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A business enterprise can be owned and organized in several
forms. Each form of organization has its own merits and demerits. The
ultimate choice of the form of business depends upon the balancing of the advantages
and disadvantages of the various forms of business. The right choice of the
form of the business is very crucial because it determines the power,
control, risk and responsibility of the entrepreneur as well as the division
of profits and losses. Being a long term commitment, the choice of the form
of business should be made after considerable thought and deliberation.
The choice of the form of
business is governed by several interrelated and interdependent factors :-
- The nature of
business is the most important factor. Businesses providing direct
services like tailors, restaurants and professional services like
doctors, lawyers are generally organised as proprietary concerns. While,
businesses requiring pooling of skills and funds like accounting firms
are better organised as partnerships. Manufacturing organisations of
large size are more commonly set up as private and public companies.
- Scale of
operations i.e. volume of business ( large, medium, small) and size of
the market area (local, national, international) served are the key
factors. Large scale enterprises catering to national and international
markets can be organised more successfully as private or public
companies. Small and medium scale firms are generally set up as
partnerships and proprietorship. Similarly, where the area of operations
is wide spread (national or international), company ownership is
appropriate. But if the area of operations is confined to a particular
locality, partnership or proprietorship will be a more suitable choice.
- The degree of
control desired by the owner(s). A person who desires direct control of
business, prefers proprietorship, because a company involves separation
of ownership and management.
- Amount of
capital required for the establishment and operation of a business. A
partnership may be converted into a company when it grows beyond the
capacity and resources of a few persons.
- The volume of
risks and liabilities as well as the willingness of the owners to bear
it, is also an important consideration.
- Comparative
tax liability.
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