The Structure of Organizations

The Structure of
Organizations
Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

Legal Forms of Organization
• It is desirable that organization whether large or small should be
given a legal existence for shielding the personal assets against
legal problems such as Taxes, Funds, Credits, and Ownerships, etc.

Incorporation
• Incorporation is the legal process used to form a corporate entity
or company.
• A corporation is the resulting legal entity that separates the firm's

assets and income from its owners and investors.
• It relates only to the legal areas of a particular corporation to be

formed shortly.
• It is short formed as Inc.

Corporation
• A corporation is an organization, usually a group of people or a
company, authorized by the state to act as a single entity (a legal
entity recognized by private and public law).
• A corporation can be Educational, Business, Private

sector/Government Organization or any type of institution.
• A corporation is often abbreviated as Corp.

Incorporation vs Corporation
Example:
An empty ground that is bought by a group of people from a real estate
company and now a group of educational institutions is formed in that area.

Limited Company
• A limited company (LC) is a general form of incorporation that
limits the amount of liability undertaken by the company's
shareholders.
• It refers to a legal structure that ensures that the liability of

company members or subscribers is limited to their stake in the
company by way of investments or commitments.

Private Limited Company
• A private limited company is any type of business entity in
"private" ownership.
• Private limited companies cannot offer shares to the general

public.
• It is a one of the most common set-ups for small businesses.

Public Limited Company
• It is a limited liability company whose shares may be freely sold
and traded to the public.
• (PLCs) can raise capital by offering shares to the general public.
• Shares are traded on the stock exchange.
• This structure is more common for larger, more established

businesses.

Sole Trader
• A sole trader is a simple business arrangement, in which one
individual runs and owns the entire business.
• While a business registered as a sole trader might only consist of

the owner, it might also consist of the owner and additional
employees.
• The actual definition of ‘sole trader’ refers to the legal structure of

the business, rather than the number of employees.

Limited Liability Company
• A limited liability company (LLC) is a business structure whereby
the owners are not personally liable for the company's debts or
liabilities.
• Because a limited company has separate finances and is legally

distinct from its owners, shareholders have limited liability.
• Shareholders are only legally responsible to the extent of their

original investment, and can only lose the capital they initially put
into the business.

Unlimited Company
• A company in which the shareholders of company have unlimited
liability is known as unlimited company.
• This means each member is jointly and individually liable for the
debts of the company in the event of its formal liquidation.
• If the company needs more money to pay its debts or liabilities on

winding up, it can call on the shareholders to contribute whatever
amount is necessary to make up the shortfall.

Liquidation of a Company
• Liquidation is when a company is closed and the assets are
redistributed to cover costs; this process is also known as winding-
up the company.
• After liquidation has occurred, the company will no longer be able

to employ people or carry on doing business.
• The company will cease to exist.

Limited by Shares
• A company can be limited in capital based on the number of
shareholders who are owed money on their shares.
• This limits the company to only pay out original investments

should it go under or suffer major financial setbacks.
• This means the owners have limited financial liability, so their

personal finances are protected if the company encounters
financial problems.

Limited by Guarantee
• A company limited by guarantee does not usually have a share
capital or shareholders, but instead has members who act as
guarantors of the company's liabilities: each member undertakes to
contribute a specified amount in the event of liquidation.
• This form of organization is commonly used by professional bodies

and charities, it is not used by normal commercial organizations.

Shareholder
• A shareholder or stockholder is a person, company, or institution that
owns at least one share of a company’s stock.
• Because shareholders are essentially owners in a company, they reap

the benefits of a business’ success.
• These rewards come in the form of increased stock valuations, or as

financial profits distributed as dividends.
• Conversely, when a company loses money, the share price invariably

drops, which can cause shareholders to lose money.

Memorandum of Association
• A Memorandum of Association (MOA) is a legal document
prepared in the formation and registration process of a limited
liability company to define its relationship with shareholders.
• The MOA is accessible to the public and describes the company’s

name, physical address of registered office, names of shareholders
and the distribution of shares.

