Role of a Financial Manager Financial activities of a firm is one of the most important and

complex activities of a firm. Therefore in order to take care of these activities a financial
manager performs all the requisite financial activities.

A financial manger is a person who takes care of all the important financial functions of an
organization. The person in charge should maintain a far sightedness in order to ensure that
the funds are utilized in the most efficient manner. His actions directly affect the Profitability,
growth and goodwill of the firm.

Following are the main functions of a Financial Manager:

1. Raising of Funds In order to meet the obligation of the business it is important to

have enough cash and liquidity. A firm can raise funds by the way of equity and debt.
It is the responsibility of a financial manager to decide the ratio between debt and
equity. It is important to maintain a good balance between equity and debt.

2. Allocation of Funds Once the funds are raised through different channels the next
important function is to allocate the funds. The funds should be allocated in such a
manner that they are optimally used. In order to allocate funds in the best possible
manner the following point must be considered
 The size of the firm and its growth capability
 Status of assets whether they are long-term or short-term
 Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities.
Hence formation of a good asset mix and proper allocation of funds is one of the most
important activity

3. Profit Planning Profit earning is one of the prime functions of any business
organization. Profit earning is important for survival and sustenance of any
organization. Profit planning refers to proper usage of the profit generated by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the
economy, mechanism of demand and supply, cost and output. A healthy mix of
variable and fixed factors of production can lead to an increase in the profitability of
the firm.

Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. In order to maintain a tandem it is important to continuously value the
depreciation cost of fixed cost of production. An opportunity cost must be calculated
in order to replace those factors of production which has gone thrown wear and tear.
If this is not noted then these fixed cost can cause huge fluctuations in profit.

4. Understanding Capital Markets Shares of a company are traded on stock exchange

and there is a continuous sale and purchase of securities. Hence a clear understanding
of capital market is an important function of a financial manager. When securities are
traded on stock market there involves a huge amount of risk involved. Therefore a
 financial manger understands and calculates the risk involved in this trading of shares
and debentures.

Its on the discretion of a financial manager as to how to distribute the profits. Many
investors do not like the firm to distribute the profits amongst share holders as
dividend instead invest in the business itself to enhance growth. The practices of a
financial manager directly impact the operation in capital market.

What Does a Finance Manager Do?

Financial Analysis and Interpretation Financial analysis is taking the financial data of the
company, organizing it and analyzing it to find the strengths of the company. This is
converted into patterns and a conclusion will be driven out of it. This helps the higher
management to take wise decisions. It also helps in evaluating the financial health of the
company. It is a very tedious task, which needs to be done articulately.

Determining the Source of Funds A finance manager identifies the sources of funds,
especially while starting a new venture. It involves identifying the lenders and banks that can
lend money to the company. Also, it deals with knowing your customers and target audience.

Investment of Funds A finance manager conducts an in-depth study about the investment
that a company should make and the possible ROI (Return on Investment). He provides a
broader selection of investment opportunities with a lower risk. So a finance manager has to
do risk analysis too.

Profit Planning and Control Profit planning and control involves establishing profit goals,
determining the expected sales volume, estimating expenses, determining profit and much
more. After planning profit successfully, an organization needs to control profit. Profit
control involves measuring the gap between the estimated level and actual level of profit
achieved by an organization.

Capital Budgeting A finance manager determines and evaluates potential expenses or

investments that are large in nature. Such expenditure can be anything like having a new
branch office or investing in a new long-term venture.
Apart from these, there are many other important responsibilities that a finance manager
shoulders. One cannot undermine the role of finance personnel.

A finance manager plays a vital role as finance is the backbone of any organization. The
organization can grow by leaps and bounds, provided sound business decisions are taken at
the right time. These important decisions come from the finance manager’s desk.

Forms of Business Organization

These are the basic forms of business ownership:

1. Sole Proprietorship A sole proprietorship is a business owned by only one person. It is

easy to set-up and is the least costly among all forms of ownership. The owner faces
unlimited liability; meaning, the creditors of the business may go after the personal assets of
the owner if the business cannot pay them.The sole proprietorship form is usually adopted by
small business entities.
2. Partnership A partnership is a business owned by two or more persons who contribute
resources into the entity. The partners divide the profits of the business among themselves. In
general partnerships, all partners have unlimited liability. In limited partnerships, creditors
cannot go after the personal assets of the limited partners.

