Different Types of Organizational Structures of Companies
One of the initial decisions an owner has to make is the format and organizational structure that the company will follow. Of course, this decision is very strategic and will vary based upon preference of the owners. The three most common forms of business organizations are sole proprietorships, general partnerships, and corporations. Additionally, some companies form hybrids which combine some of these structures.
There are a few aspects of consideration that impact the advantages and disadvantages of a particular business structure. First, who controls the firm and who owns the firm are factors that have a significant influence on the organizational structure. Does one person own the company or is the ownership spread amongst shareholders? This specific question is one of the primary considerations. Supplementary to that, other factors include the owner’s risk, the access to capital, and the tax ramifications.
The most common form of an organization, especially in the United States, is a sole proprietorship. This is when there is only one owner who controls all aspects of the business. This form of business is relatively simple, allowing it to be started much easier compared to the other forms of business. The paperwork for this organization is very minimal as compared to the other forms. The owner receives all of the profits, however, embodies all of the liabilities and losses. In fact, sole proprietorships have unlimited liability meaning that the owner’s personal assets can be jeopardized from business transactions and liability. This may pose significant risk to the owner. Although many banks opt out of funding sole proprietorships as there is only one person to pay back the debt, angel investors and venture capitalists tend to chip in money to support.
Next, general partnerships consist of two partners that own the business together and each share the liability and decision-making for the firm. The profits and the liability is divided between the two partners based on an agreement that is signed prior to the initiation of the company. Both partners have unlimited personal liability for all of the debts that are obtained. In this instance, banks are more likely to loan funds as opposed to sole proprietorships.
A corporation is a legal entity that is completely distinguished from its owners. This means that there is a component of ownership that is held by shareholders. This form of business contains different rights pertaining to the ability to own property, signing contracts, and paying taxes. The issue with this form of ownership is that there is the possibility of double taxation. First, the company is taxed at a corporate level followed by the taxation of the shareholders at a personal level. The benefit is that there is no unlimited liability and that the shareholders are incorporated in some decision making like hiring managers. The shareholders can only lose the money they invested and the access to capital is very vast.
These components of structure are very crucial to the success of a company. It is important that the owner chooses wisely.