Choice of an Appropriate Form of Business Organisation Part 2

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Selection of a suitable form of business organisation on the basis of ownership and management is one of the important tasks of the entrepreneur. Once a form of organisation is chosen, it is very difficult to switch over to another form because it needs the winding up of the existing organisation and involves a lot of time, effort and money. Therefore, the form of organisation must be chosen after careful thought and consideration. There are different forms of business ownership, i.e., Sole Proprietorship, Partnership, Joint Hindu Family Business, Company and Cooperative Society. There are number of factors to be considered while selecting an appropriate form of business organisation. Some of these factors are:

  • The process of forming or starting a business organisation;

  • Availability of financial, managerial, technical and other resources;

  • The business risk and liability of the members;

  • The stability of the business irrespective of existence of owners;

    Table of Basis of Comparison
    Title: Table of Basis of Comparison

    Basis of Comparison

    Sole Proprietorship

    Partnership Private

    Limited Company

    Public Limited Company

    Cooperative Society

    Joint Hindu Family

    Formation

    Most easy to form. No legal formalities

    Easy. Only an agreement is required

    Difficult. Some legal formalities are to be complied.

    More Difficult. Several legal formalities are to be complied

    Relatively easier to form than a JSC

    No legal formalities are required for its establishment

    Registration

    Not necessary

    Not compulsory

    Compulsory

    Compulsory

    Compulsory

    Not necessary

    Membership

    One

    Min - 2

    Max - 10 in banking and 20 in others

    Min – 2

    Max - 50

    Min – 7

    Max – Not fixed

    Min - 10 Max – Not fixed

    Min – 2

    Max – Not fixed (family members only)

    Legal status

    No separate legal entity

    No separate legal entity

    Separate legal entity

    Separate legal entity

    Separate legal entity

    No Separate legal entity

    Liability

    Unlimited

    Unlimited

    Limited

    Limited

    Limited

    Limited except Karta 6

    Sharing of profit

    All to the owner

    As per agreement

    On the basis of shares held

    On the basis of shares held

    On the basis of shares held

    Equal share on the profit

    Governing Act

    No Act

    Partnership Act 1932

    Companies Act 1956

    Companies Act 1956

    Cooperative Society Act

    Hindu Law

    State regulation

    Practically none.

    Very little

    Considerably

    Excessive

    Considerably

    Very little

    Management

    Not very efficient

    Relatively better

    Most efficient

    Most efficient

    Can be efficient if done with utmost interest and less friction

    Depends upon the efficiency of Karta

    Flexibility

    Highly flexible

    Moderately flexible

    Limited flexibility

    Limited flexibility

    Limited flexibility

    Highly flexible

    Stability

    Unstable. Fully depend on the owner

    Relatively stable.

    Perpetual

    existence

    Perpetual

    existence

    Perpetual

    existence

    Depends on the members

    Winding up

    At will

    At will

    Under the Act

    Under the Act

    Under the Act

    At will

  • Flexibility in operation, i.e., readiness to adopt to the changes in environment;

  • Maintenance of secrecy in operation of the business;

  • Area of operation; and

  • Independence from strict government regulations.

On the basis of the above points, you analyse your own resources and choose the right form of organisation.

Select the Location of Business

Once the nature and suitable form of business has been decided, the decision will have to be taken regarding the location of the place of business. Special care should be taken while making such selection because the place of business cannot be changed easily. The factors that determine location are:

  • Nearness to the source of raw material particularly when the cost of transporting the raw material is high and the materials are bulky or heavy in relation to their value and add little weight to the final product that you produce. Examples of such raw materials are timber, sugar cane, jute, iron ore, etc.

  • Availability of rail or road transport facilities is another factor require special consideration. This will make it convenient to bring raw materials to the factory and transporting finished goods to the market.

  • Availability of banking, postal and other communication facilities is absolutely necessary. Business cannot be run smoothly without such facilities in order to satisfactorily deal with buyers, dealers and suppliers. Apart from providing funds, the banks help in transmitting money, which is necessary to receive payments and make payments.

  • Adequate supply of power and water is another requirement of a factory. Availability of power and water is also a deciding factor.

  • Availability of both skilled and unskilled labour at reasonable cost and without difficulty is also a factor to be kept in view while deciding on the location. If labour is brought from far off areas, it would be expensive and the cost of the product would go up.

  • Availability of civic amenities is another consideration. The recreational facilities, schools and colleges, religious institutions, medical facilities, hospitals, etc. are required both for the labour and the management.

  • Preferably, the business unit should be located near the market. It is particularly important when the finished product is bulky and perishable. In case of a trading business, the best location is the place where there is enough scope of selling the products. It may be the main market areas of a commercial city or town. In rural area, the trading units may be opened at a place which is convenient to the customers.

  • While selecting the site for a manufacturing unit, consideration should also be given to the facility for disposal of waste.

  • The establishment of certain business in specific area attracts tax concession and other incentives. The Government also provides developed land and other facilities by establishing industrial estates. Hence, the businessman may also consider these factors while deciding upon the location of the business.

  • The social and political conditions of the locality also influence the decision regarding location of the business.

  • The climatic conditions like temperature, rainfall, humidity etc. are also considered before taking any final decision about the location of business. One may avoid establishing business in flood, cyclone and earthquake prone areas.

Identify and Arrange the Resources

Once you have decided to establish a business unit and chosen the line of business, form of organisation, location and site of the business, you have to identify and arrange resources required to set it up. For any business the main resources required are – men, money, material, and physical facilities like plant and machinery, land and building etc. In the following sections let us have a brief idea about all these resources.