Q.3 Why is it important to choose an appropriate form of organization? Discuss the factors that determine the choice of form of organization.
After studying various forms of business organizations, it is evident that each form has certain advantages as well as disadvantages. The important factors determining the choice of organization are discussed below
(i) Cost and Ease of Starting Business Sole proprietorship is started easily as far as initial business setting-up costs and legal requirements are concerned, in case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations. Registration is compulsory in case of co-operative societies and companies. Formation of a company involves a lengthy and expensive legal procedure.
(ii) Liability In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may result in payment of debt from personal assets of the owners. In joint Hindu family business, only the karta has unlimited liability. In co-operative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.
(iii) Continuity The continuity of sole proprietorship and partnership firms is affected by events such as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organizations like joint Hindu family business, co-operative societies and companies.
(iv) Managerial Ability It is difficult for a sole proprietor to have expertise in all functional areas of business. In other forms of organizations like partnership and company, there is division of work among the members which allows the managers to specialize in specific areas, leading to better decision making. But this may sometimes lead to conflicts due to differences of opinion. Company form of organization is a better alternative if the operations are complex in nature and require professional management.
(v) Capital Requirements For large scale operations, company form are the most suitable as large amount of funds can be arranged by issuing shares in this form. For medium and small sized business, one can opt for partnership or sole proprietorship. Capital requirements for expansion can also be met more easily in company form.
(vi) Degree of Control Sole proprietorship provides direct control over operations and absolute decision making power. But if the owners want to share control for more effective decision making, partnership or company form of organization can be adopted. In company form of organization, professionals are appointed to manage the affairs of a company as there is complete separation of ownership and management.
(vii) Nature of Business Sole proprietorship is more suitable for businesses in which direct personal contact is needed with the customers such as in the case of a beauty parlor or grocery store. The company form of organization is suited for large manufacturing units. Partnership form is much more suitable in case of professional services. The factors stated above are inter-related and therefore, all the relevant factors must be taken into consideration while making a decision with respect to the form of organization.