Explain the factors to be considered while selecting a form of organisation.Why is it important to choose an appropriate form of organisation ? Discuss the factors that determine the choice of form of organisation ?
It is evident that each form has certain advantages as well as disadvantages. Therefore, it is important to choose an appropriate form of organisation.
Factors that determine the choice of form of
- Cost and ease in setting up the organisation: From the’point of view of initial cost, sole proprietorship is the preferred form as it involves least expenditure.
A company form of organisation, on the other hand, is more complex and involves greater costs.
- Liability : In case of sole proprietorship and
partnership firms, the liability of the owners/ partners is unlimited. In Joint Hindu Family Business, only the Karta has unlimited liability. In cooperative societies and companies, however, liability is limited.
- Continuity: In case the business needs a permanent
structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
- Management ability : A sole proprietor
may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem.
- Capital consideration : Companies are in a better
position to collect large amount of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of combined
resources of all partners. But the resources of a sole proprietor are limited.
- Degree of control: If direct control over operations
and absolute decision making power is required, sole proprietorship may be preferred.