Developed by Authenticity Consulting, LLC
Legal Forms and Traditional Structures of Organizations
© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
Sections of This Topic Include
Broad Overview of Primary Legal Forms of For-Profit
Business Organizations
Broad Overview of Legal Forms of Nor-Profit Business
Organizations
Traditional Structures/Designs of Business Organizations
Typical Design of a Small, For-Profit Business Organization
Traditional Design of a Small, Incorporated Nonprofit
Business Organization
Additional Perspectives on Forms of Organizations
Also See the Library's Blogs Related to Structures of Organizations
In addition to the articles on this current page, see the following blogs which have posts related to Structures of Organizations. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog.
Library's Consulting
and Organizational Development Blog
Library's Leadership Blog
Library's
Nonprofit Capacity Building Blog
Also see:
Free Management Library Materials Apply to Nonprofits and For-Profits
Introduction
The organization's structure, or design, is the overall arrangement of the organization's various roles, processes and their relationships in the organization. The design of an organization is a means to accomplishing the organization's overall goal -- the structure is not an end in itself. In systems theory terms, the design ensures that the appropriate inputs go through the necessary processes to produce the required outputs to produce the intended outcomes.
Broad Overview of Primary Legal Forms of For-Profit Business Organizations
For-profit businesses are usually of three primary legal forms, including unincorporated, corporations and limited liability companies. There are other forms of businesses, too, for example, nonprofit, franchises, government-owned corporations, cooperatives, limited liability corporation ("L3C"), etc. The three primary forms are explained below. (More information is available in the topic Enterprise Law.)
A corporation is a privately owned corporation or a publicly held corporation, depending on whether the corporation is owned privately or by the public at large.
Business people should seek the counsel of a lawyer when determining what legal form of business they should choose.
1. Unincorporated (sole proprietorships or partnerships)
Most small for-profit businesses are unincorporated. As an unincorporated organization, you can be a sole proprietor or in a partnership. A sole proprietorship is owned by one person or a marriage. Business activity is viewed by the IRS as your personal activity, for example, business income and taxes are viewed as your personal income and taxes. The sole proprietor is personally liable for the business.
A partnership can be a general partnership or a limited partnership. A general partnership is viewed by the IRS essentially as two or more sole proprietors equally responsible for the business. The terms of sole proprietorship apply fully to each partner. In limited partnership includes one or more general partners and one or more limited partners. Limited partners are liable for activities of the business to the extent of their investment.
Sole Proprietorship (Wikipedia)
2. Corporations (C Corporations and S Corporations)
A corporation is formed as its own legal entity, apart from the individuals who own and/or formed the organization. (The corporation can be either for-profit or nonprofit. More on nonprofits later on below.). The principals of a for-profit business decide to incorporate mostly to shield them for personal liability for activities of the business and/or to sell stock in the business. A corporate Boards of Directors oversees policy and strategy for corporations, whether for-profit or nonprofit. Principals and board members of for-profit corporations typically have little or no liability for operations of the corporation, unless the owners or board members broke federal and/or state laws in running the corporation.
Theoretically the for-profit and nonprofit corporation exists forever, past the death of its owners. For-profit corporations can be a C Corporation or Subchapter S Corporation. More about these in the topic Enterprise Law.)
3. Limited Liability Companies (LLC)
The LLC is a relatively new form that combines the advantages of a corporation (minimum personal liability, selling stock, etc.) with those of a sole proprietorship and partnership (sharing management decisions, profit, etc). The LLC is an increasingly popular form of organization.
Limited
Liability Company (Wikipedia)
Limited
Liability Company (IRS)
Broad Overview of Primary Legal Form of Non-Profit Business Organizations
As noted above, for-profit businesses are usually of three
legal forms, including unincorporated, corporations and limited
liability companies. There are other forms of businesses, too,
for example, nonprofit, franchises, government-owned corporations,
cooperatives, etc. The following link provides more information
about nonprofits, including their many legal forms.
What
is a Nonprofit?
Traditional Structures of Business Organizations
(Numerous driving forces are causing dramatic changes in how organizations design themselves to conduct business effectively. These new designs are used organization wide or for various teams in the organization. The new designs are self-organizing, self-directing or self-managing in nature. More modern designs will be discussed later in Emerging Nature and New Organizational Structures. The following three structures are quite traditional. )
Note that a business can be any of the above legal forms and in any of the following structures.
