FACTORS OF THE SELECTION OF A TYPE OF OWNERSHIP
(Why a particular choice)
A businessman has many choices of ownership before starting a business He may start his business as
i) Sole proprietorship
iv) Cooperative society
His selection of particular type depends on the considerations of the following factors.
If the business involves low amount of risk sole proprietorship is the best choice because managing small capital all alone is not highly risky. If the business runs a high degree of risk, the partnership or the company may be set up to distribute it over a number of individuals. Divided risk over a great number of persons eases the shock of loss, and is fairly bearable.
Life Of A Business
Some businesses require a greater stability than others. Manufacturing is one of such activities that must continue without any hindrance. On the other hand retailing and wholesaling do not need that great stability. Sole proprietorships and partnerships are by their nature weakly established. They come to an end by admission, retirement, death, insanity, bankruptcy of the owner, and partners. But the company doesn’t end for such reasons. So if the business nature requires stability, company is the best choice.
Amount Of Capital
If the amount needed is great the choice of the company is the best. Around 50 percent of the capital can be had from the public in addition to the investment of the promoters. The partnership is the second choice for raising a large amount of fund. Here capital can be increased by admitting additional partners. Sole proprietorship is the best for business requiring small amount of capital.
If the business is geographically expanded selection of the company is the best. Sole proprietorship and partnership and partnerships are suitable for geographically limited business. However, for any choice prospective room for expansion must be considered.
Desire To Control
If the owner is of the opinion to control the most, the sole proprietorship is the best. Here maximum authority is possible. In the partnership and the company control is divided among partners and directors and shareholders respectively.
Tax Payment And Organization Expenses
The company has to pay many taxes. Corporate tax, organization expenses, dual income tax are its characteristics. The sole proprietorship and the partnership are free of such expenditure. The additional advantage available to the partnership is the saving of income tax. If the tax is the most important criterion partnership is the best.
In the company the government interference is maximum. If the businessman doesn’t think such interference fit he can choose the sole proprietorship or the partnership.
Importance of Secrecy
If the accounting secrecy is the most important factor, sole proprietorship is the best form of business organization. In the company secrecy is not possible because accounting and other business information must be made public.