Forms of Business Organization

Introduction

Business concerns are established with the objective of making profits. They can be established either by one person or by a group of persons in the private sector by the government or other public bodies in the public sector. A business started by only one person is called sole proprietorship. The business started by a group of persons can be either Partnership or Joint Stock Company or a Co-operative form of organization.
Forms of business organization are legal forms in which a business enterprise may be organized and operated.

These forms of organization refer to such aspects as ownership, risk bearing, control and distribution of profit. Any one of the above mentioned forms may be adopted for establishing a business, but usually one form is more suitable than other for a particular enterprise. The choice will depend on various factors like the nature of business, the objective, the capital required, the scale of operations, state control, legal requirements and so on.

Sole Proprietorship


Meaning: A sole proprietorship or one man’s business is a form of business organization owned and managed by a single person. He is entitled to receive all the profits and bears all risk of ownership.


Features:

The important features of sole proprietorship are:

• The business is owned and controlled by only one person.
• The risk is borne by a single person and hence he derives the total benefit.
• The liability of the owner of the business is unlimited. It means that his personal assets are also liable to be attached for the payment of the liabilities of the business.
• The business firm has no separate legal entity apart from that of the proprietor, and so the business lacks perpetuity.
• To set up sole proprietorship, no legal formalities are necessary, but there may be legal restrictions on the setting up of particular type of business.
• The proprietor has complete freedom of action and he himself takes decisions relating to his firm.
• The proprietor may take the help of members of his Family in running the business.

Ease of formation: As no legal formalities are required to be observed.
Motivation: As all profits belong to the owner, he will take personal interest in the business.

Freedom of Action: There is none to interfere with his authority. This freedom promotes initiative and self-reliance.

Quick Decision: No need for consultation or discussion with anybody.

Flexibility: Can adapt to changing needs with comparative ease.

Personal Touch: comes into close contact with customers as he himself manages the business. This helps him to earn goodwill.

Business Secrecy: Maintaining business secrets is very important in today’s competitive world.

Social Utility: Encourages independent living and prevents concentration of economic power.

Disadvantages

Limited resources: one man’s ability to gather capital will always be limited.

Limited Managerial Ability


Unlimited Liability: Will be discouraged to expand his business even when there are good prospects for earning more than what he has been doing for fear of losing his personal property.

Lack of Continuity: uncertain future is another handicap of this type of business. If the sole proprietor dies, his business may come to an end.
No Economies of Large Scale: As the scale of operations are small, the owner cannot secure the economies and large scale buying and selling. This may raise the cost of production.

Suitability of Sole Proprietorship Form

From the discussion of the advantages and disadvantages of sole proprietorship above, it is clear that this form of business organization is most suited where:

• The amount of capital is small
• The nature of business is simple in character requiring quick decisions to be taken
• Direct contact with the customer is essential and
• The size of demand is not very large.

These types of conditions are satisfied by various types of small business such as retail shops, legal or medical or accounting profession, tailoring, service like dry cleaning or vehicle repair etc. hence sole proprietor form of organization is mostly suitable for these lines of businesses. This form of organization also suits those individuals who have a strong drive for independent thinking and highly venturous some in their attitude.