For a new or proposed business, the selection of a suitable form of ownership business organisation is generally governed by the following factors! The selection of a suitable form of ownership organisation is an important entrepreneurial decision because it influences the success and growth of a business — e.g., it determines the decision of profits, the risk associated with business, and so on. As discussed earlier, the different forms of private ownership organisation differ from each other in respect of division of profit, control, risk, legal formalities, flexibility, etc. Therefore, a thoughtful consideration should be given to this problem and only that form of ownership should be ...view middle of the document...
Some of the financial businesses that find this form advantageous are tax, accounting, and stockbrokerage firms, and consulting agencies. Service enterprises like hotels and lodging places; trading enterprises, such as wholesale trade, large scale retail houses; manufacturing enterprises, such as small drug manufacturers, etc. can be undertaken in the form of partnership. Manufacturing contains the highest percentage of companies among all industries. Similarly large chain stores, multiple shops, super-bazaars, engineering companies are in the form of companies.
2. Scale of operations and capital requirement
The second factor that affects the form of ownership organisation is the scale of operations. If the scale of operations of business activities is small, sole proprietorship is suitable; if this scale of operations is modest — neither too small nor too large — partnership is preferable; whereas, in case of large scale of operations, the company form is advantageous The scale of business operations depends upon the size of the market area served, which, in turn, depends upon the size of demand for goods and services. If the market area is small, local, sole-proprietorship or partnership is opted. If the demand originates from a large area, partnership or company may be adopted.
Capital is one of the most crucial factors affecting the choice of a particular form of ownership organisation. Requirement of capital is closely related to the type of business and scale of operations. Enterprises requiring heavy investment (like iron and steel plants, medicinal plants, etc.) should be organised as joint stock companies. Enterprises requiring small investment (like retail business stores, personal service enterprises, etc.) can be best organised as sole proprietorships. Apart from the initial capital required to start a business, the future capital requirements—to meet modernisation, expansion, and diversification plans —also affect the choice of form of ownership organisation.
In sole proprietorship, the owner may raise additional capital by borrowing, by purchasing on credit, and by investing additional amounts himself. Banks and suppliers, however, will look closely at the proprietor’s individual financial resources before sanctioning loans or advances.
Partnerships can often raise funds with greater ease, since the resources and credit of all partners are combined in a single enterprise. Companies are usually best able to attract capital because investors are assured that their liability will be limited.
4. Degree of management of risk
The degree of control and management that an entrepreneur desires to have over business affects the choice of ownership organisation. In sole proprietorship, ownership, management, and control are completely fused, and therefore, the entrepreneur has complete control over business. In partnership, management and control of business is jointly shared by partners. They have equal voice in the management of...