One of the foremost decisions to be made by the entrepreneur is the one relating to legal structure of the enterprise.
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The choice of a particular form affects the rights, duties, and obligations of owners as well as the tax incidence. The alternative forms of organization are described herein. The main forms of ownership organization are:
1. Sole Proprietorship.
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2. Partnership.
3. Joint Stock Company.
4. Co-operative Society.
Considerations in the selection of a Particular Form of Ownership Structure:
1. Easy formation:
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The ideal form of organization is one which can be brought into existence with the least difficulty. Financial requirement, number of documents, legal complexities should be less so that it will not difficult to incorporate the business house.
2. Facility of raising required capital:
There should be no difficulty in arranging the requisite amount of capital for the form of enterprise selected. Financial institutions should not be reluctant to extent financial support in form of loans and advances.
In addition to convenience of raising capital, the entrepreneur must be assured of the safety of investment, fair return and transferability of investment.
3. Limited liability:
The degree of risk of a business depends upon its nature. The form of ente4rprise determines the quantum of risk for its owners.
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For instance, risk is the highest in sole-proprietary firm followed by a partnership firm. In case of a joint stock company, however, the liability is limited.
4. Democratic control and management:
Management and control is the vital issue for selection of any form of business. The reason is that management and control decides the future of the business.
More it is democratic, better is the performance. It makes every stake holder committed towards the organization. The extent to which on entrepreneur will take interest in business depends upon the extent of his control on management.
For instance, control and management are directly vested in the owner of a sole proprietary firm.
5. Flexibility:
A good form of organization is one which can adapt itself to changed circumstances. It should be capable for expansion or contraction depending on exigencies such as characteristic is found in sole proprietorships.
6. Stability and continuity:
Continuity means developing confidence and increase in efficiency for future period of time for its existence. It can think for future, plan and project for the longer period and develop confidence to undertake a risky and profitable venture which is not possible in short span of time.
7. Scale of operation:
Large scale operation in production, distribution, purchase and selling is instrumental in minising the cost of product there by maximum profit of the organization. It helps the consumers in availing the goods at most favourable rate.
8. Retention of business secrets:
The form of enterprise chosen should enable the entrepreneur to retain vital secrets. A sole proprietor is the sole repository of all the secrets of his business.
9. Government regulation:
Various forms of enterprise have different degree of government controls applicable to them. The entrepreneur should select the form on which Government has least control.
Of the various forms of ownership, insole proprietorship investment has no control over them so also to some extent in case of partnership.
10. Lighter tax liability:
The ideal form of enterprise is that which attracts the minimum amount of tax liability, other things being equal. Tax laws extend many as benefits in form of confusion, rebate deduction and incentives based on form of organization, area of operation, type of progress, and others. That should be duly taken into consideration.
11. Managerial efficiency:
In an era of completion, professionals and experts knowledge in all spheres of economic activities in a business marks a significant difference in the productivity and efficiency of the organization. Small firms can not afford for such individuals. Big one can enjoy such benefits.
In practice, the choice of a form of enterprise is made by balancing the following considerations:
(i) The type of business whether trading, manufacturing, commercial.
(ii) Expected volume of business.
(iii) Size of business.
(iv) Degree of control over management.
(v) Extent to which entrepreneur can assume risk.
(vi) Life span of business.
(vii) Likely tax advantages.
(viii) Financial requirements.
(ix) Degree of government regulation.