Business Organization and Organizational Structure
There are millions of successful businesses around the world. They range from local fruit stands
to huge multi-national businesses worth billions of dollars. One common trait all these
businesses share is that they have some sort of organization. Without organization, a business is
doomed to fail because it will be inefficient and that inefficiency will eventually cause its
downfall.
I- Business organization
An organization is defined as a social arrangement which puresues collective goals which
controls ít own performance and which has boundary separating it from its invironment.
From a legal point of view, there are three main types of business organization which are sole
proprietorship, partnership and corporation. Each form of business organization has its
advantages and disadvantages.
1. Sole proprietorship
1.1. Definition
A sole proprietorship consists of one individual doing business. Sole Proprietorships are the most
numerous form of business organization in the United States, however they account for little in
the way of aggregate business receipts.
1.2. Advantages
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Ease of formation and dissolution. Establishing a sole proprietorship can be as simple as
printing up business cards or hanging a sign announcing the business. Taking work as a
contract carpenter or freelance photographer, for example, can establish a sole
proprietorship. Likewise, a sole proprietorship is equally easy to dissolve.
Typically, there are low start-up costs and low operational overhead.
Ownership of all profits.
Sole Proprietorships are typically subject to fewer regulations.
No corporate income taxes. Any income realized by a sole proprietorship is declared on
the owner's individual income tax return.
1.3. Disadvantages
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Unlimited liability. Owners who organize their business as a sole proprietorship are
personally responsible for the obligations of the business, including actions of any
employee representing the business.
Limited life. In most cases, if a business owner dies, the business dies as well.
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It may be difficult for an individual to raise capital. It's common for funding to be in the
form of personal savings or personal loans.
The most daunting disadvantage of organizing as a sole proprietorship is the aspect of
unlimited liability. An advantage of a sole proprietorship is filing taxes as an individual
rather than paying corporate tax rates. Some hybrid forms of business organization may
be employed to take advantage of limited liability and lower tax rates for those businesses
that meet the requirements. These include S Corporations, and Limited Liability
Companies (LLC's). Where S-Corps are a Federal Entity, LLC's are regulated by the
various states. LLC's give the option for profits from the business to pass through to the
owner's individual income tax return.
2. Partnership
2.1. Definition
A partnership consists of two or more individuals in business together. Partnerships may be as
small as mom and pop type operations, or as large as some of the big legal or accounting firms
that may have dozens of partners. There are different types of partnerships like general
partnership, limited partnership, and limited liability partnership.
2.2. Advantages
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Synergy. There is clear potential for the enhancement of value resulting from two or
more individuals combining strengths.
Partnerships are relatively easy to form, however, considerable thought should be put into
developing a partnership agreement at the point of formation.
Partnerships may be subject to fewer regulations than corporations.
There is stronger potential of access to greater amounts of capital.
No corporate income taxes. Partnerships declare income by filing a partnership income
tax return. Yet the partnership pays no taxes when this partnership tax return is filed.
Rather, the individual partners declare their pro-rata share of the net income of the
partnership on their individual income tax returns and pay taxes at the individual income
tax rate.
2.3. Disadvantages
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Unlimited liability. General partners are individually responsible for the obligations of
the business, creating personal risk.
Limited life. A partnership may end upon the withdrawal or death of a partner.
There is a real possibility of disputes or conflicts between partners which could lead to
dissolving the partnership. This scenario enforces the need of a partnership agreement.
3. Corporation
3.1. Definition
Corporation is probably the dominant form of business organization in the United States.
Although fewer in number, corporations account for the lion's share of aggregate business
receipts in the U.S. economy. A corporation is a legal entity doing business, and is distinct from
the individuals within the entity. Public corporations are owned by shareholders who elect a
board of directors to oversee primary responsibilities. Along with standard, for-profit
corporations, there are charitable, not-for-profit corporations.
3.2. Advantages
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Unlimited commercial life. The corporation is an entity of its own and does not dissolve
when ownership changes.
Greater flexibility in raising capital through the sale of stock.