3. Corporation A corporation is a business organization that has a separate legal personality

from its owners. Ownership in a stock corporation is represented by shares of stock.The
owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the
activities of the corporation. In addition to those basic forms of business ownership, these are
some other types of organizations that are common today:

Limited Liability Company Limited liability companies (LLCs) in the USA, are hybrid
forms of business that have characteristics of both a corporation and a partnership. An LLC is
not incorporated; hence, it is not considered a corporation.Nonetheless, the owners enjoy
limited liability like in a corporation. An LLC may elect to be taxed as a sole proprietorship,
a partnership, or a corporation.

Cooperative A cooperative is a business organization owned by a group of individuals and is

operated for their mutual benefit. The persons making up the group are called members.
Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are:
water and electricity (utility) cooperatives, cooperative banking, credit unions, and housing
cooperatives.

Forms of Business Organization

One of the first decisions that you will have to make as a business owner is how the business
should be structured. All businesses must adopt some legal configuration that defines the
rights and liabilities of participants in the business’s ownership, control, personal liability,
life span, and financial structure. This decision will have long-term implications, so you may
want to consult with an accountant and attorney to help you select the form of ownership that
is right for you. In making a choice, you will want to take into account the following:

•Your vision regarding the size and nature of your business.

•The level of control you wish to have.
•The level of “structure” you are willing to deal with.
•The business’s vulnerability to lawsuits.
•Tax implications of the different organizational structures.
•Expected profit (or loss) of the business.
•Whether or not you need to re-invest earnings into the business.
•Your need for access to cash out of the business for yourself.
An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships;
Corporations and Limited Liability Company follows.

Sole Proprietorship The vast majority of small businesses start out as sole
proprietorships. These firms are owned by one person, usually the individual who has day-
to-day responsibility for running the business. Sole proprietorships own all the assets of the
business and the profits generated by it. They also assume complete responsibility for any of
its liabilities or debts. In the eyes of the law and the public, you are one in the same with the
business.
Advantages of a Sole Proprietorship

• Easiest and least expensive form of ownership to organize.

• Sole proprietors are in complete control, and within the parameters of the law, may make
decisions as they see fit.
• Profits from the business flow-through directly to the owner’s personal tax return.
• The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

• Sole proprietors have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal
savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are motivated by the
opportunity to own a part of the business.
• Some employee benefits such as owner’s medical insurance premiums are not directly
deductible from business income (only partially as an adjustment to income).

Partnerships In a Partnership, two or more people share ownership of a single

business. Like proprietorships, the law does not distinguish between the business and its
owners. The Partners should have a legal agreement that sets forth how decisions will be
made, profits will be shared, disputes will be resolved, how future partners will be admitted
to the partnership, how partners can be bought out, or what steps will be taken to dissolve the
partnership when needed; Yes, its hard to think about a “break-up” when the business is just
getting started, but many partnerships split up at crisis times and unless there is a defined
process, there will be even greater problems. They also must decide up front how much time
and capital each will contribute, etc.

Advantages of a Partnership

• Partnerships are relatively easy to establish; however time should be invested in developing
the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a
partner.
• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a
partner.

Types of Partnerships that should be considered:

1. General Partnership
Partners divide responsibility for management and liability, as well as the shares of profit or
loss according to their internal agreement. Equal shares are assumed unless there is a written
agreement that states differently.

2. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their
investment) as well as limited input regarding management decision, which generally
encourages investors for short term projects, or for investing in capital assets. This form of
ownership is not often used for operating retail or service businesses. Forming a limited
partnership is more complex and formal than that of a general partnership.

3. Joint Venture
Acts like a general partnership, but is clearly for a limited period of time or a single
project. If the partners in a joint venture repeat the activity, they will be recognized as an
ongoing partnership and will have to file as such, and distribute accumulated partnership
assets upon dissolution of the entity.

