ANSWER:
The following are the factors that determine the choice of form of business organisation:
i. Nature of business activity: An individual first needs to decide upon the nature or kind of business activity that he or she desires to undertake. In case the business type requires direct personal contact with customers, the sole proprietorship form of business proves beneficial. On the other hand, if direct personal contact is not required, a partnership or company form of business is more suitable.
ii. Degree of control: The choice of a business also depends on the degree of control that a businessperson wants to exercise over its management. If a business person aims to have direct control over all business operations, a sole proprietorship is considered appropriate. However, if he or she does not mind sharing the decision-making power with others, a partnership or company form of business is more suitable.
iii. Degree and specialisation of managerial abilities: If business operations are large and require specialised and skilled professionals for managing them, a company form of business is appropriate. However, if business operations are not very complex and the scale of operations is also not very large, a sole proprietorship is a better alternative.
iv. Extent of liability: The extent of liability is also an important factor while choosing a form of business. This is because in case of a sole proprietorship and partnership, the liability of the owner or the partners is unlimited. On the other hand, in a company form of organisation, the liability of the members is limited to the amount of shares held by them. Thus, in case investors want less risk and liability, they may go for a company form of business.
v. Government control: The choice of form of business organisation depends on the government control. If a businessperson wants its business to be free from the government control, a sole proprietorship may be chosen. On the other hand, company and partnership forms of organisations should be chosen if government rules can easily be followed.
vi. Continuity: If a business needs a permanent structure, a joint Hindu family business, a co-operative society or a company can be established. On the other hand, for short-term ventures, a partnership or sole proprietorship can be preferred, as the continuity of these types of organisations is affected by the death, insolvency or insanity of the owners.
