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Choice of Form of Organization

While choosing a particular form of organization, the following factors should be considered by an entrepreneur:

1.    Ease in Formation. A business organization should be such which may be formed easily. An organization which involves the least expenses in formation and minimum legal formalities, is the best. Form this point of view, sole tradership and partnership are preferable.

2.    Liability. Limited liability is an important feature of a good form of organization. It means that in case of insolvency or winding up, the owner(s) will be responsible only up to the amount of capital contributed by them. The company form of organization restricts the liability of an entrepreneur to the minimum.

3.    Nature of Business. Nature of business activities is an important factor affecting the decision about the choice of organization. Business activity may be trading, manufacturing or rendering services. Trading business generally managed by a sole-proprietorship organization. Service activities are usually undertaken by proprietorship firm. For a manufacturing business, partnership or joint stock company organization may be a better choice.

4.    Ease of Raising Finance. Capital is the life blood of the business. Without capital we cannot even think of starting a business. Where a large amount of capital is needed, company may be the right form of organization. But much would depend upon the facility with which finance can be reused.

5.    Control. If an entrepreneur wants to have a direct control over his business, the preferable form would be sole proprietorship. If a partnership is created, the sole proprietor has to share control with other partners. In a private company, the promoters may be able to retain effective control over the business of company, but in case of a public company, the owners will have indirect control over the management of the company.

6.    Business Secrecy. Ordinarily firm of organization which enables retention of business secrets is preferred to the one wherein business secrets are difficult to preserve. From this point of view, the sole proprietorship is the most ideal form or organization. In case the partners have been chosen carefully, partnership form comes next to proprietor form of organization in this respect.

7.    Flexibility Operation. An ideal form of business organizations one which allows for maximum flexibility of operations. In other words, it should provide enough scope to the entrepreneur to adjust and adapt to changes. Any right in regard to taking of new members or raising of additional capital will not serve the interests of business.

8.    Stability or Continuity. From the point of view of stability, company form is the ideal form of organization because it remains unaffected by the continuance or discontinuance of its members, whereas sole-proprietorship and partnership get affected immediately if the partner or the sole proprietor ceases to exist.

9.    Freedom from Government Regulations. A form of organization which does not attract too many government regulations in its day-to-day working is preferred to a form in which there are frequent government regulations. Some of the government regulations apply on the basis of the size of the business enterprise rather than on the basis of the form of its ownership. but still a company form of organization is subjected to more regulations by the Government than any other form. Sole proprietorship and partnership to that extent are in a preferable position.

10.    Taxation. Everybody wants to minimize the burden of income-tax. While selecting the form of organization, impact of taxation should be given due consideration. Tax liability is not the same in all forms of ownership. The impact of tax burden should be considered in the light of the prevailing rates of tax.

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