Ease of transferring ownership by selling stock.
Limited liability. This limited liability is probably the biggest advantage to organizing as
a corporation. Individual owners in corporations have limits on their personal liability.
Even if a corporation is sued for billions of dollars, individual shareholder's liability is
generally limited to the value of their own stock in the corporation.
3.3. Disadvantages
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Regulatory restrictions. Corporations are typically more closely monitored by
governmental agencies, including federal, state, and local. Complying with regulations
can be costly.
Higher organizational and operational costs. Corporations have to file articles of
incorporation with the appropriate state authorities. These legal and clerical expenses,
along with other recurring operational expenses, can contribute to budgetary challenges.
 Double taxation. The possibility of double taxation arises when companies declare and
pay taxes on the net income of the corporation, which they pay through their corporate
income tax returns. If the corporation also pays out dividends to individual shareholders,
those shareholders must declare that dividend income as personal income and pay taxes
at the individual income tax rates. Thus, the possibility of double taxation.
II- Organizational Structure
Organizational structure refers to the general level, an organization in which its power and
communication lines, and the allocation of rights and obligations. Organizational structure
determines the manner and extent of the role, powers and devolution of responsibilities, control
and coordination of information, and how to manage flows between levels. A structure depends
entirely on the organization's goals and choices to achieve these strategies. In a centralized
structure, decision-making power concentrated in the upper management and strict control of the
department and in the exercise. In the decentralized structure, the allocation of decision-making
and the various departments and sectors have different degrees of autonomy.
The importance of including an organizational structure to help business owners, CEOs and
entrepreneurs to the conceptualization, visualization, hierarchical system is to build their
organization and implementation. For example, a part of the organizational structure, including:
command, control, departmentalization, span the distribution of power, height, and organizations.
The first is the command system is a chain of command involved in the organizational structure,
identify and define: jobs, who make decisions and who is responsible for various duties.
The second is to control the amplitude is the control of the staff to identify and quantify the
actual amount of supervision of the manager.
The third is in the department of a department's organizational structure is divided into functional
departments (such as sales) by the specific task of structural parts. Determine which activities,
tasks and talents will be grouped in order to achieve the best goal of the origin of the so-called
process of the department.
The forth is that the power distribution authority is deciding whether to allocate decision-making
power concentrated in a few high-level bureaucrats often to see the number of shares and the
closet or the tasks of various departments and their corresponding decentralized authority.
The fifth is a high degree of organization is the organization defined the high many departments,
departments, and the highest level between the layers and the tissue level is the lowest.
There are three common structures we can found within organization such as entrepreneurial
structures, functional structure, and matrix structure. Moreover, like the forms of business
organization, each structure has its advantages and disadvantages also.
1. Entrepreneurial structure
1.1. Definition
Entrepreneurial structure is to maintain and manage the large enterprise and an important joint
venture. In this structure every play an important roles in relationship to the chief. In addition,
this structure has an important pipeline to convey the authority for all levels of management, has
a very centralized bureaucratic procedure and everything will be decide by top management.
1.2. Advantages
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The ability to make decisions quickly. Without lengthy meetings and discussions, or
proposals sat waiting for approval, decisions can be made pretty much instantly and
changes put into place. This allows businesses to quickly adapt to any change in market
conditions. It is also a leadership style which is used by governments in emergencies,
with virtually all countries having laws in place which allow legislation to bypass
parliament or equivalent bodies and be enacted when speed and response time is top
priority.
 It is one of the least expensive business structures available, and in most cases will be the
cheapest option. This is because there are no layers of middle managers to pay or
maintain (e.g. company cars).
 Everybody knows who is in charge and who they are accountable to, removing the
chances of confusion being created if different department heads asked for different
things from workers (e.g. the head of the production department asks workers to improve
the quality of the product by spending more time on each, at the same time as the head of
the finance department asks for increased output to generate more revenue).
1.3.Disadvantages
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Because of its autocratic nature, with workers being told what to do with no input on the
decision, there is always a real danger of them losing morale and motivation if they
strongly disagree with the decision. The extent of their discouragement will depend upon
a number of factors such as how strongly they disagree, as well as the amount of
explanation (if any) they get as to why that particular decision was made.
