Question

Why it is important to choose an appropriate form of organisation?discuss the factors that determine the choice of form of organisation.

Answer 1

Answer:

U can see the answer in the image attached above

Explanation:

The choice of the most suitable form of business organisation is a crucial decision because it affects the rights and liability of the owners. Therefore, the choice should be made with great thought and deliberations.

Each form of business organisation has its own merits and demerits. These merits and demerits should be duly considered before selecting the form of organisation. The factors which affect the choice of the form of business organisation are given below:

1. Nature of business:

The nature of business has an important bearing on the choice of the form of ownership. Businesses providing direct services, e.g., small retailers, hair-dressing sa­loons, tailors, restaurants, etc., and professional services, e.g., doctors, lawyers, etc., depend for their success upon personal attention to customers and the personal knowledge or skill of the owners and are, therefore, generally organised as proprietary concerns.

Business activities requir­ing pooling of skills and funds, e.g., wholesale trade, accounting firms, tax consultants, stock broker, etc., are better organized as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.

2. Size and area of operations:

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. Small scale enterprises like hairdressers, baker­ies, laundries, workshops, etc., cater to a limited market and require small capital.

The risk and liability are not heavy and the management problems can easily 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 who are important in small service enterprises like painters, decorators, repair shops, beauty parlors, etc. Medium-sized enterprises and profes­sional firms, e.g., health clinics, chartered accountants, etc. are predominantly partnerships.

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 risks, e.g., engineering firms, departmental stores, five-star hotels, chain stores, etc. are normally organised as companies. These enterprises require huge capital, heavy risks and expert managers.

3. Division of surplus:

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.

4. Duration of business:

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.

5. Government regulation and control:

Proprietorships and partnerships are subject to little regulation and control by the Government. Companies and cooperatives are, on the other hand, subject to severe restrictions and have to publish their accounts. It is also easier to maintain secrecy of business in case of proprietorship and partnership.