Due Diligence

What is Corporate Structuring?

Corporate structure refers to the organization of different departments or business units within a company. Depending on a company’s goals and the industry in which it operates, corporate structure can differ significantly between companies. Each of the departments usually performs a specialized function while constantly collaborating with each other to achieve corporate goals and values.

The Positions in a Corporation

When you form a corporation, you must organize the owners and managers—give them responsibilities and rights—according to the rules laid out in your state’s corporation laws. Within a corporate structure, shareholders are the owners of the company, while the board of directors and officers manage the business, often with the help of employee.

In order to understand the structure of a corporation, you should familiarize yourself with the different corporate roles and how they work together. As explained in more detail below, the owners and managers of a corporation fall into one of the following categories:

  • Shareholders: The shareholders are the owners of the business.
  • Board of directors: The board is responsible for the overall management of the corporation.
  • Officers: Officers handle the day-to-day affairs of the business.
  • Employees: All others who work for the business are employees. Corporations are not required to have employees (though they must have shareholders, officers, and directors).

Shareholders

The shareholders have invested money into the business and are owners of the company. Ownership interests are represented by “shares” of stock. A corporation may have a limited number of private investors, or a corporation can “go public,” meaning the general public can invest in the company in exchange for stock.

Shareholders participate in the corporation by voting on major corporate decisions, such as adding or removing board members, dissolving the corporation, or changing the bylaws. Unless shareholders also serve in another position, they do not take part in other business decisions or management of the corporation.

The Board of Directors

The shareholders elect a board of directors, which is a group of people responsible for oversight and financial decision-making for the corporation. For example, the board decides when to pay dividends to the shareholders, authorize stock issuance, and whether to merge with another corporation. Board members owe a duty to the shareholders to place the interests of the business above their own, and to keep the corporation running efficiently.

Corporate Officers and Employees

While the board is responsible for the overall direction of the company, the board appoints officers to handle the day-to-day operations. Officers have the option to hire employees to help with managing and running the business. Common officer positions include:

  • President or Chief Executive Officer (CEO): The CEO reports directly to the board and is the highest manager of the corporation.
  • Vice President or Chief Operations Officer (COO): The COO reports to the CEO and is responsible for daily operations, such as marketing and personnel.
  • Vice President or Chief Operations Officer (COO): The COO reports to the CEO and is responsible for daily operations, such as marketing and personnel.
  • Treasurer or Chief Financial Officer (CFO): The CFO monitors and analyzes financial data for the corporation.
  • Secretary: The secretary is responsible for maintaining corporate records and takes minutes at shareholder meetings.

Consequences of Failing to Follow Corporate Structure

One of the main reasons to form a corporation is to protect the directors’ and shareholders’ personal assets from the liabilities and debts of the business. However, if a judge finds that a corporation is not following corporate formalities, such as failing to designate a board of directors or hold meetings, the court can “pierce the corporate veil” to hold owners responsible for business debts.

Types of Organizational Structure

There are four general types of organizational structure:

1. Functional Structure

Under this structure, employees are grouped into the same departments based on similarity in their skill sets, tasks, and accountabilities. This allows for effective communications between people within a department and thus leads to an efficient decision-making process. Companies with departments such as IT and Accounting are good examples of a functional structure.

Highlights:

  • Allows employees to focus on their role
  • Encourages specialization
  • Help teams and departments feel self-determined
  • Is easily scalable in any sized company

2. Divisional Structure

This structure organizes business activities into specific market, product, service, or customer groups. The purpose of the divisional structure is to create work teams that can produce similar products matching the needs of individual groups. A common example of the divisional structure is geographical structure, where regional divisions are built to provide products or services to specific locations.

Depending on your organization’s focus, there are a few variations to consider.

  • Market-based divisional org structure
    Divisions are separated by market, industry, or customer type.
  • Product-based divisional org structure
    Divisions are separated by product line. For example, a tech company might have a division dedicated to its cloud offerings, while the rest of the divisions focus on the different software offerings.

3. Matrix Structure

Matrix Structure is a combination of functional and divisional structures. This structure allows decentralized decision making, greater autonomy, more inter-departmental interactions, and thus greater productivity and innovation. Despite all the advantages, this structure incurs higher costs and may lead to conflicts between the vertical functions and horizontal product lines. For example, an engineer may regularly belong to the engineering department (led by an engineering director) but work on a temporary project (led by a project manager). The matrix org chart accounts for both of these roles and reporting relationships.

Highlights:

  • Allows supervisors to easily choose individuals by the needs of a project
  • Gives a more dynamic view of the organization
  • Encourages employees to use their skills in various capacities aside from their original roles

4. Hybrid Structure

Like the Matrix Structure, the Hybrid Structure combines both functional and divisional structure. Instead of grid organization, Hybrid Structure divides its activities into departments that can be either functional or divisional. This structure allows the utilization of resources and knowledge in each function, while maintaining product specialization in different divisions. Hybrid Structure is widely adopted by many large organizations.

5. Hierarchical organizational structure

The pyramid-shaped organizational chart we referred to earlier is known as a hierarchical org chart. It’s the most common type of organizational structure—the chain of command goes from the top (e.g., the CEO or manager) down (e.g., entry-level and low-level employees), and each employee has a supervisor.

Highlights:

  • Better defines levels of authority and responsibility
  • Shows who each person reports to or who to talk to about specific projects
  • Motivates employees with clear career paths and chances for promotion
  • Gives each employee a specialty
  • Creates camaraderie between employees within the same department

6.HORIZONTAL ORGANIZATIONAL STRUCTURE

A horizontal or flat organizational structure fits companies with few levels between upper management and staff-level employees. Many start-up businesses use a horizontal org structure before they grow large enough to build out different departments, but some organizations maintain this structure since it encourages less supervision and more involvement from all employees.

Highlights:

  • Gives employees more responsibility
  • Fosters more open communication
  • Improves coordination and speed of implementing new ideas

7. Geographic divisional org structure

Divisions are separated by region, territories, or districts, offering more effective localization and logistics.

Highlights:

  • Helps large companies stay flexible
  • Allows for a quicker response to industry changes or customer needs
  • Promotes independence, autonomy, and a customized approach

8. Team-based org structure

A team organizational structure is meant to disrupt the traditional hierarchy, focusing more on problem-solving, cooperation, and giving employees more control.

Highlights:

  • Increases productivity, performance, and transparency by breaking down silo mentality
  • Promotes a growth mindset
  • Changes the traditional career models by getting people to move laterally
  • Values experience rather than seniority
  • Requires minimal management
  • Fits well with agile companies with Scrum or tiger teams
  • Goes against many companies’ natural inclination of a purely hierarchical structure

9. Network org structure

CHART

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