What aspects of a proposed business should an entrepreneur consider before choosing a type of business ownership? Elaborate your answer.
Answers
Explanation:
The selection of a suitable form of ownership organisation is an important entrepreneurial decision because it influences the success and growth of a business — e.g., it determines the decision of profits, the risk associated with business, and so on. As discussed earlier, the different forms of private ownership organisation differ from each other in respect of division of profit, control, risk, legal formalities, flexibility, etc.
Therefore, a thoughtful consideration should be given to this problem and only that form of ownership should be chosen. Since the need for the selection of ownership organisation arises both initially, while starting a business, and at a later stage for meeting the needs of growth and expansion, it is desirable to discuss this question at both these levels.
For a new or proposed business, the selection of a suitable form of ownership organisation is generally governed by the following factors:
1. Nature of business activity:
This is an important factor having a direct bearing on the choice of a form of ownership. In small trading businesses, professions, and personal service trades, sole-proprietorship is predominant.
Examples are Laundromats, beauty parlours, repair shops, consulting agencies, small retail stores, medicine, dentist accounting concerns, boarding-house, restaurants, speciality ships, jobbing builders, painters, decorators, bakers, confectioners, tailoring shops, small scale shoe repairers and manufactures, etc. The partnership is suitable in all those cases where sole proprietorship is suitable, provided the business is to be carried on a slightly bigger scale.
Besides, partnership is also advantageous in case of manufacturing activities on a modest scale. The finance, insurance, and real estate industries seem to be suited to partnership form of organisation. Some of the financial businesses that find this form advantageous are tax, accounting, and stockbrokerage firms, and consulting agencies.
Service enterprises like hotels and lodging places; trading enterprises, such as wholesale trade, large scale retail houses; manufacturing enterprises, such as small drug manufacturers, etc. can be undertaken in the form of partnership. Manufacturing contains the highest percentage of companies among all industries. Similarly large chain stores, multiple shops, super-bazaars, engineering companies are in the form of companies.
2. Scale of operations:
The second factor that affects the form of ownership organisation is the scale of operations. If the scale of operations of business activities is small, sole proprietorship is suitable; if this scale of operations is modest — neither too small nor too large — partnership is preferable; whereas, in case of large scale of operations, the company form is advantageous.