There are various forms of organizations a business can adopt – sole proprietorship, partnership, company etc. But how do you choose the one most suited to your business? Let us study some characteristics of an ideal form of organization which will help us make the decision.
Characteristics of an Ideal Form of Organization
These are the factors any business should consider before choosing their form of organization. After consideration of these factors the business should be able to make an appropriate and informed decision.
1] Ease of Formation
The ideal situation would be very easy formation of the chosen form of organization. The legal formalities, paperwork etc are very limited. And the cost and time involved should also be minimal.
Browse more Topics under Forms Of Business Organizations
- Sole Proprietorship
- Hindu Undivided Family
- Statutory Bodies and Corporations
- Co-operative Societies and Trusts
2] Raising Capital/Finances
Every business needs to raise capital at the beginning. So the form of organization you choose must consider the amount of capital you need to raise.
If the capital needed is huge, then your chosen ideal form of organization must provide security and assurance to the investors. They will also want transparency and return on their investment.
On the other hand if the capital needed is reasonable then other factors should be considered. Like the ownership of the business must not be unnecessarily dilute. And there must be scope for future development and expansion requiring further financing.
3] Nature of Liability
Liability of the parties involved in the business can be limited or unlimited. In terms of risk, an ideal form of organization will have limited liability. So the liability of the owners is only limited to their contribution of the capital. Their personal assets cannot be attached in case of the business going bankrupt.
On the other hand some forms of organization have unlimited liability. And the owners are liable even beyond their contribution to the company. So their personal assets and wealth can be in danger. This is not an ideal situation.
4] Scope of Control
In an ideal form of organization, the control will be with the owners of the firm. The management and ownership of a business must go hand in hand. If the owners cannot take independent decisions then the business will suffer.
5] Continuity and Stability
Stability and continuity is essential for the success of any business. So the chosen form of organization must provide both. Also this will allow the owners to plan for the future and carry out their long term plans without interruption or disturbance,
Every business functions in a very complex and dynamic business environment. So it becomes essential that they can be flexible in their operations to adapt and succeed in this changing environment. So an ideal form of organization will provide this flexibility.
Some businesses require secrecy about their records and processes. Other businesses will not suffer if there is transparency. So accordingly the owners must chose the form of organization that suits them best.
8] Lawful Business
This is a given. The choice of business must be legal. There can be no illegal activities or transactions and the form of organization you chose should safeguard this.
Solved Question on Ideal Form of Organization
Q: Which of the following is a consideration for choosing an ideal form of organization?
- Nature of Goods
- Physical Location of Business
- Tax Burden
- None of the above
Ans: The correct option is C. Tax burden is one of the points to consider when choosing the ideal form of organization. The one with the lowest tax burden would be the first preference.