Choosing Appropriate Form of Business Organisation
A business enterprise can be owned and organized in several forms. Each form of organization has its own merits and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and disadvantages of the various forms of business. The appropriate choice of the form of the business is very crucial because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses. Being a long term commitment, the choice of the form of business should be made after considerable thought and deliberation.
The choice of the form of business is governed by several interrelated and interdependent factors:-
- The Nature of Business: Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organised as proprietary concerns. While, businesses requiring pooling of skills and funds like accounting firms are better organised as partnerships. Manufacturing organisations of large size are more commonly set up as private and public limited companies.
- Volume of Business & Size of the Market Area: Large scale enterprises catering to national and international markets can be organised more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship. Similarly, where the area of operations is wide spread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, partnership or proprietorship will be a more suitable choice.
- Degree of Control Desired by the Owner: A person, who desires direct control of business, prefers proprietorship, because a company involves separation of ownership and management.
- Amount of Capital Required for Business: A business involving small amount of capital is generally formed as a sole proprietorship or partnership concern. This may be converted into a company when it grows beyond it's capacity and resources of one/ few persons.
- Volume of Risks and Liabilities: The volume of risks and liabilities as well as the willingness of the owners to bear it, is also an important consideration. A sole proprietorship or partnership concern involves unlimited personal liability & risk; on the other hand, as the name suggest itself, that the liability of owner/ shareholder is limited in a company to the extent of their capital invested.
- Comparative Tax Liablity: When a business grows beyond a level in terms of capital, turnover and geographical boundaries the owner/s generally compare tax liability among various forms of business available keeping in mind the future prospects and growth.