In sole — trade and partnership business, the liability of owners is unlimited. In case of companies the liability of shareholders is limited to the value of shares they have purchased.
Factors influencing the choice of suitable form of organisation. Nature of business activities: The nature of business is an important factor affecting a decision about the firm or organisation. Relationship between ownership and management: There is a direct relationship between ownership and management in sole-trade concern and partnership firms. Managerial Needs : Managerial and administrative requirements also affect the decision about form of organisation.
Tax Liability : A joint stock company has more tax liability as compared to a sole — trade business and a partnership firm. Continuity : This is another factor influencing a decision about the form of ownership.
Capital Requirement : The need for capital will depend upon the nature of business and scale of operators. Flexibility : A good form of organisation should also provide for flexibility in its operations. Easy in formation : The nature and extent of formalities required at the time establishing a concern also influence a decision about the form of organisation. Liability : In sole — trade and partnership business, the liability of owners is unlimited.
Education Factors influencing the choice of suitable form of organisation. Go to mobile version. The internal organisation of a sole proprietary business, for instance, is very simple, and therefore, any change in its administration can be effected with least inconvenience and loss.
To a large extent, the same is true of a partnership business also. In a company organisation, however, administration is not that flexible because its activities are conducted on a large scale and they are quite rigidly structured. Even when it is permitted by the Memorandum, it might have to be endorsed by the shareholders at the general meeting of the company. Thus, from flexibility point of view, sole proprietorship has a distinct edge over other forms. Division of profit: Profit is the guiding force of private business and it has a tremendous influence on the selection of a particular form of ownership organisation.
An entrepreneur desiring to pocket all the profits of business will naturally prefer sole proprietorship. Of course, in sole proprietorship, the personal liability is also unlimited. But, if he is willing to share the profits partnership is best. In company organisation, however, the profits whenever the Board of Directors decides are distributed among shareholders in proportion to their shareholding, but the liability is also limited. The rate of dividend is generally quite low. Different forms of organisation involve different procedure for establishment, and are governed by different laws which affect the immediate and long-term functioning of a business enterprise.
From this point of view, sole proprietorships are the easiest and cheapest to get started. There is no government regulation. What is necessary is the technical competence and the business acumen of the owner.
The causes are highly complex and so it is very difficult to classify them under definite categories. However, the causes fall under two broad groups namely: i.
Causes, which are meant for the reduction in the cost of production, ii. Besides these economic factors, there are certain non-economic factors, which have also influenced the formation of combinations. Now, we shall discuss some of the principal causes for the growth of the combination movement.
Elimination of Cutthroat Competition Large-scale production and intense competition have become the rule of the present day economy. Cutthroat competition leads to wasteful advertising, unnecessary duplication, over production etc.
Under such circumstances, small units could not survive. Therefore, the only alternative available to the industrialists is the elimination of competition, which could be possible only through business combination. If different firms come together and form amalgamations, the scale of operation also become larger and savings in overhead charges can be effected.
Influence of Tariff The tariff policies of different countries have also furthered the causes of the combination movement. By imposing high tariff on imported goods, the Governments throughout the world offered protection to home industries. The protection offered by the state resulted in the establishment of a number of business units. Consequently, competition amongst them became tense and the need for business combination was felt.
Transport Revolution Another contributory cause for the combination movement was the revolution in transport and development of communications. The large undertakings began to absorb smaller units to cater to the needs of the local market. Organizational Revolution The growth of joint stock companies has also facilitated combinations.
Basically the company form of organization itself is a type of combination. Large companies with huge capital were able to control comparatively small companies by subscribing to their shares. Hence, holding companies came into being. Control of the Market Another important cause for the rise of the combination movement was the desire to control the market by regulating the output. This goal could be achieved only through business combination.
Trade Cycles The tendency of business activities to fluctuate regularly between booms and depressions gave a fillip to business combinations. Particularly during the periods of depression, new units cannot enter into the industry and even the existing small and inefficient units cannot survive. During , when the Great Depression occurred, the situation became very awkward and the industrialists began to adopt the technique of business combination.
