Forms of Business Organization: Factors Affecting Choice and Comparative Study Questions

Question 1

What is meant by “form of business organisation”?

Accepted Answer

Form of business organisation means the legal and organisational structure under which a business is owned, managed and operated.

Question 2

State any one factor affecting choice of form of business organisation.

Accepted Answer

Capital requirement is a factor affecting the choice of form of business organisation.

Question 3

What is limited liability?

Accepted Answer

Limited liability means the owners’ liability is restricted to the amount of their investment/guarantee and their personal assets are generally not used to pay business debts.

Question 4

Name any one form of business organisation.

Accepted Answer

Sole proprietorship is a form of business organisation.

Question 5

What is perpetual succession?

Accepted Answer

Perpetual succession means the business continues to exist even if members/owners change due to death, insolvency or transfer.

Question 6

What is LLP?

Accepted Answer

LLP (Limited Liability Partnership) is a business form having separate legal entity with limited liability of partners and flexible internal management through an LLP agreement.

Question 7

Explain factors affecting choice of form of business organisation.

Accepted Answer

The choice of form depends on factors like **capital requirement** (high capital favours company/LLP), **risk and liability** (high risk favours limited liability forms), and **control/management** (full control favours proprietorship; shared control in partnership). Other factors include **continuity**, **legal formalities and cost**, **secrecy**, **tax considerations**, and **growth/expansion needs**.

Question 8

Differentiate between sole proprietorship and partnership.

Accepted Answer

In **sole proprietorship**, ownership and control lie with one person and decisions are quick, but capital is limited and liability is unlimited. In **partnership**, two or more persons contribute capital and skills and management is shared, allowing larger resources. However, partnership also generally has unlimited liability and may face conflicts among partners.

Question 9

Differentiate between partnership and company.

Accepted Answer

A **company** is a separate legal entity with **limited liability** and **perpetual succession** and can raise large capital by issuing shares; however, it has heavy legal formalities and statutory disclosures. A **partnership** is comparatively easy to form with flexibility, but it generally has **no separate legal entity**, **unlimited liability**, and limited capacity for large-scale capital raising and continuity.

Question 10

Write a short note on LLP as a form of business organisation.

Accepted Answer

LLP is a hybrid form combining partnership flexibility with limited liability. It has **separate legal entity** and partners’ liability is **limited**, protecting personal assets in most cases. Internal management is governed by an **LLP agreement**, making it more flexible than a company. LLP is suitable for professional and service businesses where limited liability and flexible management are both required.

Question 11

Explain the role of capital requirement in choosing a form of organisation.

Accepted Answer

Capital requirement strongly influences the choice of organisation. Small businesses with low capital needs generally adopt **sole proprietorship** or **partnership** because they are easy and inexpensive to start. When capital needs are large for expansion, technology and large-scale operations, forms like **company** or **LLP** are preferred because they can mobilise funds from many investors/partners and have better creditworthiness.

Question 12

Explain why limited liability is an important factor in selection of form of organisation.

Accepted Answer

Limited liability reduces personal risk of owners by restricting liability to the amount invested. This is especially important in high-risk businesses because personal assets are protected from business losses. Limited liability also encourages investment and entrepreneurship, as investors are more willing to contribute capital when their risk is limited, which supports growth and expansion.

Question 13

Explain the factors affecting the choice of form of business organisation in detail.

Accepted Answer

The choice of a suitable form of business organisation is an important decision because it affects ownership, liability, capital, control and future growth. The major factors are:

1. **Nature of business and size of operations:** Small trading and service activities may suit proprietorship or partnership, while large manufacturing and complex operations may require company/LLP.
2. **Capital requirement:** Low capital needs favour proprietorship/partnership; large capital requirements favour company (issue of shares/debentures) or LLP.
3. **Risk and liability:** High-risk businesses prefer limited liability forms (company/LLP) to protect owners’ personal assets.
4. **Control and management:** If the owner wants full control and quick decisions, proprietorship is suitable. For shared control with combined skills, partnership/LLP is suitable. In a company, ownership and management are separated and control is through Board of Directors.
5. **Continuity and stability:** Proprietorship and partnership may be affected by death/insolvency; company and LLP provide better continuity (perpetual succession).
6. **Legal formalities and cost:** Proprietorship has minimum formalities, partnership has low formalities, while company requires registration, disclosures and higher compliance cost.
7. **Secrecy and flexibility:** Proprietorship provides maximum secrecy and flexibility; company has more disclosure and is comparatively less flexible.
8. **Transferability and growth needs:** Company shares are transferable and it is better suited for large-scale growth.

Thus, the form should be selected after balancing capital needs, risk, control, continuity and compliance requirements.

Question 14

Compare sole proprietorship, partnership and company on major points.

Accepted Answer

Sole proprietorship, partnership and company differ on many important points:

1. **Ownership:** Proprietorship is owned by one person, partnership by two or more partners, and company by shareholders.
2. **Legal status:** Proprietorship and traditional partnership have no separate legal entity, whereas company is a separate legal entity distinct from its owners.
3. **Liability:** Proprietor and partners generally have unlimited liability, while shareholders’ liability in a company is limited.
4. **Capital:** Proprietorship has very limited capital, partnership can pool moderate capital, while company can raise large capital through shares and debentures.
5. **Control and management:** Proprietor has full control and quick decisions; partnership has shared management; company is managed by Board of Directors and professional managers.
6. **Continuity:** Proprietorship and partnership may be affected by death/insolvency, while company enjoys perpetual succession.
7. **Secrecy and compliance:** Proprietorship maintains high secrecy and minimal formalities; partnership has relatively low formalities; company requires statutory disclosures, audits and higher compliance cost.

Therefore, proprietorship suits small businesses, partnership suits medium businesses, and company is most suitable for large-scale and expansion-oriented businesses.

Question 15

Explain LLP and compare LLP with company and partnership (any key points).

Accepted Answer

LLP (Limited Liability Partnership) is a modern business form that combines the flexibility of partnership with the advantages of limited liability. It is a separate legal entity and the liability of partners is limited, usually to their agreed contribution.

**LLP vs Partnership:** Traditional partnership usually has no separate legal entity and partners have unlimited liability. In LLP, there is separate legal identity and partners enjoy limited liability. LLP is governed by an LLP agreement, providing flexibility similar to partnership but with better protection.

**LLP vs Company:** Both LLP and company are separate legal entities and provide limited liability. However, a company is governed by stricter corporate governance requirements, board structure, and more detailed statutory compliances and disclosures. LLP generally has comparatively simpler compliance and offers flexible internal management through LLP agreement.

LLP is suitable for professional and service businesses and for enterprises that require limited liability with simpler compliance and flexible management.

Forms of Business Organization: Factors Affecting Choice and Comparative Study

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