Legal Forms and Traditional Structures of Organizations

Sections of this topic

    Legal Forms and Traditional Structures of Organizations

    © Copyright Carter McNamara,
    MBA, PhD, Authenticity Consulting, LLC
    .

    Sections of This Article Include

    Broad Overview of Primary Legal Forms of For-Profit
    Organizations

    Broad Overview of Legal Forms of Nor-Profit Organizations
    Traditional Organizational Structures and Design in Businesses
    Traditional Organizational Structures and Design in Nonprofits

    New Structures of Organizations
    Additional Perspectives on Forms of Organizations


    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 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)

    Sole
    Proprietorship (IRS)

    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.)

    Corporations
    (Wikipedia)

    Corporations
    (IRS)

    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 Forms of Non-Profit 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 Organizational Structures and Design in Businesses

    See the organization charts depicted in Traditional
    Organizational Structures and Design in Businesses
    .

    Functional Structure

    Most organizations start out with a functional structure, or a small variation
    of this structure. This is the basic “building block” for other structures.
    It is useful because it recognizes that there are different types of recurring
    management functions (Manufacturing, Sales, Marketing, etc.) in the organization
    and it also ensures coordination of these activities by a central office.

    Divisional Structure

    This structure is typically for well established organizations that have multiple
    and often complex products such that each product requires its own functionally
    designed structure. Similar to the functional structure, it recognizes that
    there are different types of product lines, each of which requires different
    its own functional structure of different management functions.

    Matrix Structure

    This is referred to as a matrix because it is essentially a grid with rows
    and columns. The different rows represent different management functions and
    the columns represent different products. In this structure, highly skilled
    personnel in each management function are shared across different product lines.
    Thus, each person reports to a functional manager and a product manager.


    Traditional Organizational Structures and Design in Nonprofits

    See the organization charts depicted in Traditional
    Organizational Structures and Design in Nonprofits.

    Functional Structure With Non CEO

    New nonprofits often start by having no paid staff, including no paid CEO.
    The CEO might even be a member of the Board of Directors — a practice that
    is often frowned upon by key stakeholders because a CEO reports to the Board
    of Directors and, thus, there is an inherent conflict of interest in having
    a CEO on the Board. Thus, the CEO usually is not on the Board later on. Staff
    members are all volunteers.

    Functional Structure With a CEO

    The CEO reports to the Board of Directors and is not on the Board. Staff members
    are paid as is the CEO. In this structure, different employees might begin being
    associated with certain different programs.

    Program-Based Structure With a CEO

    In this structure, the nonprofit has different programs each of which has employees
    dedicated to operating a certain program for the nonprofits clients. The manager
    of each program reports to the CEO.

    If the nonprofit continues to expand with each program expanding as well, then
    it might evolve into a divisional structure as explained in the above section.


    New Structures of Organizations

    Driving Forces Causing New Structures

    In organizational design, there is a guideline that “form follows function”.
    In other words, the structure of the organization is a strategy to work toward
    the purpose and priorities of the organization. There are numerous driving forces
    that are causing organizations to re-think their priorities, for example, driving
    forces such as increasing diversity in the workforce, expanding markets around
    the world, and the public’s increasing demands for more transparency and accountability
    for how organizations operate.
    Emerging
    Nature and New Organizational Structures and Design

    In addition, to become more adaptable to the rapidly changing environments
    outside and inside of organizations, organizations are resorting to different
    structures in how they operate.
    New Paradigm in
    Management

    Self-Directed
    and Self-Managed Work Teams

    B-Corporations

    From the B-Corp website
    “Certified B Corporations are a new kind of business that balances purpose
    and profit. They are legally required to consider the impact of their decisions
    on their workers, customers, suppliers, community, and the environment. This
    is a community of leaders, driving a global movement of people using business
    as a force for good.”
    B-Corp
    as a Competitive Edge

    This Article is in a Series About Understanding Organizational Structures and Design

    This article is the sixth in the series which includes:

    1. What is an Organization?
    2. What
    Makes Each Organization Unique
    3. How They’re the Same: They’re Systems

    4. Basic Overview of Life Cycles in
    Organizations
    5. Basic Overview of Organizational
    Culture

    6. Legal Forms and Traditional
    Structures of Organizations
    7. Driving Forces and a New Organizational
    Paradigm
    8. Emerging Nature and New
    Organizational Structures and Design
    9. Basic Guidelines for Organizational
    Design
    10. Wrap
    Up: Grasping the Big Picture in Organizations (video)


    Learn More in the Library’s Blogs Related to Organizations

    In addition to the articles on this current page, see the following blogs which
    have posts related to 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


    Additional Perspectives on Forms of Organizations

    Organizational Theory: Determinants of Structure
    Organizational Structure
    Organizational
    Theory

    Matrix
    Management (Wikipedia)

    Virtual
    Corporations & Outsourcing: @BRINT ™

    The
    Right Corporate Structure is Essential for Success
    Alternative
    Legal Structures for Your Business


    For the Category of Organizational Development:

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