Technological Factors The technological development also paved way for large-scale operations. Small units with limited financial resources were found unable to compete with bigger ones. Hence, they realized the need for business combination. Moreover, the adoption of modern techniques required huge capital investments, which small units could not provide. Therefore, they were forced to combine themselves to get the benefits of modernization. The inventors were given exclusive right of the use of their inventions.
This statutory right also furthered the combination movement. Individual Ability Men of technical skill of a superior order are less in number. The scarcity of business talent is also a cause for the centralization of powers in the hands of a few.
Many combines have common directors, managers, which in effect would mean their common control. Policies of the Government The labour, fiscal, industrial and taxation policies of the Governments also influenced the formation of business combinations. The Government may even exert pressure on weaker units to merge with bigger ones. Frequent changes in the policies of the Government also increased the uncertainty among the businessmen.
The instability of the economic policies also encouraged the growth of the combination movement. Rationalization In fact, combination is the first step towards rationalization. The growth of rationalization movement encouraged the emergence of business combinations to a great extent.
Cult of the Colossal The mid-nineteenth century brought in its wake the cult of the colossal- respect for bigness. People began to respect big things and there was a corresponding contempt for small things. The impact of this tendency was felt in the business field also. For that purpose the entrepreneur would most probably prefer sole proprietorship.
In case, he has to take oilier persons as partners, he shall have to exercise great care in choosing his partners. Continuity of existence and stability are factors which make an organisation superior in status as against those which lack continuity. Company, as a legal person, may outlive many generations of individual producers.
In sole proprietorship the government regulation is minimum but a partnership is exposed to more legal complications, particularly regarding ownership and sharing of profits. A company is created by the process of law and the Government reserves the right to control its actions more closely than of the other two types of organisation.
The basis of taxation is different in case of each of the forms of organisation. Some of the business taxes affect all forms of enterprise alike, and need not affect the choice, such as- excise duties, sales tax, property tax and customs duties.
But individual income tax has an important bearing upon the choice of the form of business organisation. In making the choice of a suitable form of organisation, the factors mentioned above will have to be weighed against each other.
This will ensure the best realization of the result. Of the various factors discussed above, facility in formation, ease in raising the requisite amount of capital are the most important. Limited liability, especially if the capital requirements are large and relationship between ownership and management is not direct, is another important factor. There should also be available flexibility of operation, continuity, secrecy, freedom from government regulation and minimum tax liability.
These factors are inter-related and cannot be taken into account singly. The entrepreneur will make his choice after weighing all of them. The capital will, of course, influence him most and then the limitation of liability. Some other factors, such as the type of the product to be manufactured and sold, competitive conditions in the chosen industry and so on.
All of these factors will be considered in relation to each of the forms of organisation. A business enterprise can be organised into several forms. Every form of organisation has its own merits and demerits. A businessman has to keep in view these merits and demerits while selecting an appropriate form of organisation.
Tie choice has to be made both at the time of setting up a new enterprise and at the time of expansion and growth of an existing concern. At the time of launching a new business enterprise, the choice of the form of ownership is dictated by several factors as given below:. Scale of operations — Volume of business large medium, small and size of the market area local, national, international served.
Degree of risk and liability and the willingness of owners to assume personal liability for debts of business. Relative freedom from government regulations flexibility of operations.
It must be noted that these factors are interrelated and interdependent. For instance, the amount of capital required and the degree of risk involved depend upon the nature and volume of business operations. The degree of control and the division of profits are both related to risk and liability. Therefore, an entrepreneur should not consider these factors in isolation.
The interrelationship between these factors should be duly considered. The impact of each one of these factors on the choice of a suitable form of ownership is described as follows:.
The nature of business has an important bearing on the choice of the form of ownership. Business providing direct services, e. Business activities requiring pooling of skills and funds, e. Manufacturing organisations of large size are more commonly set up as private and public companies. Large scale enterprises catering to national and international markets can be organised more successfully as private or public companies.
The reason is that large-sized enterprises require large financial and managerial resources which are beyond the capacity of a single person or a few partners. On the other hand, small and medium scale firms are generally set up as partnership and proprietorship. The risk and liability are not heavy and the management problems can be handled by the owner himself. Therefore, the owner likes to be his own master by organising as a sole proprietor.
