Contents:
Introduction
Requisites
of an Ideal Form of Business Organisation
Comparison
of Various Forms of Organisations
Criteria
for the Choice of Organisation
Criteria at the Time of Starting a Business
Criteria at the Time of Expansion
Choice
of Form of Organisation
Let
Us Sum Up
Terminal
Questions
INTRODUCTION
You
learnt in previous chapter that there are four forms of business organisation,
viz (i) sole proprietorship, (ii) partnership, (iii) joint stock company, and
(iv) cooperative society. You have also learnt about the main features, merits
and limitations of each of these four forms.
Sole
proprietorship and partnership have the advantages from the point of view of
control, secrecy, motivation, ease of formation, and low cost of organisation.
But they suffer from the drawbacks of limited resources, limited managerial
abilities with unlimited liability. The company form of organisation, on the
other hand, has the advantages of more resources, limited liability and diverse
managerial abilities. When you plan to set up a new business, you have to
decide which form of organisation is more suitable for the proposed business.
For this you have to critically analyse the suitability of each of the four
forms of organisations in the light of the nature of the proposed business. This
is a very crucial decision because it determines the power and responsibility
of the entrepreneur and the division of profits and losses. Once it is chosen,
it is very difficult and expensive to change it. In this chapter you will learn
about the requisites of a good form of organisation, compare the four forms of
organisations, analyse the factors influencing the choice of organisation form,
and decide which form is the most suitable in a given situation.
REQUISITES
OF AN IDEAL FORM OF BUSINESS ORGANIS ATION
Before
we discuss how to select a particular form of business organization in a given situation,
we should know the essentials of an ideal form of organisation. This may help
you in the evaluation of each form of organisation in the right perspective and
take the final decision about the choice of a particular form more judiciously.
The requisites of an ideal form of organisation are as follows :
1.
Ease of formation: An important factor for preferring a
particular form of organization to another is the ease with which a business
can be brought into existence. The comparative ease of difficulty in forming a
particular form of organisation mainly depends on three factors: (i) formation
expenses by way of registration fee, stamp duty, fees of legal experts, charges
involved in the drafting of documents, obtaining licenses, etc., (ii) legal
formalities, and (iii) procedural delays, etc. Unless it is very essential, it
is better to go for an organisation which is easy to form.
2.
Scope of raising capital: The choice of
organisation mainly depends on the amount of capital required which is
determined by the nature of business and the scale of operations. For example,
if you want to open a retail shop in groceries, the amount of capital needed
will not be much. But if you want to set up a sugar factory, you may require a
large amount of capitaI. Ideal form of organisation is one which provides scope
for raising the amount of capital as and when required.
3.
Extent of liability: You know that the element of risk
and uncertainty is prevalent in each business. In view of this, normally, the businessmen
prefer limited liability. Obviously, limited liability is considered as an
important feature of a good form of organisation. However, a certain amount of
risk is also found to be important to provide the needed spur for initiative,
drive, and involvement in business. Many times, the absence of such spur leads
to weakness, inefficiency and even dishonesty on the part of management personnel.
4.
Flexibility of operations: The form of
organisation should be very flexible and adaptable to changing business
conditions without much difficulty or complication. For example, if you want to
expand your business, diversify or modernise the plant and equipment, the
organisation should be able to meet all requirements.
5.
Stability and continuity: Stability and long
life of business is desirable from the point of view of owners, employees, and
customers. Employees always prefer a stable and continuous employment. If the
business is stable, the owner should be able to formulate plans for the future
and to make investments paying for a considerable length of time. From the
customers' point of view also, regular supply of goods and services is expected
to meet their needs. An ideal form of organisation is one which provides
reasonable amount of stability to the business.
6.
Effectiveness of management: As you know that
the success of any business enterprise depends on the efficiency of management.
Managerial efficiency depends on skills, motivation, flexibility, adaptability,
etc. It is difficult for an individual to possess all these qualities.
7.
Extent of government control and regulations: If the governmental
control and regulations are too many, the enterprise may have to divert a lot
of time, money and energy for complying with legal formalities and
instructions. In some cases there may be too much interference by the
government officials in the day-to-day business of the firm. No doubt, the
investors, creditors, and customers trust the business enterprises whose activities
are properly regulated by the government. But too much government interference
is not favoured by the entrepreneurs because it mars their initiative and disrupts
the working of their business.
8.
Business secrecy: In business, it is important to maintain
business secrets without leaking them out to competitors. Therefore, a form of
organisation which enables, retention of business secrets is preferred to the
one wherein business secrets are difficult to preserve.
9.
