In certain lines of business like insurance and banking, business can be undertaken only by the incorporated organization. But in other cases, a large number of factors have to be considered while choosing a particular form of organization. The important characteristics of an ideal form of organization are discussed below:

1.    Ease of Formation. The comparative ease or difficulty with which a business can e brought into existence makes on form preferable to another. The question of finding suitable business partners/associates, promotion expenses and legal formalities are some of the components which make the formation easy or difficult depending upon the fact whether they are required to be gone through or not.

2.    Ease of Raising Capital. Another important feature of a good form or organization is its capacity to raise adequate funds. Generally speaking, an investor while investing his money looks to the safety of his investment, reasonable return on investment, transferability of investment and limited liability. Safety of investment, transferability of investment and limited liability are all present if the investors decide to invest their money in the form of company shares or debentures.

3.    Limit of Liability. The form of organization which can reduce the risk should be preferred to others. Except sole proprietorship and partnership, in all other forms of business organization, the liability of the owner is limited to the extent of investment in shares. In case of sole proprietorship and partnership, the liability of the owner in unlimited in the sense that his personal estate (personal property and belongings) can be used to pay off the debts and losses sustained in the business. But unlimited liability has one great merit in that it provides the spur for initiative, derive and involvement in business.

4.    Effectiveness of Management. Management constitutes one of the most crucial factors in business success. It is the effectiveness of management which can bring business prosperity and success and its ineffectiveness may push the business on the door of bankruptcy. The effectiveness of management depends upon three factors; (i) Motivation, (ii) Skill, and (iii) Flexibility. Motivation for effective management is high where ownership and management go hand in hand because of the direct relation of the rewards to the efforts put in. So far as the skill and flexibility are concerned, in case the owner is unable to contribute them, he brings in these by introducing outside talents either as partner(s) or as hired manager.

5.    Ownership 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, he has to share control with other partners. In a private company the promoters may be able to retain effusive control over the business of the company. But in case of a public company, the owners will have indirect control over the management of the company.

6.    Flexibility of Operation. An ideal form of business organization is 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 rigidity in regarded to taking in of new members or raising of additional capital will not serve the interest of business.

7.    Maintenance of Secrecy. Ordinarily a form 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 of organization. In case the partners have been chosen carefully, partnership form comes next to proprietary form of organization in this respect. On the contrary, the company form is under legal obligation to put forward a number of important details by way disclosure to the shareholders and the general public.

8.    Stability or Continuity. The long life of business concern is desired both by the owners and the employees because the owner is able to reap the fruits of his investment over a long period f time and the employees fund a source of continuous employment if the business continues for long. Form the pint of view of stability, company form is the ideal form of organization because it remains unaffected by the continuance or discontinuance of its member, whereas sole proprietorship and partnership get affected immediately if the partner or the sole proprietor ceases to exist.

9.    Freedom form 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.    Impact of Taxation. Everybody wants to minimize the burden of income fax. 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. Sole traders and partnership firms re liable to pay income-tax on a slab rate system. The rate of tax increases if their income exceeds a particular slab. But in case of companies, a flat rate of income tax is to be paid. The impact of tax burden should be considered in the light of the prevailing rates of tax.

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