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
organisation:
- 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.