Tax burden: Business taxes like sales tax, excise duty,
and customs duty are charged on certain products and services. Hence, such
taxes affect all forms alike and they will not affect the choice. But the
income tax liability is different from one form of organisation to the
other. Naturally, the form of organisation which attracts the minimum amount of
this tax liability is considered as an ideal form. From this point of view
company form of organisation is considered to be best because it enjoys a
number of tax reliefs which are not available in case of other forms of
organisation.
10.
Ownership prerogatives: Some persons have a very strong
desire to control the entire business activities themselves and place a great
value upon their right of personal leadership. Some persons are desirous of
sharing the responsibilities and risks of a business. Some people may want to own
a part of the capital without a strong desire to control the affairs of the
business. You can also find some persons who are not ready to bear the business
risk. An ideal form of organisation takes care of such prerogatives of the
owners.
COMPARISON
OF VARIOUS FORMS OF ORGANIS ATIONS
you
have learnt that an ideal form of organisation should have the features of easy
formation, limited liability, scope to raise enough capital, business secrecy,
flexibility, stability in operations, less governmental controls, less tax
burden, etc. You know there are four basic forms of organisations viz., (I)
sole proprietorship, (2) partnership, (3) company, and (4) cooperative society.
In the light of the above features identified for an ideal form of organisation,
let us now compare the features of these four forms of organisations. With such
comparison, probably, we can identify that form of organisation which fulfils
all the ideal features.
If
you carefully analyse the merits and
limitations of each form of business organisation you will realise that no
single form of organisation is having all the ideal features. You can find each
form of organisation having some of these features. Each form is good in some
aspects and not good in other respects. For instance, sole proprietorship and
partnership forms of organisations are considered good from the point of view
of ease of formation, freedom from government regulations, ownership interest,
retention of business secrets, etc. But the same features are not prevalent
much in company form and cooperative form of organisations. Company form and
cooperative form are ideal from the point of view of limited liability, scope
of raising capital, professionalised management, continuity of life, etc. So,
it is difficult to treat any one form as ideal in all respects and suitable in
all situations.
CRITERIA
FOR THE CHOICE OF ORGANISATION
By
comparing the four forms, we realised that none of them is ideal in all
respects. Each form of organisation is good in some respects and not good in
other respects. It means that looking for one best form of organization will be
like looking for a shirt that fits everybody in the family. Thus, a particular
form of organisation which is suitable in one situation may not be suitable in
other situations. So, the best form of organisation is one which fulfils the requirements
of a particular business in a satisfactory manner. The basic consideration governing
the selection is the attainment of the objectives decided upon by the
entrepreneur. Since these objectives also vary from one business to the other,
no single form of organisation can be considered as the best suited for all
kinds of business. Now, let us analyse what considerations help us in making
our choice of the form of business organisation. The decision regarding the
choice of organisation assumes importance at two stages of a business.
a) At the time of starting a business.
b) At the time of expansion.
Criteria
at the Time of Starting a Business
Choice
of a suitable form of business organisation assumes great importance at the
time of initiating or launching a new business enterprise because it is the
form of organisation which ultimately determines the power and responsibility
of the entrepreneur. The choice is dependent on the following factors.
1.
Nature of business: Choice of a suitable form of
organisation is dependent on the nature of the proposed business. The
organisational requirements are different for different types of business. For
example, a big cement manufacturing activity and a retail cement shop cannot
have the same form of organisation. Similarly, the form of organization suitable
for a textile mill is not suitable for a tailoring shop.
2.
Volume of business: The expected volume of business also
influences the decision about the suitable form of organisation. If the volume
of business is small, you need small amount of capital and run less risk. In
that case sole proprietorship may be quite suitable. But if the volume of
business is large, you need more capital and run more risk which a single owner
may find it difficult to cope with. So, partnership form or a company form
would be considered more suitable.
3.
Area of operation: The area of operation of the business
also influences the choice of form of organisation. If the area is limited and
confined to a particular locality, the suitable form of organisation may be
sole proprietorship. In case the area is widespread, the suitable form may be a
joint stock company.
4.
Desire for control: The extent of control and supervision
will also determine the choice of organisation. If it is desired to have a
direct control over the business operations, a sole proprietorship or a partnership
form of business should be adopted. In case if you feel that there is no need
for direct control, the company form of organization is the best.
5.
Capital requirements: The form of organisation will also
depend on the extent of financial requirements of the business. A business
which requires a small amount of capital can be organised on sole
proprietorship or partnership basis. But if the financial requirements are
huge, then the joint stock company form of organisation may be preferred.
6.
Extent of risk and liability: You know business
operations involve risk. If the promoters of a business enterprise are deterred
by the risk involved, they will start the business on the basis of a limited
liability. That means they can go for a company. In case they have capacity to
bear the risk involved, it can he organised on sole proprietorship or
partnership basis.