Corporations A Corporation, chartered by the state in which it is headquartered, is

considered by law to be a unique entity, separate and apart from those who own it. A
Corporation can be taxed; it can be sued; it can enter into contractual agreements. The
owners of a corporation are its shareholders. The shareholders elect a board of directors to
oversee the major policies and decisions. The corporation has a life of its own and does not
dissolve when ownership changes.

Advantages of a Corporation

• Shareholders have limited liability for the corporation’s debts or judgments against the
corporation.
• Generally, shareholders can only be held accountable for their investment in stock of the
company. (Note however, that officers can be held personally liable for their actions, such as
the failure to withhold and pay employment taxes.
• Corporations can raise additional funds through the sale of stock.
• A Corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S Corporation status if certain requirements are met. This election enables
company to be taxed similar to a partnership.

Disadvantages of a Corporation

• The process of incorporation requires more time and money than other forms of
organization.
• Corporations are monitored by federal, state and some local agencies, and as a result may
have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes. Dividends paid to shareholders are not
deductible from business income; thus this income can be taxed twice.

Subchapter S Corporation A tax election only; this election enables the shareholder to treat
the earnings and profits as distributions, and have them pass through directly to their personal
tax return. The catch here is that the shareholder, if working for the company, and if there is
a profit, must pay his/herself wages, and it must meet standards of “reasonable
compensation”. This can vary by geographical region as well as occupation, but the basic
rule is to pay yourself what you would have to pay someone to do your job, as long as there is
enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as
wages, and you will be liable for all of the payroll taxes on the total amount.

Limited Liability Company (LLC) The LLC is a relatively new type of hybrid business
structure that is now permissible in most states. It is designed to provide limited liability
features of a corporation and the tax efficiencies and operational flexibility of a
partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the
organization papers are filed. The time limit can be continued if desired by a vote of the
members at the time of expiration. LLC’s must not have more than two of the four
characteristics that define corporations: Limited liability to the extent of assets; continuity of
life; centralization of management; and free transferability of ownership interests.

Federal Tax Forms for LLC Taxed as a partnership in most cases; corporation forms must
be used if there are more than 2 of the 4 corporate characteristics, as described above.

A business can be organized in one of several ways, and the form its owners choose will
affect the company's and owners' legal liability and income tax treatment. Here are the most
common options and their major defining characteristics.

Sole Proprietorship
The default option is to be a sole proprietor. With this option there are fewer forms to file
than with other business organizations. The business is structured in such a manner that legal
documents are not required to determine how profit-sharing from business operations will be
allocated.

This structure is acceptable if you are the business's sole owner and you do not need to
distinguish the business from yourself. Being a sole proprietor does not preclude you from
using a business name that is different from your own name, however. In a sole
proprietorship all profits, losses, assets and liabilities are the direct and sole responsibility of
the owner. Also, the sole proprietor will pay self-employment tax on his or her income.

Sole proprietorships are not ideal for high-risk businesses because they put your personal
assets at risk. If you are taking on significant amounts of debt to start your business, if you've
gotten into trouble with personal debt in the past or if your business involves an activity for
which you might potentially be sued, then you should choose a legal structure that will better
protect your personal assets. Nolo, a company whose educational books make legal
information accessible to the average person, gives several examples of risky businesses,
including businesses that involve child care, animal care, manufacturing or selling edible
goods, repairing items of value, and providing alcohol. These are just a few examples. There
are many other activities that can make your business high risk.

If the risks in your line of work are not very high, a good business insurance policy can
provide protection and peace of mind while allowing you to remain a sole proprietor. One of
the biggest advantages of a sole proprietorship is the ease with which business decisions can
be made.
LLC
An LLC is a limited liability company. This business structure protects the owner's personal
assets from financial liability and provides some protection against personal liability. There
are situations where an LLC owner can still be held personally responsible, such as if he
intentionally does something fraudulent, reckless or illegal, or if she fails to adequately
separate the activities of the LLC from her personal affairs.

This structure is established under state law, so the rules governing LLCs vary depending on
where your business is located. According to the IRS, most states do not allow banks,
insurance companies or nonprofit organizations to be LLCs.

Because an LLC is a state structure, there are no special federal tax forms for LLCs. An LLC
must elect to be taxed as an individual, partnership or corporation. You will need to file
paperwork with the state if you want to adopt this business structure, and you will need to pay
fees that usually range from $100 to $800. In some states, there is an additional annual fee for
being an LLC.