Those making the decisions may not know as much about the problem, market conditions
etc. as they think they do. Whilst they make quick decisions, they are not necessarily the
best decisions, and it may be better for the business to have a specialist manager in place
who is an expert in a particular area.
It may also not be a suitable organisational structure if the business grows, as the decision
makers have simply too many decisions to make. As stated earlier, decisions can be made
quickly in an entrepreneurial business structure. But if there are so many decisions to be
made causing delays as different employees wait for answers, it may actually be quicker
to appoint a manager and delegate responsibility to them for making certain decisions.
2. Functional structure
2.1. Definition
Functional structure is a general structure in any organization. This functional structure has
divided the activities of the organization into different units or special departmental groups.
While each functional structure is controlled by the top level of management. Therefore, this
structure is hierarchical structure and centralized structure.
2.2. Advantages
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Staff is managed by a person with experience in their same specialty who can adequately
understand and review their work.
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Staffers have the opportunity to move up within their functional areas, which gives a
reason for them to stay long term. The company gets the advantage of their expertise and
company knowledge over time.
Staffers work with others in their field, which allows for knowledge sharing and lateral
job moves to learn new skills.
2.3. Disadvantages
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Functional areas may have difficulties working with other functional areas. There is often
a perception that they are competing with other functional areas for resources and a lack
of understanding of what other areas do for the company. So, the accounting department
may be upset that its request for an additional headcount is denied, but the company
financial results point to a need for additional sales people rather than accountants.
As the company grows larger, the functional areas can become difficult to manage due to
their size. They can become almost like small companies on their own, with their own
cultures, facilities, and management methods.
Functional areas may become distracted by their own goals and focus on them, rather
than on overall company objectives. For instance, there may be a desire by the I.T.
department to implement a new, state of the art computer system, but the overall
company objectives support investment in new products instead. Since the unit doesn't
have an overview of the entire company, it may focus attention on goals that it believes
are important but which are not priorities for top management.
3. Matrix structure
3.1. Definition
Matrix structure is a system of management and also is a complex structure which includes
multiple lines of authority. In the working environment of matrix structure has different
professionals together and worker report is more than one person. In addition, in this structure
has combined with the basic of functional structure and a basic of project structure.
3.2. Advantages
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Resources can be used efficiently, since experts and equipment can be shared across
projects.
Products and projects are formally coordinated across functional departments.
Information flows both across and up through the organization.
Employees are in contact with many people, which helps with sharing of information and
can speed the decision process.
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Staffers have to work autonomously and do some self-management between their
competing bosses; this can enhance motivation and decision making in employees who
enjoy it.
3.3. Disadvantages
 Violation of unity of command
 Costly structure
 Problem of overspecialization
 Difficult to balance
 Feeling of insecurity
 Lack of white coordination
Now let’s see what types of business should employ what types of organizational structure.There
are many types of business operate in the market so that means the company will employ
different types of organizational. There are three common organizational structures such as
entrepreneurial structure, functional structure, and matrix structure.
Entrepreneurial structure is suitable for small business and in the structure just have entrepreneur
and employees. In addition, in this structure only have 1 or 2 people at the top making decision.
Moreover, the entrepreneur has authority to control all over aspect of the business and employees
by using this structure. Examples of business using this structure are café and tutorial.
Functional structure is very general in the organization. In addition, this structure can divides in
many different departments. Besides that, this structure is suitable for produce single product and
service. Examples of business using this structure are construction and manufacturing.
Matrix structure is most complex structure in this four common structure. This structure to have
good coordination and information when there is a wide variety of community organizations.
Examples of business using this structure are Sunway Group, IOI Group and Berjaya Group.
Inconclusion, now we all know about the main forms of business organization as well as
organizational structures clearly both advantages and disadvantages of each type. It is so much
important to find an organizational structure that works best for the organization as a wrong
setup can hamper functioning and be detrimental to organizational success.