Authorized Share Capital
• Authorized share capital is the number of shares that a company
can issue as stated in its memorandum of association.
• Part of the authorized capital often remains unissued to retain a

controlling interest in the business.
• The authorized capital can be changed with shareholders'

approval.

Company Subscriber
• A subscriber is one of the initial shareholders in a private limited
company.
• They are called subscribers because, as part of the company

formation process, they subscribe to the company’s memorandum
of association.

Shareholders vs Subscribers
• A shareholder is someone who owns shares in a limited company.
• Anyone who becomes a shareholder of a company after it has been

incorporated is shareholder.
• A subscriber is someone who was a shareholder at the time of the

company's incorporation.

Nominal Value of Shares
• The nominal value of a company's stock, or par value, is an arbitrary value
assigned for balance sheet purposes when the company is issuing share
capital – and is typically $1 or less.
• It has little to no bearing on the stock's market price.
• For example, if a company obtains authorization to raise $5 million and its

stock has a par value of $1, it may issue and sell up to 5 million shares of
stock.
• Normally it is the money paid to the company when the share is first
purchased.
Fully Paid Shares
• A fully paid share means the purchaser has paid the total issue
price of the share.
• For example, shares may be issued for $1 each, and a shareholder

may purchase those shares for $1 each.
• The shareholder has no further obligation to pay money on that

share.

Partly Paid Shares
• This means the purchaser has only paid part of the total issue price
of the share when purchasing it.
• For example, they may have only paid 60 cents for a share issued at
1$.
• This means the company can, when it chooses and on giving notice
to the shareholder, request that the shareholder pay the balance on
each share, the remaining 40 cents.

Par Value of Share
• Par value means stated value or face value.
• The par value of stock has no relation to market value.
• The par value of a share is the value below which shares cannot be sold
upon initial offering; the issuing company promises not to issue
further shares below par value.
• Hence investors can be confident that no one else will receive a more
favorable issue price.
Shares Issued at a Premium
• A company issues its shares at a premium when the price at which
it sells the shares is higher than their par value.
• This is quite common, since the par value is typically set at a

minimal value, such as $0.01 per share.
• The amount of the premium is the difference between the par value
and the selling price.
• If shares do not have a par value, then there is no premium.

Employee Stock Ownership Program
• An employee stock ownership plan is a type of benefit plan that
invests in company stock and distributes shares to its employees.
• It's a way of transferring company stock to employees without

requiring selling the business to a third party.
• ESOPs also function as a type of retirement plan by providing

income to employees through the sale of their stock when they
retire.

Employee Stock Ownership Program
• Employee stock ownership plans are designed to increase
employee investment in positive outcomes for the organization.
• After all, if an employee owns stock in the company, then they will
likely feel motivated for the company to succeed and for the firm's
stock value to increase.
• Employees who own stock in the company have an incentive to

remain at the company, which could reduce employee turnover.

Residuary Interest
• The term residual interest refers to the interest that may accrue on
an interest-bearing account like a credit card, loan, line of credit, or
mortgage.
• Residual interest is normally charged on balances incurred

between billing cycles.
• While borrowers are only required to make a minimum monthly

payment on revolving credit accounts many borrowers choose to
pay their outstanding balance in full.

Residuary Interest
• Consumers may pay their balances off entirely, they may still be subject
to interest charges.
• Residual interest is any interest charged on a balance incurred between

the billing date and the payment due date.
• People who don't pay off their accounts in full and carry a balance
month-to-month are subject to interest charges.

The Constitution of a Company
• All companies must have a written constitution, which consists of two
documents:
• The memorandum of association, which controls its external relations,
• The articles of association, which state how its internal affairs are to be
run.
• Separate from these documents and not formally part of the company’s
constitution, there may also be a shareholders’ agreement.
The Memorandum of Association
• This document covers the following matters:
1. The name of the company.

2. The country in which its registered office will be located.
3. The objects of the company.
4. Liability clause. In the case of a company limited by shares, this
clause merely states that the liability of the members is limited.
5. The company’s authorized share capital and the number and
nominal value of its shares.

Declaration of Association
• We, the several persons whose names, addresses and descriptions
are written below, are desirous of being formed into a company in
pursuance of this Memorandum of Association, and we respectively
agree to take the number of shares in the capital of the company
set out opposite our respective names.