You will also need to name your LLC and file some simple documents, called articles of
organization, with your state. Depending on your state's laws and your business's needs, you
may also need to create an LLC operating agreement that spells out each owner's percentage
interest in the business, responsibilities and voting power, as well as how profits and losses
will be shared and what happens if an owner wants to sell her interest in the business. You
may also have to publish a notice in your local newspaper stating that you are forming an
LLC.

Corporation
Like the LLC, the corporate structure distinguishes the business entity from its owner and can
reduce liability. However, it is considered more complicated to run a corporation because of
tax, accounting, record keeping and paperwork requirements. Unless you want to have
shareholders or your potential clients will only do business with a corporation, it may not be
logical to establish your business as a corporation from the start - an LLC may be a better
choice.

The steps for establishing a corporation are very similar to the steps for establishing an LLC.
You will need to choose a business name, appoint directors, file articles of incorporation, pay
filing fees and follow any other specific state/national requirements. (Find out how becoming
a corporation can protect and further your finances. See Should You Incorporate Your
Business?)

There are two types of corporations: C corporations (C corps) and S corporations (S corps). C
corporations are considered separate tax-paying entities. C corps file their own income tax
returns, and income earned remains in the corporation until it is paid as a salary or wages to
the corporation's officers and employees. Corporate income is often taxed at lower rates than
personal income, so you can save money on taxes by leaving money in the corporation.

If you're only making enough to get by, however, this won't help you because you'll need to
pay almost all of the corporation's earnings to yourself. If the corporation has shareholders,
corporate earnings become subject to double taxation in the sense that income earned by the
corporation is taxed and dividends distributed to shareholders are also taxed. However, if you
are a one-person corporation, you don't have to worry about double taxation.

S corporations are pass-through entities, meaning that their income, losses, deductions and
credits pass through the company and become the direct responsibility of the company's
shareholders. The shareholders report these items on their personal income tax returns, thus S
corps avoid the income double taxation that is associated with C corps.

All shareholders must sign IRS form 2553 to make the business an S corp for tax purposes.
The IRS also requires S corps to meet the following requirements:

 Be a domestic corporation
 Have only allowable shareholders, including individuals, certain trusts and estates
 Not include partnerships, corporations or non-resident alien shareholders
 Have no more than 100 shareholders
 Have one class of stock
 Not be an ineligible corporation (i.e., certain financial institutions, insurance
companies and domestic international sales corporations)

General Partnerships, Limited Partnerships (LP) and Limited Liability Partnerships

(LLP)
A partnership is a structure appropriate to use if you are not going to be the sole owner of
your new business.

In a general partnership, all partners are personally liable for business debts, any partner can
be held totally responsible for the business and any partner can make decisions that affect the
whole business.

In a limited partnership, one partner is responsible for decision-making and can be held
personally liable for business debts. The other partner merely invests in the business.
Although the general structure of limited partnerships can vary, each individual is liable only
to the extent of their invested capital.

LLPs are most commonly used by professionals such as doctors and lawyers. The LLP
structure protects each partner's personal assets and each partner from debts or liability
incurred by the other partners. Different states have varying regulations regarding these
establishments of which business owners must take note.

Partnerships must file information returns with the IRS, but they do not file separate tax
returns. For tax purposes, the partnership's profits or losses pass through to its owners, so a
partnership's income is taxed at the individual level. LPs and LLPs are also state entities and
must file paperwork and pay fees similar to those involved in establishing an LLC.

Regardless of the way a business is structured, its owners will have the same overarching
goals when it comes to the company's financial management.
9 Factors Governing the Selection of a Suitable Form of
Ownership Business Organization
The selection of a suitable form of ownership organisation is an important entrepreneurial
decision because it influences the success and growth of a business — e.g., it determines the
decision of profits, the risk associated with business, and so on. As discussed earlier, the
different forms of private ownership organisation differ from each other in respect of division
of profit, control, risk, legal formalities, flexibility, etc.

Therefore, a thoughtful consideration should be given to this problem and only that form of
ownership should be chosen. Since the need for the selection of ownership organisation arises
both initially, while starting a business, and at a later stage for meeting the needs of growth
and expansion, it is desirable to discuss this question at both these levels.

