Legal Forms and Structures of Organizations

Written by Max | Edited by Rory Hart
Sections of this topic
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    © Copyright Carter McNamara, MBA, Ph.D., Authenticity Consulting, LLC.

    Sections of This Article Include

    Introduction

    The organization’s structure, or design, is the overall arrangement of the organization’s various roles, processes, and 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, nonprofits, franchises, government-owned corporations, cooperatives, limited liability corporations (“L3C”), etc. The three primary
    forms are explained below. (More information is available on the topic of 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.

    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 themselves from personal liability for activities of the business and/or to sell stock in the business. A corporate Board 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 the 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 C Corporations or Subchapter S Corporations. 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.

    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, nonprofits, 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 nonprofit’s 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.

    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.

    Additional Perspectives on Forms of Organizations

    For the Category of Organizational Development:

    To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.

    Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.

    Max