If the size of business is small, it would be advantageous to form a sole proprietary business organisation without much expense and legal formalities.
However, the biggest disadvantage of a sole proprietorship business is the limited liability to raise funds which restricts its growth. Besides, the owner has unlimited personal liability. In order to avoid this disadvantage, it is advisable to form a partnership firm.
2. A Partnership Firm:
This is almost as easy as a proprietary concern and can be set up with ease and economy. It may or may not involve registration with the Registrar of Firms. Obviously, a partnership firm involves more than one partner.
The number of partners may be any, but it is better to limit the number of partners from 2 to 3 upto 5. It is not advisable to have many partners as; too many cooks spoil the broth. A partnership firm is better than a proprietary concern because, it brings in more money, varied experience and the expertise of the partners.
There can be a division of work and, hence specialisation can be achieved in different segments of business activities.
It is simple to constitute a partnership firm by writing a partnership deed on non-judicial stamp paper of specified value, signed by every partner and witnessed by two persons/firms. It is advisable that the Partnership Deed may be got registered with the Registrar of Firms under the Partnership Act, 1932.
The liability of the partners though joint and several, is practically distributed amongst the various partners, despite the fact that personal liability of the partner is unlimited. The major disadvantage of a partnership form of business organisation is that, conflict amongst the partners is a potential threat to the business.
3. A Company:
A company is another form of business organisation, which has the advantage of distinct identity and limited liability to the share holders. It can be constituted either as a private or public limited company under the Indian Companies Act.
In a private limited company, there can be a minimum of two shareholders, with a maximum 50% share each and the public cannot be invited to subscribe to its capital. Under a public limited company, there can be a minimum number of 7 partners with no upper limit.
The public limited company can be a closely-held-company or a widely-held company. In a closely- held company, the funds cannot be raised from the public, whereas in a widely-held company, the shares or the debentures of the company can be floated in the market.
The constitution of a firm such as a company, either private or public limited confers a status in business, in comparison to a proprietary or partnership firm. But it involves certain additional formalities to be completed, which involve money and time.
A public limited company offers enormous potential for growth, because of access to substantial funds. The liquidity of investment is high because of easiness of transfer of shares.
However, its formation can be recommended only when the size of the business is large. For a small business, a sole proprietary concern or a partnership firm will be the most suitable form of business organisation.
In case it is decided to incorporate a private or public limited company, the same is to be registered with the Registrar of Companies. Hence, one has to take judicious decision according to the need and requirements of the exporting firm.