This article throws light upon the top six factors influencing choice of a particular form of organisation. The factors are: 1. Liability 2. Life of the Business 3. Raising of Funds 4. Transferability of Interests 5. Taxation Liability 6. Legal Formalities.
Factor # 1. Liability:
The liability of the owner/promoters is an important consideration in selecting the form of organisation. No owner would like to risk his private assets for the losses of the business.
When the liability is unlimited, as in the case of sole-proprietorship and partnership, the creditors can claim the payment of their dues from the personal property of the owners if business assets have not been able to meet their obligations. In the case of limited liability, the owner’s liability in meeting business losses is limited only to the extent of their capital investments.
Factor # 2. Life of the Business:
Legal form of an organisation influences the life of a business. An enterprise may be dissolved on the death of an owner. Some other form may not be affected by the change of ownership or the death of owners. The longer life of an enterprise is essential for its growth and prosperity. The owner will prefer that legal form of organisation which ensures permanency of the enterprise.
Factor # 3. Raising of Funds:
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Entrepreneurs will prefer that form of organisation in which funds can be raised as per the requirements. An organisation should be flexible for raising funds from a number of sources. The capital investment will also depend upon the legal form of organisation.
A concern issuing share capital to the public may be able to raise more funds as compared to an organisation where investments are limited to the sources of owners only.
Factor # 4. Transferability of Interests:
In some forms of organisation ownership interests cannot be transferred while in others it is possible. Owners will prefer that legal form where interest (share) is easily transferable.
Factor # 5. Taxation Liability:
Tax is a cost to the business. It has to be paid because the enterprise has earned profits. Different legal forms have varying tax liabilities. An entrepreneur does have tax burden in his mind while choosing a legal form of organisation.
Factor # 6. Legal Formalities:
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The nature and extent of formalities required at the time of establishing a concern also influence a decision about the form of ownership. The formalities also involve costs in completing them. Entrepreneurs will prefer a form of legal organisation where minimum formalities are required.
The time taken in completing these formalities should be minimum and cost involved should be small. The taking up of new activities without any legal formalities is also preferred by entrepreneurs. They also opt for a form where control is in their hands.
Though a number of factors have been considered as desirable for a suitable form of organisation but all of these may not be required in each case. One entrepreneur may prefer some factors while another may have another preference. A person with little private assets may not bother about unlimited liabilities.
Similarly if an entrepreneur requires limited funds for his enterprise then he needs not to bother about a legal form where a number of sources may be available for raising funds. It is the priority for different factors which influences the selection of a particular form of legal organisation.