Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of the form of organisation.
Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of the form of organisation.
It is evident that each form has certain advantages as well as disadvantages. Therefore, it is essential to choose an appropriate form of organisation.
Factors that determine the choice of the form of organisation:
1. Cost in setting up the organisation: For the initial cost, a sole proprietorship is the preferred form as it involves the least expenditure. A company form of organisation, on the other hand, is more complex and involves more significant costs.
2. Liability: In case of sole proprietorship and partners firms, the liability of the owners/partners is unlimited. In Joint Hindu Family Business, only the Karta has unlimited liability. In cooperative societies and companies, however, liability is limited.
3. Continuity: In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
4. Management ability: A sole proprietor may find it challenging to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem.
5. Capital consideration: Companies are in a better position to collect a large amount of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of the combined resources of all partners. However, the resources of a sole proprietor are limited.
6. Degree of control: If direct control over operations and absolute decision-making power is required, a sole proprietorship may be preferred.
It is evident that each form has certain advantages as well as disadvantages. Therefore, it is essential to choose an appropriate form of organisation.
Factors that determine the choice of the form of organisation:
1. Cost in setting up the organisation: For the initial cost, a sole proprietorship is the preferred form as it involves the least expenditure. A company form of organisation, on the other hand, is more complex and involves more significant costs.
2. Liability: In case of sole proprietorship and partners firms, the liability of the owners/partners is unlimited. In Joint Hindu Family Business, only the Karta has unlimited liability. In cooperative societies and companies, however, liability is limited.
3. Continuity: In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
4. Management ability: A sole proprietor may find it challenging to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem.
5. Capital consideration: Companies are in a better position to collect a large amount of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of the combined resources of all partners. However, the resources of a sole proprietor are limited.
6. Degree of control: If direct control over operations and absolute decision-making power is required, a sole proprietorship may be preferred.
