Ques. Why is it important to choose an appropriate form of business organisation? Which form of business organisation do you think is the best and why?
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It is important to choose an appropriate form of business organization because if one is planning to start a business or is interested in expanding an existing one, one important decision relates to the choice of the form of organization.
A business firm can be owned & managed in several forms. Once a form of business is chosen it is difficult to change it. Therefore, the form of business enterprise should be selected with due care & thought.
The most appropriate form is determined by weighing the advantages & disadvantages of each type of organization against one's own requirements.
Basic considerations which are to be kept in mind while choosing an appropriate form of organization are:
1.Cost and ease of setting up the organization-
Sole proprietorship is an easiest way of starting a business. Legal requirements are minimum. Partnership also has advantage of less legal formalities but cooperative societies and company have to be compulsorily registered. Formation of a company involves a lengthy and expensive legal procedure. From this point of view, sole proprietorship is preferred form.
2. Liability-
In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. In coop. society and company the liability is limited. So, from the point of view of liability, it is better to form a company or a cooperative society.
3. Continuity-
The continuity of sole proprietorship and partnership firm is effected the death, insolvency or insanity of the owners. However, such factors do not affect the continuity of company or cooperative business. So for a permanent structure, Company form is more suitable.
4. Management ability-
A sole proprietor may find it difficult to have expertise in all functional areas of management. In other form of organizations like partnership and company, there is no such problem. If the organization’s operations are complex and require professional management Company or Partnership may be more suitable.
5. Capital considerations-
Companies are in better position to collect large amount of capital by issuing shares. Partnership firms also have advantage of combined resources of all partners. But resources of a sole proprietor are limited. Thus if the scale of operations is large, company form may be suitable. However for small and medium sized business partnership or sole proprietor is preferred.
6. Degree of control-
If direct control over operations and absolute decision making power is required, proprietorship is preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organization can be adopted.
7. Nature of business-
If direct personal contact is needed with the customer such as in case of a grocery store, proprietorship may be more suitable. For large manufacturing units however the company form of organization is more suitable.
To conclude we can say that no business organization is the best. It mainly depends on the type of business we want to start. The choice of the form of ownership depends on several factors. A good form of ownership should be easy to form, simple to operate, flexible, durable, free from heavy taxation & legal requirements, etc. In some cases, the form of ownership may be prescribed by law. For instance, banking and insurance business can be carried on only in the form of a joint stock company.
(answer by Lakshit and Apoorv)
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