7.
Government regulations: As you know the
governmental controls and regulations are more in company form and cooperative
form of organisations compared to the remaining two forms. If you do not want
too much government control and regulation, you should choose either sole proprietorship
form or partnership form.
Criteria
at the Time of Expansion
Growth
is a normal phenomenon in business. When your business is successful,
naturally, you may plan to expand it. The expansion programmes may have the
following implications.
i)
Need
for larger financial resources.
ii)
Need
for internal reorganisation and control.
iii)
Need
for specialised services like communicalion, accounting, marketing, etc.
iv) Increase
in governmental controls and regulations.
iv)
Increase
in tax liability.
v)
Increase
in the problem of control and coordination.
In
fact the nature of these problems will depend upon the nature of the existing
business and type of expansion programme undertaken. To implement your
expansion programme, you can either continue with the existing form of
organisation or adopt a new form of organisation. Whatever alternative you
choose, it must be able to meet all requirements of expansion. If your existing
business is organised as a sole proprietor concern, you can think about
employing a manager or taking a partner. In case it is a partnership firm, you
may have to choose between increasing the number of partners or converting it
into a private limited company. Similarly, if your existing business is in the
form of a private company, you have the choice of converting it into a public
limited company or not.
CHOICE
OF FORM OF ORGANISATION
On
the basis of the above discussion, we can conclude that the small businesses
like grocery stores, hair dressers, small restaurants and hotels, small auto
workshops, stationery shops, confectionaries, bakeries, dry cleaners, shoe
manufacture and suppliers, small electric and electronics repair shops,
barbers, tailors, etc., are predominantly sole trade organisations. The reasons
for preferring sole proprietorship form of organisation for these types of businesses
are abundantly clear. They function on small scale, cater to the needs of a
limited market or deal with a restricted number of customers or dealers, and
require a very limited capital. Moreover, they require the personalised
attention of the owners to deal with a face-to-face situation. The managerial
supervision can be tackled easily by the owner himself and the owner generally
likes to be his own boss and active manager.
Business
on a relatively larger scale is generally organised as partnership firm.
Service enterprises like auto workshops, larger restaurants and hotels, large
scale retail houses and medium scale industrial organisations are generally
organised under partnership form. In these cases the entrepreneurs would like to
pool their capital, skills, experience, etc., as partners of a firm. The
internal organisation of such undertakings is looked after by the partners who
specialise in a particular activity in the enterprise.
In
those enterprises where the risk involved is quite significant and scale of
operation is medium, the likely choice will be the private company. Transport
undertakings, hire purchase units, finance and leasing companies, medium scale
manufacturing companies are generally organised as private limited companies.
In these undertakings the requirements of
capital
are larger as compared to those of a partnership firm. For large scale business
operations, the most suitable form of business organisation is the public
limited company. The large scale manufacturing plants, large transport
undertakings, engineering and electronic companies, departmental stores,
multiple shops, etc., are usually organised on the basis of public limited
company.
The
principal reasons are the necessity of larger capital and the large amount of
risk involved.
On
the other hand, the cooperative form of organisation is suitable when the
interest of a particular segment of society is to be promoted. Thus, the
cooperative form of organization is used largely for consumers, producers,
farmers, etc.
LET
US SUM UP
The
features of an ideal form of business organisation are ease of formation, limited
liability. scope to raise enough capital, maintenance of business secrecy, flexibility,
stability in operations, less governmental controls, less tax burden, higher
managerial efficiency, and more ownership interest.
Comparison
of the four forms of organisations shows that none of these forms have all the ideal
Features. Each form of organisation is good in some respects and not good in
other respects. Sole proprietorship and partnership forms are ideal from the
point of view of ease of formation, governmental controls, ownership interest,
business secrecy, and flexibility.
Company
and cooperative forms are ideal from the point of view of limited Liability,
scope of raising capital, managerial efficiency, stability, and continuity of
operations.
As
none of the four forms is ideal in all respects, the entrepreneur has to choose
the suitable form of organisation in the light of the objectives of his
business. For choosing a suitable form of organisation at the time of launching
the new business, the entrepreneur has to consider the nature of business,
volume of business, ark of operation, capital requirements, degree of control
desired, expected life of business and desired level of governmental regulations.
At the time of the expansion, depending on the situation, the entrepreneur can either
continue the existing form or adopt a new form or organisation. Raised on the
analysis it is concluded that the sole proprietorship is the suitable form for small
business. If business is relatively larger, partnership is the proper form of
organisation. Private limited company is ideal for medium sized business' and
public company is suitable for large scale business. The cooperative form of
organisation is suitable when the interest of a particular segment of the
society is to be looked after.