He can maintain face-to-face relationship with his customers which is important in small service enterprises like painters, decorators, repair shops, beauty parlours, etc. Medium-size enterprises and professional firms, e. They pool their capital and expertise to operate on a larger scale and to avail of the benefits of specialisation.
Large scale enterprises and enterprises involving heavy risk, e. These enterprises require huge capital, heavy risks and expert managers. Proprietary and partnership forms are unable to provide these resources. The company form is, therefore, best suited to large scale enterprises. Similarly, where the area of operations is widespread national or international , company ownership is appropriate. But if the area of operations is confined to a particular locality, sole proprietorship or partnership will be a more suitable choice.
A person who desires direct control of business prefers proprietorship rather than the company because there is a separation of ownership and management in the latter case. In case the owner is not interested in direct personal control but in large scale operations, it would be desirable to adopt the company form of ownership. The funds required for the establishment and operations of a business have an important impact on the choice.
Enterprises requiring heavy investment, i. A partnership has to be converted into a company when it grows beyond the capacity and resources of few persons. Requirements of growth and expansion should also be considered in making the choice.
There is maximum scope for expansion in case of a public company. Where the funds required initially are small and scope for expansion is not desired, proprietorship or partnership is a better choice. The volume of risk and the willingness of owners to bear it is an important consideration. A single individual may have large financial resources sufficient for a medium scale enterprise but due to unlimited personal liability he may not like to organise as a proprietor or a partnership.
Due to limited liability and a large number of shareholders, there is maximum diffusion of risk in a public company. But an enterprising individual not afraid of unlimited liability may go in for sole proprietorship. A sole trader receives all the profits of his business but he also bears all the risks. If a person is ready to bear unlimited personal liability and desires maximum share of profits, proprietorship and partnership are preferable to company form of organisation.
Temporary and ad hoc ventures can be organised as proprietorships and partnerships as they are easy to form and dissolve. But they lack continuity and stability. Enterprises of a permanent nature can be better organised as joint stock companies and cooperatives because they enjoy perpetual succession.
A business requiring a long period for establishment and constitution should be organised as a corporate body. Proprietorships and partnerships are subject to little regulation and control by the Government. Companies and co-operatives are, on the other hand, subject to several restrictions and have to undergo several legal formalities. But this factor is not very important and it can be helpful in making the choice only when all other factors are unable to indicate a clear-cut choice.
Organisational and administrative requirements depend upon the size and nature of business. Small businesses using simple processes of production and distribution can be managed effectively as proprietorships and partnerships. On the other hand, giant enterprises involving the use of complex techniques and procedures require professional management. Such enterprises can be managed efficiently only as joint stock companies. Due to identity of ownership and management, motivation is very high in proprietorships and partnerships.
Such motivation is lacking in a company due to separation of ownership from management. Businesses which require a high degree of administrative flexibility should better be organised as proprietorships or partnerships. Flexibility of operations is linked with the internal organisation of a business. The internal organisation of sole proprietorship and partnership is much more simple and less elaborate than the internal organisation of joint stock company. Moreover, the objectives and powers of a company cannot be changed easily or without legal formalities.
Various forms of ownership are taxed differently under the Income-tax Act in India. If the expected volume of profit is very high it may be profitable to start a company. A company is taxed at a uniform rate, i. The above analysis indicates that the basic consideration in the choice of a form of ownership is the nature and size of business. All other factors are dependent on this basic consideration. The scope and plan of organisation will also vary with the size and nature of business.
In a grocery store, for example, the organisation will be simple as few employees will be needed. Thus, the nature and size of business is the key factor in the choice of a form of ownership. After studying the various forms of business organisations, it is observed that each form has certain merits as well as limitations. Therefore, it is important to identify the basic considerations, which should be kept in mind while choosing an appropriate form of organisation.
The first and foremost consideration in selecting the form of organisation is the ease and cost with which it can be formed. Sole proprietorship is very easy to start with minimum costs and legal requirements. Partnership also has the advantage of lower cost and less legal formalities due to limited scale of operations.
Cooperative societies and companies have to be compulsorily registered. Formation of a company is a complex task and involves lengthy and expensive legal procedure. According to this consideration, sole proprietorship is the preferred form as it involves least expenditure.
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