Factors Affecting Choice of a Suitable Form of Business Organisation

Choosing the right form of business organisation is one of the first and most important decisions an entrepreneur makes. The choice usually depends on the following factors:

• Nature of business activity — a small trading or service activity often suits sole proprietorship, while manufacturing on a large scale may need the bigger capital base a company can raise.
• Scale of operations — a small, local-scale business needs less capital and coordination than a large-scale business serving a wide market.
• Capital requirement — forms like sole proprietorship suit low capital needs; a partnership can pool more funds than one person, and a joint stock company can raise the largest amounts by issuing shares to the public.
• Degree of control desired — an entrepreneur who wants complete, independent control over every decision will prefer sole proprietorship over a form where control is shared.
• Extent of liability the owner is willing to bear — someone unwilling to risk personal property beyond the business will prefer a form offering limited liability, such as a cooperative society or a joint stock company.
• Continuity and stability desired — a business meant to continue indefinitely, beyond the life of any one owner, is better organised as a company, which enjoys perpetual succession.
• Area of operation — a business intended to remain local can start small (sole proprietorship or partnership); one aiming for a wider, national, or international market may eventually need the scale a company provides.
• Cost and legal formalities of formation — sole proprietorship and partnership involve fewer formalities and lower cost to start than a joint stock company, which must be registered under the Companies Act, 2013.
• Flexibility of operations — forms with fewer owners (sole proprietorship, partnership) can change their line of business or working methods more quickly than a company, which must follow more formal procedures. …