11. Basically there are three fundamental forms of business organizations, namely, “Proprietorship”, “Partnership”, and “Corporation”. While the advantages of the first two are: Ease and low cost of formation; Advantage of corporation are limited liability, indefinite life, ease of ownership transfer, and access to capital markets. Disadvantage of the first are: Barriers in obtaining funds; Unlimited personal liability for debts; and limited life. Disadvantages of the second are: Unlimited liability; limited life; difficulty in transferring ownership; and difficulty in obtaining funds. Disadvantage of the third are: Double taxation of earnings; complex and time consuming reports and foundation process.
As observed previously, by definition, “Agents” are expected to perform as they are supposed to do, in the interests of other people. Therefore, they should be optimally motivated by incentives so that it is worth-while for them to serve their obligation(s) as expected. Larger the degree of autonomy to do their work efficiently and effectively, the less forceful would be the coercive pressure of the imposed sanctions. Under such conditions, moral and material incentives would be more effective for the principals. This logic clearly indicates that in order to enforce an optimum combination of sanctions and motivational factors, organizations need to be structured in a way which tends the agent expect that serving the interests of principals will also be in their own long-run interests. This would be possible only if the principals set up clear rules within the contract of the employment. The performance level of agents could then be traced for longer terms under the conditions of minimum tolerable agency costs, thus rendering possibilities for designing appropriate incentive schemes.