What are the various factors that should be considered while choosing the most suitable form of business organisation?

The choice of the best suitable form of organization is a very crucial decision. So, the choice should be made with great thought and consultations. Each form of business organization has its own advantages and disadvantages, and these should be considered before choosing the form of organization. The following are the various factors that should be considered while making the selection of the form of organization:

1. Nature of business: The nature of business has an important role in the choice of the form of business organization. Businesses providing direct services, like small retailers, salons, tailors, restaurants, and professional services depend on their success upon personal attention to customers and the personal knowledge or skill of the owner and are, therefore, organized as proprietary concerns. Business activities which required pooling of skills and funds, like wholesale trade, accounting firms, tax consultants, stockbroker, are better organized as partnerships.

2. Size and area of operations: The large-scaled enterprises can be organized as private or public companies. Large enterprises require financial and managerial resources that are beyond the capacity of a single person or a few partners. On the other hand, small and medium scale firms are generally set up as partnership and proprietorship.  Small scale enterprises serve a limited market and require small capital. The risk and liability are not heavy and the management problems can easily be handled by the owner himself. Medium-sized enterprises or professional firms such as health clinics, chartered accountants are predominantly partnerships. They combine their capital and expertise to operate on a larger scale and to avail of the benefits of specialization. Therefore,  Company form is best suited for large scale enterprises. But if the area of operations is confined to a particular locality then sole proprietorship or partnership will be a more suitable choice.

3. Control:  A person who desires to have direct control of business prefers proprietorship rather than the company because in the case of the company there is a separation of ownership and management. But if the person is not interested in direct control then he can go for the company form of ownership.

4. Capital Requirement: The funds required for the formation of a business enterprise have an important impact on the choice of the form of organization. Enterprises requiring huge capital like iron and steel plants should be organized as joint-stock companies. A partnership has to be converted into a company when it grows beyond the capacity and resources of a few persons. Requirements for growth and expansion should also be considered in making the choice. There is maximum scope for expansion in the case of a public company. Where the funds required initially are small and scope for expansion is not desired, proprietorship or partnership is a better choice.

5. Risk Involved: The amount of risk and the willingness of owners to bear it is an important consideration. A single person may have large financial resources sufficient for a medium scale enterprise but due to unlimited personal liability, he may not like to organize as a proprietor or a partnership. But in the case of a public company the risk is shared by a large number of shareholders.

6. Division of Profits: A sole trader receives all the profits of his business but he also bears all the risks. If a person is ready to bear the unlimited personal liability and desires a maximum share of profits, proprietorship and partnership are preferable to company form.

7. Government regulation and control: Sole proprietorship and partnership firms are subject to little regulation and control by the Government. While in the case of companies and cooperatives, they are subject to severe restrictions and have to publish their accounts.

8. The flexibility of operations: Businesses that require a high degree of administrative flexibility should better be organized as proprietorships or partnerships. The internal organization of sole proprietorship and partnership is much more simple and less elaborate than the internal organization of a joint-stock company.