CHOICE OF THE FORM OF BUSINESS ORGANIZATION

1. NATURE OF BUSINESS :

Business providing ‘Direct Services’ – Personal attention to customers and Self knowledge are the key areas. therefore better organized as Sole- Proprietorship. Salons, Tailors, Restaurants, etc.

Business activities like trading of stock, medicine wholesale trade, servicing clients relating to tax dealings, etc where pooling of skills & funds are required, are better organized as Partnership Firms.

Manufacturing concerns of large size, Market-Research enterprises, Service rendering concerns, which require specialized knowledge, higher level skills and management expertise, are better organized as Joint stock Company.

2. SIZE & AREA OF OPERATIONS :

Large scale enterprises - better organized as private / public companies. Need for large financial resources and specialized management resources. Departmental stores, FMCG Enterprises catering to national & international market, industrial equipments manufacturers, etc.

MEDIUM SCALE ENTERPRISES – Catering to local markets are better organized as Partnership firms. Salons, FMCG/ Consumer durables distributors, Law firms, etc.

Pooling of capital and expertise, availing benefits of specialization.

SMALL SCALE ENTERPRISES – Limited areas of operation, low risk and management problems can be easily handled, low capital. Better organized as sole proprietary concerns.

Retailers, trading in jewelleries, ancillary industries, etc.

3. DEGREE OF CONTROL DESIRED : Person desiring to have direct control over business activities; Proprietorship is preferable.

If the priority is specialization, division of labor, professionalization of management, Corporate form is preferable.

4. AMOUNT OF CAPITAL :

Enterprises requiring heavy investment – Corporate form is preferable.

Amount of capital is also influenced by desires for expansion and diversification.

5. DEGREE OF RISK ASSOCIATED WITH NATURE OF LIABILITY

Volume of risk and willingness of owners to bear such risk influence choice of the form of enterprise.

Risks tagged with nature of liability also determines the choice of form of enterprise.

E.g., An enterprising individual willing to bear unlimited liability, may set up proprietary form of business enterprise.

6. DIVISION OF SURPLUS :

Amount of surplus to be shared by a business owner along with nature of liability influence the choice of the form of enterprise.

7. FLEXIBILITY OF OPERATIONS : Business which require high degree of administrative flexibility – better organized as proprietorship or partnership.

In corporate form of enterprise, objectives and powers cannot be changed without legal formalities.

8. GOVERNMENT REGULATION :

Proprietorships and Partnerships are subject to little regulation by the Government.

Companies and Cooperatives are subject to several regulatory mechanism enacted by the Government.