For a new or proposed business, the selection of a suitable form of ownership organisation is
generally governed by the following factors:

1. Nature of business activity:

This is an important factor having a direct bearing on the choice of a form of ownership. In
small trading businesses, professions, and personal service trades, sole-proprietorship is
predominant.Examples are Laundromats, beauty parlours, repair shops, consulting agencies,
small retail stores, medicine, dentist accounting concerns, boarding-house, restaurants,
speciality ships, jobbing builders, painters, decorators, bakers, confectioners, tailoring shops,
small scale shoe repairers and manufactures, etc. The partnership is suitable in all those cases
where sole proprietorship is suitable, provided the business is to be carried on a slightly
bigger scale. Besides, partnership is also advantageous in case of manufacturing activities on
a modest scale. The finance, insurance, and real estate industries seem to be suited to
partnership form of organisation. Some of the financial businesses that find this form
advantageous are tax, accounting, and stockbrokerage firms, and consulting agencies.Service
enterprises like hotels and lodging places; trading enterprises, such as wholesale trade, large
scale retail houses; manufacturing enterprises, such as small drug manufacturers, etc. can be
undertaken in the form of partnership. Manufacturing contains the highest percentage of
companies among all industries. Similarly large chain stores, multiple shops, super-bazaars,
engineering companies are in the form of companies.

2. Scale of operations:

The second factor that affects the form of ownership organisation is the scale of operations. If
the scale of operations of business activities is small, sole proprietorship is suitable; if this
scale of operations is modest — neither too small nor too large — partnership is preferable;
whereas, in case of large scale of operations, the company form is advantageous.The scale of
business operations depends upon the size of the market area served, which, in turn, depends
upon the size of demand for goods and services. If the market area is small, local, sole-
proprietorship or partnership is opted. If the demand originates from a large area, partnership
or company may be adopted.

3. Capital requirements:
Capital is one of the most crucial factors affecting the choice of a particular form of
ownership organisation. Requirement of capital is closely related to the type of business and
scale of operations. Enterprises requiring heavy investment (like iron and steel plants,
medicinal plants, etc.) should be organised as joint stock companies. Enterprises requiring
small investment (like retail business stores, personal service enterprises, etc.) can be best
organised as sole proprietorships. Apart from the initial capital required to start a business,
the future capital requirements—to meet modernisation, expansion, and diversification plans
—also affect the choice of form of ownership organisation. In sole proprietorship, the owner
may raise additional capital by borrowing, by purchasing on credit, and by investing
additional amounts himself. Banks and suppliers, however, will look closely at the
proprietor’s individual financial resources before sanctioning loans or advances.

Partnerships can often raise funds with greater ease, since the resources and credit of all
partners are combined in a single enterprise. Companies are usually best able to attract capital
because investors are assured that their liability will be limited.

4. Degree of control and management: The degree of control and management

that an entrepreneur desires to have over business affects the choice of ownership
organisation. In sole proprietorship, ownership, management, and control are
completely fused, and therefore, the entrepreneur has complete control over
business. In partnership, management and control of business is jointly shared by
partners.They have equal voice in the management of partnership business except
to the extent that they agree to divide among themselves the business
responsibilities. Even then, they are legally accountable to each other. In a
company, however, there is divorce between ownership and management. The
management and control of company business is entrusted to the elected
representatives 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 he is just not bothered about it, he will go in for company.

5. Degree of risk and liability: The size of risk and the willingness of owners to
bear it is an important consideration in the selection of a legal form of ownership
organisation. The amount of risk involved in a business depends, among other, on
the nature and size of business. Smaller the size of business, smaller the amount of
risk. Thus, a sole proprietary business carries small amount of risk with it as
compared to partnership or company. However, the sole proprietor is personally
liable for all the debts of the business to the extent of his entire property. Likewise,
in partnership, partners are individually and jointly responsible for the liabilities of
the partnership firm. Companies have a real advantage, as far as the risk goes, over
other forms of ownership. Creditors can force payment on their claims only to the
limit of the company’s assets. Thus, while a shareholder may lose the entire money
he put into the company, he cannot be forced to contribute additional funds out of
his own pocket to satisfy business debts.
6. Stability of business: Stability of business is yet another factor that governs the
choice of an ownership organisation. A stable business is preferred by the owners
insofar as it helps him in attracting suppliers of capital who look for safety of
investment and regular return, and also helps in getting competent workers and
managers who look for security of service and opportunities of advancement. From
this point of view, sole proprietorships are not stable, although no time limit is
placed on them by law.

