After studying sole proprietorship, partnership, limited company forms of business organizations; it is evident that each form has certain advantages as well as disadvantages. The important factors to consider before starting a business is to choose the business organization.
Cost and Ease of Starting Business
Sole proprietorship is started easily as far as initial business setting-up costs and legal requirements are concerned, in case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations. Registration is compulsory in case of co-operative societies and companies. Formation of a company involves a lengthy and expensive legal procedure.
Liability
In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may result in payment of debt from personal assets of the owners. However, in LLP and limited companies, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.
Also Learn : How to Keep a Business Afloat and Manage Debt?
Continuity
The continuity of sole proprietorship and partnership firms is affected by events such as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organizations like co-operative societies, limited companies.
Managerial Ability
It is difficult for a sole proprietor to have expertise in all functional areas of business. In other forms of organizations like partnership and company, there is division of work among the members; which allows the managers to specialize in specific areas, leading to better decision making. But this may sometimes lead to conflicts due to differences of opinion. Company form of organization is a better alternative if the operations are complex in nature and require professional management.
Capital Requirements
For large scale operations, company form is the most suitable as large amount of funds can be arranged by issuing shares in this form. For medium and small sized business, one can opt for partnership or sole proprietorship. Capital requirements for expansion can also be met more easily in company form.
Read More : What Is Financial Capital in The Business World?
Degree of Control
Sole proprietorship provides direct control over operations and absolute decision making power. But if the owners want to share control for more effective decision making, partnership or company form of organization can be adopted. In company form of organization, professionals are appointed to manage the affairs of a company. Thus, there is complete separation of ownership and management.
Nature of Business
Sole proprietorship is more suitable for businesses in which direct personal contact is needed with the customers such as in the case of a beauty parlor or grocery store. The company form of organization is suited for large manufacturing units. Partnership form is much more suitable in case of professional services. The factors stated above are inter-related and therefore, all the relevant factors must be taken into consideration while making a decision with respect to the form of organization.
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