The following points are taken into consideration while selecting a form of business organisation: 1. Easy in Formation 2. Easy in Raising Finance 3. Extent of Liability 4. Flexibility of Operation 5. Stability and Continuity 6. Secrecy 7. Government Regulations 8. Tax Liability 9. Decision-Making Opportunities.
Factor # 1. Easy in Formation:
The primary consideration in making the choice is which type or form of business organisation can be set up easily or without any difficulty. The important considerations are: facility of forming, minimum legal requirement, freedom of payment of fees to state or authority.
Factor # 2. Easy in Raising Finance:
The other important consideration is the ease with which the requisite capital can be raised. Small amount of capital can be invested by the entrepreneur himself and he would be content to put up a business, and sole proprietorship of organisation would serve the purpose effectively.
If a large business requiring huge amount of capital is to be set up, company form of organisation may be necessary which will entail certain formalities to be followed for raising the capital.
Factor # 3. Extent of Liability:
This is another important factor in making the choice of a form of business organisation. The extent of liability means the extent upto which one is accountable to law. He is either fully liable or he is liable to a limited extent, in the former one, the liability is said to be unlimited, his personal or private estate will be liable for the debt, but in the latter case the liability is limited and he can be made to pay only to the extent of certain definite limit. Ordinarily he would like a liability where his liability is limited.
Unlimited liability, however, acts as a stimulus for hard work and may result in good gains. The greater the extent of liability the greater one could feel his responsibility and risk and hence would always try his best to escape from the risk of the liability which is only possible by doing hard work. He may in that case choose sole proprietorship or partnership.
Factor # 4. Flexibility of Operation:
A good form of business organisation is one which permits maximum flexibility, as changes can be introduced promptly without any difficulty. Individual proprietorship enjoys to the maximum extent the characteristic of flexibility of operation.
Factor # 5. Stability and Continuity:
The continuity of existence and stability are the essential factors which make an organisation superior in status as against those which lack continuity. The company form of organisation is the only form which ensures stability and continuity. The life span of sole proprietary organisation is not long. This may be closed after the death of its owner.
A partnership too does not have a permanent life. It may be dissolved for a number of reasons. Hence, a company form of organisation will be suitable if stability of operation is essential.
Factor # 6. Secrecy:
Secrecy is of supreme importance, particularly in small business concerns. Accordingly, the entrepreneur would select the sole proprietorship for that reason. In case, he has partners, he will have to carefully weigh whether other partners will be able to maintain the secrecy. He will have to exercise great care in taking partners.
Factor # 7. Government Regulations:
Different forms of business organisations are subject to various kinds of control exercised by Government rules and regulations. In case of sole proprietorship, the Government control is minimum. A sole proprietary organisation is not expected to meet any legal requirement. Similarly, a partnership form of organisation is free from government regulations. Even the registration of partnership is not compulsory.
But a number of formalities are required to be complied with while incorporating a company. A company is created by the process of law and government reserves the right to control its actions more closely than the other two forms of organisations.
Factor # 8. Tax Liability:
The basis of taxation is different in each type of business organisation. A joint stock company has more tax liability as compared to the sole proprietorship and partnership.
Factor # 9. Decision-Making Opportunities:
Some entrepreneurs, particularly those who attach great value to their own leadership would prefer sole proprietorship as the form of organisation. If a very high leadership is required which he may not possess, he will then be obliged to form a company in order to attract a more able leadership to assume responsibility for the operation of the enterprise.
The above mentioned factors are inter-related and cannot be considered singly. The entrepreneur will have to consider all the factors relatively before making choice. The capital requirement and limited liability are also most important factors for taking into consideration before taking a decision.