Question [Dec 2020 2(a) (4 Marks)]
X is planning to start a mobile based and web based business. In selection of suitable form of a business organisation, ‘degree of control and management’ plays a significant role. Explain how this factor affects the choice of form of organisation.
The degree of control and management that an entrepreneur desires to have over business affects the choice of form of organisation.
In sole proprietorship and OPC – ownership, management and control are completely fused and therefore, an entrepreneur has complete control over his business.
In partnership – management and control of business is jointly shared by the partners and their specific rights, duties and responsibilities would be documented through incorporating various clauses in this regard in the partnership deed. They have equal voice in the management of partnership business except where they agree to divide among themselves the business responsibilities in a different manner. Even then, they are legally accountable to each other.
In a company – however, there is divergence between ownership and management, the management and control of the company business is entrusted to the Board of Directors, who are generally the elected representative of shareholders. Thus, a person wishing to have complete and direct control of business prefers proprietary organisation rather than partnership or company. If he is prepared to share it with others, he will choose partnership. But, if the activities are large, professional managers are required to handle the day-to-day affairs and there is need for corporate structure and management, he will prefer the company form of organisation.
So, while deciding to commence a business in any form ‘X’ should just not only consider risk, return, sharing, and control over decision making but should also consider the nature of business and the funding requirement over the period of time.