Write short answer of the following.
State the point of choice of forms of business organization.
Introduction: - Each form of organization are good in some respect and not for other respect. So the comparison of the various forms of business organization shows that none of these forms is suitable in all respects. The selection of a suitable form of organization can be made after discussing the following factor.
The following are the factors that determine the choice of the form of business organization:
- Nature of business activity: An individual first needs to decide upon the nature or kind of business activity that he or she desires to undertake. In case the business type requires direct personal contact with customers, the sole proprietorship form of business proves beneficial. On the other hand, if direct personal contact is not required, a partnership or company form of business is more suitable.
- Degree of control: The choice of a business also depends on the degree of control that a businessperson wants to exercise over its management. If a business person aims to have direct control over all business operations, a sole proprietorship is considered appropriate. However, if he or she does not mind sharing the decision-making power with others, a partnership or company form of business is more suitable.
- Degree and specialization of managerial abilities: If business operations are large and require specialized and skilled professionals for managing them, a company form of business is appropriate. However, if business operations are not very complex and the scale of operations is also not very large, a sole proprietorship is a better alternative.
- The extent of liability: The extent of liability is also an important factor while choosing a form of business. This is because, in the case of a sole proprietorship and partnership, the liability of the owner or the partners is unlimited. On the other hand, in a company form of organization, the liability of the members is limited to the amount of shares held by them. Thus, in case investors want less risk and liability, they may go for a company form of business.
- Government control: The choice of the form of business organization depends on government control. If a businessperson wants its business to be free from government control, a sole proprietorship may be chosen. On the other hand, company and partnership forms of organizations should be chosen if government rules can easily be followed.
- Continuity: If a business needs a permanent structure, a joint Hindu family business, a co-operative society or a company can be established. On the other hand, for short-term ventures, a partnership or sole proprietorship can be preferred, as the continuity of these types of organizations is affected by the death, insolvency or insanity of the owners.
The requirement of Capital: -The choice of suitable form of organization is also influenced by the capital requirement of the business. When there is small amount of capital required then the sole proprietorship form of business is suitable. If the capital is medium then partnership or private company form of business is suitable and if the capital is required on a large scale, then the company organization of business is appropriate (suitable).
Risk factors and liability: -The second factor is risk and liability taking capacity of entrepreneur decides the form of business organization. If the risk is low and owner desires to bear the risk, the sole proprietorship or partnership is suitable and if the risk is very high and owners are not bear the risk, then company organization is suitable.
- Tax Liability: -The tax Liability of a company is more as compared to partnership or sole trading. The small size of business is small tax liability. An ideal business organization should have minimum tax liability. Sole trading concern generally is an ideal form in this regard.
- Business Secrecy: - Maintain vital business secrets are very important for success of any organization. Sole trading concern enjoys maximum business secrecy. Partnership firms and private companies also have this advantage to some extent.
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