Forms of Business Organization: Factors Affecting Choice and Comparative Study

Table of Contents

• Meaning of form of business organization
• Need for choosing a suitable form
• Factors affecting choice of form of business organization (important)
• Brief introduction of major forms
• Comparative study / comparison (important tables)
• Key differences (asked frequently)
• Quick recap (1-minute revision)

Meaning of form of business organization

A form of business organization refers to the legal and organisational structure under which a business operates. It determines ownership, control, liability, continuity, capital raising capacity, profit distribution and regulatory requirements.

Need for choosing a suitable form

Choosing a proper form is necessary because it affects:

• Risk and liability of owners
• Capital requirements and sources
• Management and control
• Continuity and stability of business
• Expansion possibilities
• Legal formalities and cost of compliance

Factors affecting choice of form of business organization (important)

1. Nature of business/activity: manufacturing and large-scale operations usually require larger organisation forms than small trading.
2. Size and scale of operations: as size increases, need for more capital, specialised management and limited liability increases.
3. Capital requirement: high capital needs favour company/LLP; low capital needs may suit proprietorship/partnership.
4. Degree of risk and liability: high risk businesses prefer limited liability forms (company/LLP).
5. Control and management: if owner wants full control, proprietorship is suitable; shared control exists in partnership; company has separation of ownership and management.
6. Continuity/stability: proprietorship and partnership have less continuity; company has perpetual succession.
7. Flexibility of operations: proprietorship and partnership are flexible; company is comparatively less flexible due to legal rules.
8. Legal requirements and cost: company formation involves more legal formalities and compliance cost than proprietorship/partnership.
9. Secrecy: proprietorship offers maximum secrecy; company has statutory disclosure requirements.
10. Tax considerations: different forms have different tax treatment; managers consider overall tax burden.
11. Transferability of ownership: company shares are transferable (especially public companies) which helps liquidity and raising capital.
12. Social and public image: companies often enjoy better goodwill and creditworthiness due to regulation and larger resources.

Brief introduction of major forms

1. Sole proprietorship: owned and managed by one person; unlimited liability; easy to form.
2. Partnership: owned by 2 or more persons under a partnership deed; mutual agency; usually unlimited liability (traditional firm).
3. Joint Hindu Family (HUF) business: governed by Hindu law; managed by Karta; membership by birth.
4. Co-operative society: voluntary association for mutual help; service motive; democratic control.
5. Company (joint stock company): separate legal entity; limited liability; perpetual succession; owned by shareholders.
6. LLP (Limited Liability Partnership): hybrid of partnership and company; separate legal entity with limited liability for partners.

Comparative study / comparison (important tables)

Comparison on key basis

Sole proprietorship vs partnership (summary)

• Proprietorship is suitable for small scale and when single ownership and quick decisions are needed.
• Partnership is suitable when more capital, more skills, and shared responsibility are required.

Company vs partnership (summary)

• Company provides limited liability, large capital, perpetual succession, but requires more legal formalities.
• Partnership is simple and flexible, but has unlimited liability and limited growth.

Key differences (asked frequently)

(A) Private company vs public company (basic)

• Members: private (minimum 2, limited maximum) vs public (minimum 7; can invite public).
• Share transfer: restricted in private; relatively free in public.
• Capital raising: private cannot issue prospectus to public; public can.

(B) Company vs LLP

• Both have separate legal entity and limited liability.
• Company has stricter compliance and corporate governance; LLP has comparatively simpler compliance and is flexible through LLP agreement.

Quick recap (1-minute revision)

• Choice of form depends on capital, risk/liability, control, continuity, legal formalities, secrecy and growth needs.
• Proprietorship: simple, full control, unlimited liability.
• Partnership: shared skills/capital, mutual agency, usually unlimited liability.
• LLP: limited liability + partnership flexibility.
• Company: separate legal entity, limited liability, large capital, perpetual succession, more compliance.