Factors Governing a Suitable Form of Business
The following criteria influence the choice of an appropriate form of ownership organization for a new or proposed business.
The activity of the business
This is an essential aspect that has a strong influence on the type of ownership chosen. In small commercial enterprises, specialties, as well as personal service industries, a sole proprietor is prevalent.
Operational scale
The level of tasks and operations also guides the choice of ownership. Sole proprietorships are suitable for small-scale operations, partnerships for intermediate levels, and companies for significantly larger operations. Market size and demand determine the volume of business activity, with sole proprietorships and partnerships being ideal for localized industries, while partnerships and companies may be formed for higher demands.
Requirements of capital
The amount of capital needed is a crucial consideration. Joint-stock companies are suitable for businesses requiring significant investment, while sole proprietors can raise capital through loans and additional funding. Lenders and vendors assess the financial assets of sole proprietors before providing credit. Companies have an advantage in obtaining capital as investors perceive lower risk.
Controlling as well as management level
The entrepreneur's desire for control and management influence the choice of ownership. Sole proprietors have complete authority, while partnerships involve shared management and control.
Risk and liability
The level of risk and the proprietors' willingness to bear it are important factors. The nature and scale of the business determine the associated risks, with lower levels of risk in smaller firms.
Company stability
Stability is a consideration in attracting capital suppliers and competent personnel. Sole proprietorships lack legislative limitations on their lifespan, making them less stable in terms of attracting investors and employees seeking long-term security.