The Articles of Association
• The articles of association of a company usually need to address at
least the following topics:
1. The rules to be applied in allotting new shares up to the amount

of the authorized but unissued share capital of the company.
2. The rules governing the transfer of shares.
3. Meetings of members.
4. Appointment and removal of directors.
5. Powers of directors.
6. Dividends and reserves.

Shareholders’ Agreements
• The articles of association can be changed by resolution at a general
meeting by a 75 percent majority.
• This may make it difficult to protect the interests of minority shareholders.
• In order to alleviate possible problems, it is open to the shareholders (or

some subset of them) to conclude an agreement amongst themselves
governing the way that the company is run and agreeing to use their voting
rights to enforce this.
• Such an agreement can only be varied with the consent of all the
signatories.
Directors and the Company Secretary
• The directors are elected by the shareholders to run the company
on their behalf.
• They have considerable powers and, in a large company with many

shareholders, the effective “democratic control” is very weak.
• However, this is balanced by a series of obligations.

• Directors must act in good faith and for the benefit of the company.
• Directors must exercise the skill and care in carrying out their
duties that might be expected from someone of their qualifications
and experience.
• A director who has an interest in a contract made with the

company must disclose this interest to the board of directors.

• A company is required to have a company secretary whose
statutory duties include the keeping of the various records that the
company is obliged to maintain.
• Provided the company has more than one director, the secretary
may be a director.
• Because of the technical expertise required, small companies often

appoint an outside professional advisor as a company secretary.

Executive vs Non-Executive Directors
• Many companies have both executive directors and non-executive
directors.
• Executive directors are normally also employees of the company,

with specific responsibility for certain areas of its activities.
• Non-executive directors are directors who act in advisory capacity

only.
• Typically, they attend monthly board meetings to offer the benefit

of their advice and are paid a fee for their services.
Disclosure Requirements
• The law imposes on limited companies a requirement to disclose
information about their operations.
• All limited companies must submit an annual return and copies of

their accounts to the Registrar of Companies.
• Over and above this requirement, public companies that wish to

have their shares listed on a stock exchange must satisfy the
disclosure requirements of that exchange.

Corporate Governance
• In a large company with many shareholders, the democratic
control is very weak.
• The result is that the directors, together possibly with the senior
management, become self respecting.
• They run the company in their own interests rather than that of
the shareholders.

• There are other people who have a stake in the company, notably
its employees, but also those to whom it owes money and,
perhaps, the public at large.
• On the one hand, some say that shareholders, as the owners of the
company, are free to exercise their rights so as to maximize their
income or profits, and that the duty of the directors is to pursue
this aim to the best of their ability.

• At the other extreme, it is argued that the activities of many
companies, particularly large ones, can affect the public interest
and that their direction should be required to take this into
account.
• There are many circumstances in which the economic interests of

the shareholders conflict with the interests of the employees.
• This is most obviously the case when a takeover bid is made, which
may provide shareholders with a handsome profit but will mean
many employees losing their jobs.

• The relationship between the stakeholders in companies and its
most senior management is known as corporate governance.

Organizing an Organization
• The tasks that have to be carried out in an organization must be
identified and agreement must be reached as to who will do what.
• It is usual to group the tasks together and to assign responsibility

for each group of tasks to a specific executive director.

Functional Units of an Organization
1. Production—the activities that directly contribute to creating the
products or services that the company sells.
2. Quality Management—the quality activities necessary to ensure that

quality of the products and services produced is maintained at the
agreed level.
3. Sales and Marketing—sales is concerned directly with selling the

product, while marketing is concerned with establishing the
environment in which the product is sold (e.g. through advertising).

Functional Units of an Organization
4. Finance and Administration—every company needs to pay its
bills, to look after its funds, to pay its employees and so on and it is
usual to include within this function central services such as data
processing and the legal department.
5. Research and Development—how can the company do better the

things that it already does and what other things might it profitably
be doing?