The illness of owner may derange the business and his death cause the demise of the
business. Partnerships are also unstable, since they are terminated by the death, insolvency,
insanity, or withdrawal of one of the partners. Companies have the most permanent legal
structure. The life of the company is not dependent upon the life of this member. Members
may come, members may go, but the company goes on forever.

7. Flexibility of administration: As far as possible, the form of organisation

chosen should allow flexibility of administration. The flexibility of administration
is closely related to the internal organisation of a business, i.e., the manner in
which organisational activities are structured into departments, sections, and units
with a clear definition of authority and responsibility. The internal organisation of
a sole proprietary business, for instance, is very simple, and therefore, any change
in its administration can be effected with least inconvenience and loss. To a large
extent, the same is true of a partnership business also. In a company organisation,
however, administration is not that flexible because its activities are conducted on
a large scale and they are quite rigidly structured. Any substantial change in the
existing line of business activity — say from cotton textiles to sugar manufacturing
— may not be permitted by law if such a provision is not made in the ‘objects
clause’ of the Memorandum of Association of the company. Even when it is
permitted by the Memorandum, it might have to be endorsed by the shareholders at
the general meeting of the company. Thus, from flexibility point of view, sole
proprietorship has a distinct edge over other forms.

8. Division of profit: Profit is the guiding force of private business and it has a
tremendous influence on the selection of a particular form of ownership
organisation. An entrepreneur desiring to pocket all the profits of business will
naturally prefer sole proprietorship.
Of course, in sole proprietorship, the personal liability is also unlimited. But, if he is willing
to share the profits partnership is best. In company organisation, however, the profits
(whenever the Board of Directors decides) are distributed among shareholders in proportion
to their shareholding, but the liability is also limited. The rate of dividend is generally quite
low.

9. Costs, procedure, and government regulation:

This is also an important factor that should be taken into account while choosing a particular
form of organisation. Different forms of organisation involve different procedure for
establishment, and are governed by different laws which affect the immediate and long-term
functioning of a business enterprise. From this point of view, sole proprietorships are the
easiest and cheapest to get started. There is no government regulation. What is necessary is
the technical competence and the business acumen of the owner.Partnerships are also quite
simple initiated. Even a written document is not necessarily a prerequisite, since an oral
agreement can be equally effective. Company form of ownership is more complicated to
from.It can be created by law, dissolved by law, and operate under the complicated
provisions of the law. In the formation of a company, a large number of legal formalities is to
be gone through which entails, at times, quite a substantial amount of expenditure.For
example, the cost incurred on the drafting of the Memorandum of Association, the Articles of
Association, the Prospectus, issuing of share capital, etc. This cost is however, small in case
of private companies. Besides, companies are subjected to a large number of anti-monopoly
and other economic laws so that they do not hamper the public interest.

The consideration of the various factors listed above clearly shows that:

(a) These factors do not exist in isolation, but are interdependent, and they are all important in
their own right. Nevertheless, the factors of nature of business and scale of operations are the
most basic ones in the selection of a form of ownership. All other factors are dependent on
these basic considerations. For instance, the financial requirements of a business will depend
on the nature of business and the scale of operations planned. To take an example, if a
business wants to set up a trading enterprise (say, a retail store) on a small scale, his financial
requirements will be small.

(b) The various factors listed above are only major factors, and in no case they constitute an
exhaustive list. Depending upon the requirements of the business and the demands of the
situation and sometimes even the personal preference of the owner, the choice of a form of
ownership is made.

(c) The problem in choosing the best form of ownership is one of analysing and weighing
relative advantages and disadvantages to find the one that will yield the highest net
advantage. And for that, weights may be assigned to different factors depending upon their
importance in each form of organisation, and the organisation that obtains the maximum
weights may be ultimately selected.