Selection of form of Business Organization
The crucial decision to be taken at the time of establishment of a business undertaking is the selection of the form of organization.
Important points to be considered
The following points are taken into consideration while selecting a form of business organization.
1. Easy information
The primary consideration in making the choice is the formalities required for its formation. The formation of business organization should be easy without many legal formalities. An organization which involves the least expenses in formation and minimum legal formalities is the best.
2. Easy in raising finance
Capital is the life blood of the business. Without capital we cannot even think of starting a business. When large amount of capital is needed, Joint stock company may be the right form of organization. But much would depend upon the facility with which finance can be raised.
3. Extent of liability
Other things being equal, limited liability is an important feature. The liability of a sole trader is unlimited. The liability of a partnership is unlimited, joint and several, whereas the liability of a company and a cooperative society is limited. Hence, the form of organization should be such which restricts the liability of an entrepreneur to the minimum.
4. Flexibility of operation
A good form of business organization should allow all types of changes without any difficulty. Sole trading concerns enjoy to the maximum extent the characteristic of flexibility of operation followed by partnership form of organization.
5. Stability and continuity
The continuity of existence and stability are the essential factors. The company form of organization is the only form having perpetual existence. The sole trader and partnership form of organizations do not have a permanent life. They might be closed due to the death or retirement of the members on any day.
6. Maintenance of secrecy
Secrecy is of prime importance in business concerns. Accordingly, the entrepreneur would select the sole proprietorship for that reason. In case, he has partners, he will have to carefully weigh whether other partners will be able to maintain the secrecy.
7. Government regulation
In case of sole proprietorship, the Government control is minimum. A sole proprietor organization is not expected to meet many legal requirements. A partnership form of organization is also free from government regulations. Even the registration of partnership is not compulsory. But a number of formalities are required to be complied in forming a company.
8. Tax liability
The basis of taxation is different in each type of organization.
9. Ownership and control
An ideal form of organization is one which provides incentive, initiative and active interest to its owners. This is most effectively available when management and control over business dealings remain with the owner or owners of the business.
The above mentioned factors are inter-related and cannot be considered in isolation. The entrepreneur will have to consider all these factors before making choice of form of business organization.