Geographical Organization
• If an organization operates in more than one country, for example,
it is usually desirable to handle sales and marketing on a country
by country basis.
• Because of cultural differences, an approach to selling a product

which may prove very effective in one country can fail completely
in another.
• The most obvious examples are in the field of food and drink but
there are plenty of examples in the field of professional services.

Geographical Organization
• Even within a single country, the facts of geography may dictate a
geographical organization.
• Geography dictates that the distribution of goods and supervision

of the branches is organized geographically.

Organization by Product
• Where an organization produces several different types of product
or services, it may be desirable to use a top-level structure based
on this division.
• This is perhaps the commonest form of structure to be found in

really large corporations today.
• Thus a motor vehicle manufacturer may be organized on the basis

of divisions handling light goods vehicles and another handling
heavy goods vehicles.

• In software companies this type of structure is often found to be
desirable in order to separate fee-based services from the development
and sale of products.
• There is an inherent “culture clash” between these activities.
• If they are not clearly separated, there is a great risk that staff will be
moved from product development to fee-based work because the latter
brings more immediate and more certain revenue.
• The result is that the longer term rewards that can come from product
development are never realized.
• With this sort of organization, each division is likely to be headed
by a director; within the division, organization may well be by
function.
• An alternative is that each division is itself a separate company,

with its own board of directors.
• Such companies are known as subsidiaries.

Centralization vs Decentralization
• In a centralized organization, many of the detailed operational decisions
are taken at the center.
• Alternatively, in a decentralized organization, as many details as

possible are settled at local level.
• There are advantages and disadvantages to both approaches.
• By devolving decisions to the lowest level at which the knowledge and

ability to take them exists, it is likely that better decisions will be taken
and the performance of the individual units improved.

Centralization vs Decentralization
• The motivation of the managers of these units is likely to be
improved by giving them greater responsibility for the operation
of their own units.
• On the other hand, this can lead to wasteful duplication—it is

unlikely to be sensible for six different subsidiaries each to
produce its own set of working standards.
• It can also mean that good practice is slow to spread through the
organization.

The Position of Quality Management
• The day-to-day pressures on production and sales create the
temptation to skimp on quality procedures in the interests of
raising production levels, increasing sales or reducing costs.
• This can only be avoided by developing a “quality culture” within

the organization, that is by creating an environment in which the
idea of skipping quality procedures because of other pressures
becomes unthinkable.

The Position of Quality Management
• The role of the central quality management function is to establish
a quality plan which describes the quality procedures to be
followed throughout the organization and how compliance with
the plan will be monitored.

Management
• The goal of project managers is to produce systems which meet the
users’ needs, on time and within budget.
• Their main concerns are therefore planning, progress monitoring,

acquisition and allocation of resources, and quality control.
• The tools of their trade are bar charts, activity networks, critical
path analysis.

Production Management
• Production management is concerned with the management of
activities which continue indefinitely and change comparatively
slowly; production managers’ horizons are both longer and shorter
than project managers’.
• On the one hand, they are concerned with very short term problems,
such as the need to restart production as quickly as possible after a
breakdown.
• On the other hand, they are concerned to maintain the productivity

and efficiency of their plants over their whole lifetime, perhaps 20 or
30 years.
Production Management
• Production management is concerned with productivity, efficiency
and maintenance of quality.
• It is an area in which quantitative models have an important part

to play.

Corporate Management
• General or corporate management deals with the management of
the organization as a whole.
• On the one hand, corporate managers are responsible for the long-
term strategy of the organization.
• On the other hand they must monitor the overall performance of

the organization and be prepared to handle serious problems
which arise anywhere in the organization.

Motivation
• How well individuals carry out their jobs depends on several
factors:
1. How well they understand what is required of them.

2. Their ability.
3. The quality of the facilities provided for doing the job.
4. Their motivation, that is how well they want to do the job.
5. The attitude of their colleagues.

Motivation
• People are motivated by such things as:
1. Self-esteem—the feeling that they are doing a worthwhile job

and doing it well;
2. The esteem of others—their peers, their superiors, their
inferiors and their customers;
3. Satisfaction of social needs—the sense of belonging to a group;
4. A sense of security.
5. Financial rewards.

