation. (vi) Degree of control:  If direct control over operations and absolute decision making power is required, proprietorship may be preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organisation can be adopted. The added advantage in the case of company form of organisation is that(ii) Liability:  In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners. In joint Hindu family business, only the karta  has unlimited liability. In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets. Hence, from the point of view of investors, the company form of organisation is more suitable as the risk involved is limited. (iii) Continuity:  The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like joint Hindu family business, cooperative societies and companies. In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred. (iv) Management ability:  A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem. Division of work among the members in such organisations allows the managers to specialise in specific areas, leading to better decision making. But this may lead to situations of conflicts because of differences of opinion amongst people. Further, if the organisation’s operations are complex BUSINESS STUDIES in nature and require professionalised management, company form of organisation is a better alternative. Proprietorship or partnership may be suitable, where simplicity of operations allow even people with limited skills to run the business. Thus, the nature of operations and the need for professionalised management affect the choice of the form of organisation. (v) Capital  considerations:  Companies are in a better position to collect large amounts of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of combined resources of all partners. But the resources of a sole proprietor are limited. Thus, if the scale of operations is large, company form may be suitable whereas for medium and small sized business one can opt for partnership or sole proprietorship. Further,  from the point of view of expansion, a company is more suitable because of its capability to raise more funds and invest in expansion plans. It is precisely for this purpose that in our opening case Neha’s father suggested she should consider switching over to the company form of organisation. (vi) Degree of control:  If direct control over operations and absolute decision making power is required, proprietorship may be preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organisation can be adopted. The added advantage in the case of company form of organisation is that there is complete separation of ownership and management and it is professionals who are appointed to independently manage the affairs of a company. (vii) Nature of business:  If direct personal contact is needed with the customers such as in the case of  a  grocery store, proprietorship may be more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organisation may be adopted. Similarly, in cases where services of a professional nature are required, partnership form is  much  more suitable. It would not be out of place to mention here that the factors stated above are inter-related. Factors like capital contribution and risk vary with the size and nature of business, and hence a form of business organisation that is suitable from the point of view of the risks for a given business when run on a small scale might not bethere is complete separation of ownership and management and it is professionals who are appointed to independently manage the affairs of a company. (vii) Nature of business:  If direct personal contact is needed with the customers such as in the case of  a  grocery store, proprietorship may be more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organisation may be adopted. Similarly, in cases where services of a professional nature are required, partnership form is  much  more suitable. It would not be out of place to mention here that the factors stated above are inter-related. Factors like capital contribution and risk vary with the size and nature of business, and hence a form of business organisation that is suitable from the point of view of the risks for a given business when run on a small scale might not be appropriate when the same business is carried on a large scale. It is, therefore, suggested that all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation that should be adopted.appropriate when the same business is carried on a large scale. It is, therefore, suggested that all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation that should be adopted.