Functional Structure
Most business organizations start out with a functional structure, or a small variation of this structure. This is the basic "building block" for other structures. In this structure, there is a central office which oversees various departments or major functions, e.g., human resources, finances, sales, marketing, engineering, etc. Think of a picture that has a box at the top labeled "Central Office". Think of a row of boxes underneath the top box. Each box is labeled, e.g., sales, engineering, human resources, etc. Connect the boxes with lines coming down from the top box to each of the boxes below.
Divisional Structure
In this structure, there is a centralized corporate office and under it, are various divisions each of which is dedicated to producing and / or selling a certain type of business or product, e.g., product 1, product 2, etc. Each division that is dedicated to a certain business or product is, in turn, is organized as its own functional structure. So, for example, the division dedicated to making product 1 has its own sales department, human resources, etc. Basically, the divisional structure is a bunch of functional structures each of which reports to one central office.
Matrix Structure
Think of the functional structure. Imagine if you took someone from each of the major functions in the functional structure (the boxes along the bottom of the organization chart), e.g., people from sales, engineering, etc., and organized them into a separate group intended to produce and sell one certain kind of product or service. Members of this group stay together until that product is produced or they continue to sell and service it. This overall structure (made up of a functional structure that also has groups assigned to products) is a matrix structure. This structure is useful because it focuses highly skilled people from across the organization to work on a complex product or service. It can be difficult, though, because each person essentially reports to two supervisors: the supervisor of the functional area (e.g., engineering) and the product manager, as well.
Typical Structure of a Small, For-Profit Business Organization
NOTE: At the time of this writing, I am not aware of any studies that report the specifications and primary designs of small, for-profit businesses. Thus, the following information is anecdotal.
NOTE: The following description is not meant to imply that all new, small for-profit organizations should follow this typical structure.
It seems that the typical, small for-profit business is a form of functional structure. An entrepreneur forms a sole proprietorship, or two or more entrepreneurs form a partnership. Employees are hired to do whatever tasks, jobs and roles are needed to help the business to survive. Over time, certain activities become ongoing and in support of other activities in the business. These ongoing, support activities become a "central office", of sorts. Eventually, each employee becomes responsible for the same set of tasks, or job. At this point, the business is a form of functional structure, with a central office overseeing various major functions.
Note that the organization can, at any time, use more modern designs even within the same overall organizational design. For example, a self-managed team might be formed in a functional structure to research new ideas for products and services.
Typical Structure of a Small, Incorporated Nonprofit Business Organization
NOTE: Although this section is labeled "Nonprofit", a small, incorporated for-profit business might be structured similar to that described below. However, rather than having programs, the for-profit business typically would have products or services.
NOTE: The following description is not meant to imply that all new, incorporated, small for-profit organizations should follow this typical structure. Also note that, as specified above, not all nonprofits are incorporated, that is, have a board of directors. The following description is of the typical small, incorporated nonprofit organization.
To understand the structure of a typical, small, incorporated nonprofit business organization, think of a picture with a box at the top of the page. The box is labeled "Board of Directors". Directly under this box is a single box labeled "Executive Director (or Chief Executive Office, or President, etc.)". Under this box is a row of boxes, each of which is labeled "Program 1", "Program 2", etc. Draw a line down from the "Board of Directors" box to the "Executive Director" box to show that the "Executive Director" reports to the "Board of Directors". Draw lines down from the "Executive Director" box to each of the programs to show that the "Executive Director" is responsible for overseeing the program.
As with for-profit organizations, nonprofits can, at any time, use more modern designs even within the same overall organizational design. For example, a self-managed team might be formed in a functional structure to research new ideas for services to the community.
Additional Perspectives on Forms of Organizations
Organizational Theory: Determinants of Structure
Organizational Structure
Organizational
Theory
Matrix
Management (Wikipedia)
Virtual
Corporations & Outsourcing: @BRINT (tm)
The
Right Corporate Structure is Essential for Success
For the Category of Organizational Development:
To round out your knowledge of this Library topic, you may
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Each of the related topics includes free, online resources.
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