Performance Appraisal
• The importance of giving staff clear objectives and of measuring their
performance against these objectives led to the development of a style
of management known as management by objectives (MBO).
• The central idea is that of performance appraisal against agreed targets.
• Managers are required to agree with each of their subordinates what

the subordinate’s objectives in his or her job should be over the next
time period, typically six or twelve months.

• At the end of the time period, the subordinate’s performance is
assessed against these objectives and new objectives agreed for
the next time period.

• There are several important points for performance appraisal:
1. Both manager and subordinate must participate in setting the subordinate’s

objectives.
2. They should agree that the objectives are both feasible and desirable.
3. It is very desirable that the attainment or otherwise of the objectives should
be objectively verifiable.
4. The subordinate’s job must be sufficiently homogeneous to make it probable
that the objectives will remain valid throughout the time period.
5. Continuing commitment from all levels of management is required.
6. Staff reviews carried out under the scheme should be diagnostic rather than
purely evaluative.
• The purpose of the review should be to identify the reasons behind
any failure to meet the objectives rather than to take the
subordinate to task for failure.
• It is undesirable that the review procedure should be too closely

linked with the salary review procedure.

• There are many factors other than performance over one time
period that must be taken into account in a salary review:
1. The state of the market for people with the same skills as the
person being reviewed.
2. The need to keep the salaries of employees with similar skills
and responsibilities broadly comparable across the company.
3. The profitability of the company.

Sub-optimization
• Optimizing the performance of individual units within an organization
may not optimize the performance of the whole organization.
• This problem is known as sub-optimization.
Example:
• A division of a software company is flourishing; it has plenty of business
and its services are highly regarded by its customers. Unfortunately, its
profitability is very poor. Manager succeeds in increasing profitability
this by increasing the division’s charging rates and holding down salary
increases.
Sub-optimization
• Sub-optimization is inevitable in very small organizations.
• Managers and units within the organization will always seek to

optimize their performance in terms of the parameters by which they
will be judged.
• To choose these parameters in such a way that optimizing them will

optimize the performance of the whole organization is usually
impossible.
• In the case of the software house, if incompletely specified objectives are

mitigated, sub-optimization can be avoided.

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The Structure of

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• A corporation is the resulting legal entity that separates the firm's

• It relates only to the legal areas of a particular corporation to be

• It is short formed as Inc.

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• A corporation can be Educational, Business, Private

• A corporation is often abbreviated as Corp.

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• It refers to a legal structure that ensures that the liability of

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Private limited companies cannot offer shares to the general

• It is a one of the most common set-ups for small businesses.

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• (PLCs) can raise capital by offering shares to the general public.

• Shares are traded on the stock exchange.

• This structure is more common for larger, more established

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• While a business registered as a sole trader might only consist of

• The actual definition of ‘sole trader’ refers to the legal structure of

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Because a limited company has separate finances and is legally

• Shareholders are only legally responsible to the extent of their

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• If the company needs more money to pay its debts or liabilities on

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• After liquidation has occurred, the company will no longer be able

• The company will cease to exist.

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• This limits the company to only pay out original investments

• This means the owners have limited financial liability, so their

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• This form of organization is commonly used by professional bodies

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Because shareholders are essentially owners in a company, they reap

• These rewards come in the form of increased stock valuations, or as

• Conversely, when a company loses money, the share price invariably

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• The MOA is accessible to the public and describes the company’s

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Part of the authorized capital often remains unissued to retain a

• The authorized capital can be changed with shareholders'

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• They are called subscribers because, as part of the company

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Anyone who becomes a shareholder of a company after it has been

• A subscriber is someone who was a shareholder at the time of the

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• It has little to no bearing on the stock's market price.

• For example, if a company obtains authorization to raise $5 million and its

• For example, shares may be issued for $1 each, and a shareholder

• The shareholder has no further obligation to pay money on that

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• The par value of stock has no relation to market value.

• This is quite common, since the par value is typically set at a

• If shares do not have a par value, then there is no premium.

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• It's a way of transferring company stock to employees without

• ESOPs also function as a type of retirement plan by providing

Ahmad Sarosh Huda, Dept. of CS & IT, ILM College Sargodha

• Employees who own stock in the company have an incentive to