Choice of forms of Organization.pdf

Choice of forms of organisation

1. INTRODUCTION
Forms of Ownership Organisation
The first question to be settled in organising business operations is that of the ownership Rnnisation. Ownership of business is represented by the right of an individual or group of
individuals to acquire legal title to assets for the purpOse of controlling them and to enjoy the
ins or profits from such possession and use. This right to acquire, enjoy and dispose nertv of business vests in private individuals or group for firms in the private sector and
in Government or other public bodies in the public sector. From this point of view, there
four main alternate possibilities for a business unit. It may be organized by an individual as
sole proprietorship, or by an association of persons by mutual agreement as a partnership
firm, or by an association of persons who forma co-operative society for the purpose, or else,
it may be organized by a number of persons as a joint stock company. Besides these, Hindu
undivided families also undertake business in India. The importance of the Hindu undivided
family, or the joint Hindu family, as it is known, is declining. For business purposes,
therefore, the chief form of ownership organisation are:
(a) sole proprietorship
(6) partnership
(c) co-operative society
(d) joint stock company.
(e) limited liability partnership
Before these forms are taken up to detailed discussion and evaluation, it must be noted
that this classification of business units is based only on their ownership. Besides, these
forms of organisation are used essentially for business firms in the private sector.
CHARACTERISTICs OF AN IDEAL FORM OF ORGANISATION
Before undertakingg a description of the various forms of organisation and their respective
merits and weaknesses, it will be desirable to refer to the features which make for an ideal
form of business organisation. These characteristics will be found in varying degrees. In
choosing a particular form of organisation, an entrepreneur will try to find out how far his

2. 2.4
requirements will be met by a particular form of organisation. The following
factors will
generally be considered by him while making this type of an assessment:
INDIVIDUAL
OWNERSHIP
SOLE PROPRIETORSHIP
GENERAL
PRIVATE
(With State
participation)
PARTNERSHIP
(Association
of Persons)
BUSINESS ORGANISATION AND
MANAGEMENT
COLLECTIVE COMPANY
OWNERSHIP
BUSINESS
LIMITED PRIVATE
Commercial/ndustrial
JOINT
(With State
participation)
COMPANY CO-OPERATIVE
SOCIETY
PUBLIC
PUBLIC
(Complete State
control)
CO-OPERATIVE (a) PUBLIC CORPORATION
(b) DEPARTMENTAL
ORGANISATION
(c) GOVERNMENT COMPANY
Chart showing the forms of ownership organisation
(i) Ease of formation. From the point of view of the entrepreneur, the first
consideration, though not the only one, in the choice of a proper form of organisation
is as to which one can be formed with the greatest ease. An ideal form of
organisation is, therefore, one which can be brought into existence with the least
difficulty. A good form of organisation, as judged from the point of view of ease of
formation, is one which involves the least expense in formnation and minimum of
legal formalities. Besides, it should involve the least difficulty in the choice of proper
associates for running the business.
(ü) Ease of raising capital. Another important feature of a good form of organisation is
the facility of raising the required amount of capital. Where a large amount of
capital is needed, it is desirable to ensure that investors in the business concerned
are assured of safety of investment, fair return on investment and transferability of
investment. The entrepreneur will do well to consider the comparative ease (or
difficulty) with which capital can be raised for the various forms of organisation.
(iii) Limit to liability. From the point of view of risk, the entrepreneur will prefer limited
liability. This would mean that in case of insolvency or winding up, the owner or
owners will be held responsible only up to the amount of capital agreed to be
contributed by them. Unlimited liability (making the personal estates of the owners
liable for losses) is preferred in some cases just because it provides the necessary
incentive to the owners to work for the success of the chosen form of organisation.
(iu) Direct relationship between ownership, control and management. As a rule, cou
should lie where ownership lies, This will lead the management and o
entrepreneurs to take active interest in the efficient running of the enterprise. Ir tne

3. responsibility for management or the control of management does not lie with the
owners, the management may not have a direct person al interest in maximizing
profits through increase in efficiency. However, sometimes, close association of
ownership with management may discourage adventure and enterprise on the part
of the management. If the owners are all the time worried about the safety of their
investment in the enterprise, as they naturally would be, it will be difficult for them
to take big risks or follow a bold or adventurous business policy.
(v) Flexibility of operation. A good form of organisation offers the maximum flexibility
and adaptability. This means that the organisation should lend itself to change and
adjustment without much difficulty as the need be. In choosing a form of
organisation, the entrepreneur will consider as to whether it will add to the
flexibility and efficiency of management to associate some more persons as part
owners or as employees.
(vi) Continuity or stability. An ideal form of organisation enjoys uninterrupted existence
over a long period of time. From the point of view of the entrepreneur, it is important
that he should be able to formulate plans for the future and to make investment
paying for considerable periods of time. From the social point of view also, it is
desirable that there should be an agency which meets its economic needs
continuously and provides continued employment to a section of the society. "The
organisation must both be able, when undisturbed, to last through a long period of
time, and also to resist temporary disturbing influences, that is, be stable."
(vü) Retention of business secrets. The entrepreneur will also have to be careful to ensure
that the form of organisation chosen by him will allow vital business secrets to be
retained without being leaked out to the competitors. This will naturally mean that
he will have to select his associates with utmost care.
(viiü) Freedom from State regulation. Various forms of organisation are exposed to varying
degrees of control and regulation by the State. Where the extent of regulation by
Government is considerable, the enterprise may have to spend considerable amount
of time, money and energy in complying with legal formalities and instructions. As
far as possible, keeping in view the particular requirements of an enterprise, the
form that is selected should be such that it does not attract the eye of law at every
step.
(iz) Lighter tax liability. Various forms of business organisation are assessed to income
tax on different bases. Obviously, other things being equal, the ideal form of
organisation will be that which attracts the minimum amount of tax liability.
Choice of a Suitable Form of Organisation
The various characteristics of an ideal form of organisation indicated above are not to be
Considered in isolation from each other. The choice of the entrepreneur will, in actual
practice, be dictated by the peculiar requirements of the enterprise proposed to be started.
Some requirements which guide entrepreneurs in making this choice are:
(a) Type of business-trading, manufacturing, commercial or service.
(6) Expected volume of business.
1. LH Hanez : Business Organisation and Combination, p. 44

4. 2-6
(c) Area of operation.
BUSINESS ORGANISATION AND MANAGEMENT
(d) Degree of direct control over management desired by management.
(e) Finance required for initial requirements and expansions.
) Willingness of owners to assume personal liability for business risks.
(g) Arrangement for sharing profits.
(h) Expected life-span of business.
(i) Tax advantage under different types of ownership.
) Degree of Government regulation and the freedom desired by the entrepreneurs.
As it is, capital being the most important prerequisite to the success of a business
enterprise in the modern times, the facility with which the amount required for the launching
of enterprise can be raised will generally decide the form of organisation to be adopted. The
limitation of liability is the second most important factor in the choice of a proper form of
organisation for a business. The other characteristics of a good form of organisation
mentioned above generally tend to be relatively less important in such a choice. In any event.
the choice of a form of organisation has to be made by balancing these considerations and
determining the alternative that will provide the maximum net gain. The respective merits
and weaknesses of the various forms of organisation have been discussed in the following
pages mainly with reference to the factors mentioned above.'