Types of Business Organizations

It is essential to understand the various ways companies can exist in the US and the impact that company structures have on taxes, regulations, liability, and decision-making. In these sections, you will learn the difference between sole proprietors, partnerships and corporations, and how you decide which form is best for your business.

Overview of Organizational Structure

Business organizations can be structured in various ways, both as legal entities and in terms of internal management processes.


LEARNING OBJECTIVE

  • Select the appropriate organizational structure for a business after reviewing its key characteristics


KEY POINTS

  • From a legal structure perspective, many business structures require a form of incorporation to register the business as a legal entity. The business entity's type, its geographic span of operations, risk profile, and other factors are issues to consider when choosing what entity type to use.
  • There are various forms of organizational structures from a corporate law perspective, including sole proprietorships, cooperatives, partnerships, limited liability companies, and corporations.
  • One of the issues dividing the different organizational structures is that of liability. With sole proprietorships and some forms of partnership, owners can be personally liable for business losses, meaning their personal assets are not protected against the claims of creditors.
  • Internally, organizations can also be structured differently, in terms of the groupings of organizational relationships and the characteristics of management. Some common structures are the functional, divisional, matrix, team, network, and modular structures.
  • Independent from their legal and internal structures, organizations can also operate differently. For example, hybrid organizations, which may fall under various legal categories, can mix elements, value systems, and logics of action from the private, public, and voluntary sectors.


TERMS

  • liability
    An obligation, debt, or responsibility owed to someone.

  • incorporate
    To form into a legal company.
  • hierarchy
    Any group of objects ranked so that every one but the topmost is subordinate to a specified one above it.

Organizational Structure

Business organizations can be structured in various ways, depending on their standing as legal entities, internal structure, and management processes.

Pre-bureaucratic structures

Pre-bureaucratic (entrepreneurial) structures lack standardization of tasks. This structure is most common in smaller organizations and is best used to solve simple tasks. The structure is totally centralized and appears like a hierarchy. The strategic leader makes all key decisions and most communication is done by one-on-one conversations. It is particularly useful for new (entrepreneurial) business as it enables the founder to control growth and development.


Bureaucratic structures

Weber said that the fully developed bureaucratic mechanism compares with other organizations exactly as does the machine compare with the non-mechanical modes of production. Precision, speed, unambiguity…strict subordination, reduction of friction, and of material and personal costs are raised to the optimum point in the strictly bureaucratic administration. Bureaucratic structures have a certain degree of standardization. They are better suited for more complex or larger scale organizations, usually adopting a tall structure. The tension between bureaucratic structures and non-bureaucratic is echoed in Burns and Stalker's distinction between mechanistic and organic structures.


Functional structure

Employees within the functional divisions of an organization tend to perform a specialized set of tasks; for instance, the engineering department is staffed only with software engineers. This leads to operational efficiencies within that group. However, it could also lead to a lack of communication between the functional groups within an organization, making the organization slow and inflexible. As a whole, a functional organization is best suited as a producer of standardized goods and services at large volume and low cost.


Divisional structure

Also called a "product structure," the divisional structure groups each organizational function into a division. Each division within a divisional structure contains all the necessary resources and functions within it. Divisions can be categorized by different points of view. One might make distinctions on a geographical basis (a US division and an EU division, for example) or on product/service basis (different products for different customers, households, or companies). In another example, an automobile company with a divisional structure might have one division for SUVs, another division for subcompact cars, and another for sedans.


Matrix structure

The matrix structure groups employees by both function and product. This structure can combine the best of both separate structures. A matrix organization frequently uses teams of employees to accomplish work, in order to take advantage of strengths and make up for weaknesses of functional and decentralized forms. An example would be a company that produces two products, "product a" and "product b. " Using the matrix structure, this company would organize functions within the company as follows: "product a" sales department, "product a" customer service department, "product a" accounting department, "product b" sales department, "product b" customer service department, "product b" accounting department. Matrix structure is amongst the purest of organizational structures – a simple lattice emulating order and regularity demonstrated in nature.


Legal considerations

In the US and elsewhere, many business structures require a form of incorporation to register the business as a legal entity. The owner files articles of incorporation with the secretary of state's office for the particular jurisdiction. The organization may also hold meetings, select a board of directors, adopt bylaws, and report on a regular basis. The business entity's type, its geographic span of operations, risk profile, and other factors are issues to consider when choosing what entity type to use, in what jurisdiction to incorporate, how the articles should be drafted, and if a stock form should be used.


Business perspective

There are various forms of organizational structures from a business perspective, including sole proprietorships, cooperatives, partnerships, limited liability companies, and corporations. All of these structures are for profit, but there are also non-profit corporations and other structures. The differences in structures can depend on the number of entrepreneurs or owners involved, and the different tax treatments. One of the issues dividing forms is that of liability. With sole proprietorships and some forms of partnership, owners can be personally liable for business losses, meaning their personal assets are not protected against the claims of creditors. These organizational structures are also not separate entities from the owners/entrepreneurs, unlike a corporation.


Organizational behavior

Internally, organizations can also be structured differently, in terms of the groupings of organizational relationships and the characteristics of management. Some common structures are the functional, divisional, matrix, team, network, and modular structures.

Independent from their legal and internal structures, organizations can also behave differently. For example, hybrid organizations, which may fall under various legal categories, can mix elements, value systems, and logics of action from the private, public, and voluntary sectors.


Source: Boundless, http://oer2go.org/mods/en-boundless/www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-field-and-goals-of-financial-management-1/types-of-business-organizations-26/index.html
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