Choice of Business Organization - tradecareer.blogspot.com

 Choice of Business Organization

Introduction

When a person plans to set up a business an important decision has to be taken 

regarding the choice of the form of organization. One has to measure all the advantages 

& disadvantages of each type of organization and choose the one which suits him the 

best.

Being a long term commitment, the choice of the form of organization is very crucial as 

the success or failure of business depends on choice or organization. Once a choice is 

made, it will be difficult to switch over to another form. Therefore, the form of 

organization should be chosen after proper thought and consideration.

                                                                 

Type of Business Organization

1. Nature of Business activity

This is an important factor having a direct bearing on the choice of a form of 

ownership. In small trading businesses, professions, and rendering of personal 

services, sole-proprietorship is predominant. 

The partnership is suitable in all those cases where sole proprietorship is suitable, 

provided the business is to be carried on a slightly bigger scale with help of one or 

more partner 

Where the persons intending to start a business wish to launch a business 

organisation clothed with a legal entity and in corporate form with a feature of 

having their sole ownership and control thereon, they may decide to form an OPC 

or other form of company. An alternative form of organisation is LLP under LLP Act 

2008

2. Scale of Operation

If the scale of operations of business activities is small, sole proprietorship or a One 

Person Company (OPC) is suitable 

if the scale of operations is modest — neither too small nor too large — partnership 

or limited liability partnership (LLP) is preferable; whereas, in case of large scale of 

operations, the company form is advantageous.

3. Capital requirements 

Requirement of capital is closely related to the type of business and scale of 

operations. Enterprises requiring heavy investment (like iron and steel plants, large 

scale infrastructure projects, etc.) should be organised as companies. 

Enterprises requiring small investment can be best organised as sole 

proprietorships or even as Partnerships.

4. Managerial Ability 

It is difficult for a sole proprietor to have expertise in all functional areas of 

business. Further, the size of the business may not permit engagement of 

professional management. 

In other forms of organizations like partnership and company, there is division of 

work among the partners which allows the partners to specialize in specific areas, 

leading to better outputs and decision making

                                                                       

5.Degree of risk and liability 

Companies and LLPs have a real advantage, as far as the risk is concerned, over the 

other forms of business organisation. Creditors can force payment of their claims 

only to the limit of the company’s and LLPs assets. Thus, while a 

shareholder/member/partner may lose the entire money he puts into or agreed to 

put into the company and LLP, he cannot be forced to contribute additional funds 

out of his own pocket to satisfy the business debts of the company and LLP. 

6. Stability of business 

The illness of owner may derange the business and his death cause the demise of 

the business. Partnerships are also unstable, since they are terminated by the death, 

insolvency, insanity, retirement, admission, expulsion or withdrawal of/ by one of 

the partners. Companies and LLPs have the most business stability due to its 

feature or perpetuity being an artificial or legal person. The life of the company and 

LLP is not dependent upon the life of its members/partners. Members/partners 

may come, members/partners may go, but the company/LLP goes on forever unless 

and until it being wound up.

7.Flexibility of administration 

Any substantial change in the existing line of business activity — say from cotton 

textiles to sugar manufacturing — may not be permitted by law if such a provision 

is not made in the ‘objects clause’ of the Memorandum of Association of the 

company. Thus, from flexibility point of view, sole proprietorship has a distinct edge 

over other forms. 

8. Division of profit 

Profit is the guiding force of private business and it has a tremendous influence on 

the selection of a particular form of business organisation. An entrepreneur 

desiring to pocket all the profits of business will naturally prefer sole 

proprietorship.