Why is it important to choose an appropriate form of organisation discuss the factors that determine the choice of form of organisation?
Answers
You have to decide certain things before starting a business, you need to weigh the pros and cons of the business. There are different types of organizations:
- Sole proprietorship
- Partnership and
- Corporation
For example if you are setting up a business solely, the cost and the expenses will be comparatively lower but then if you are operating alone the losses will be handled by you as well. If you are partnering with someone the losses can be shared, but then if you are partnering with someone there is a lot of paper work and also the profits are shared equally too.
In limited liability business if you face the loss the liability is limited and you do not lose everything you have.
There is another factor; if you are handling the business alone and if there is a death the business will be over. If you are dealing in a partnership business it will still continue.
You have to look at each and every factor before choosing the type of organization you want to deal in.
Explanation:
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.