WEEK 2

BUS1010: FORMS AND STRUCTURES OF

BUSINESS
BY DR. RUTH MWAI
rmwai@usiu.ac.ke
Dr. Ruth Mwai 1
 LEARNING OUTCOMES

By the end of this class, students should be able to:

• Explain sole proprietorships, partnerships, and cooperatives and
discuss the advantages and disadvantages of each.
• Discuss the advantages and disadvantages of corporations and
identify the different types of corporations.
• Explain the differences among functional, divisional, matrix and
international organizational structures and describe the most
popular new forms of organizational design.
Dr. Ruth Mwai
 FORMS OF BUSINESS
OWNERSHIP
• All entrepreneurs must decide on the form of legal ownership
that best suits their goals:
• Sole proprietorship.
• Partnership.
• Corporation
• Entrepreneurs must consider their own preferences – immediate
& long-range needs, advantages & disadvantages of each form.

Dr. Ruth Mwai

 SOLE PROPRIETORSHIP

Sole proprietorship is owned by one person, who may also be the

only employee
Advantages Disadvantages
Freedom Lack of continuity
Easy to start/form Difficult to raise funds alone
Lower start-up costs Long hours
Lower tax Unlimited legal liabilities
Fewer government regulations No one to offer encouragement
Ability to make quick decisions Higher chances of failure
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Owner keeps all the profits
 PARTNERSHIP

• Most common type is general partnership – similar to sole

proprietorship, but owned by more than one person.
• Partners may invest equal or unequal sums of money.
• Partners share profits equally or in proportion to the investment.
• Silent partner – invests all of the funds but leaves management to
the other partner.
• Labor partner – invests sweat equity.
Dr. Ruth Mwai
 PARTNERSHIP
Advantages Disadvantages
Ability to grow by adding new Unlimited liability like a sole
talents proprietorship
Similar to sole proprietorship, it Like a sole proprietorship, it has the
undergoes fewer legal potential of lack of continuity
requirements
Partners may agree to bind Difficulty in transferring ownership
themselves in ways not specified
in law.
Shared business risks – long Profits are shared equally
hours & legal liabilities
Different skills & contacts come Partners input must be considered
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together
 PARTNERSHIP

• General partnerships are among the least popular forms of

business.
• To overcome challenges inherent in general partnerships, some
partners have tried alternative agreements:
• The limited partnership – allows for limited partners who invest money
but are liable for debts only to the extent of their investments.
• Master limited partnership – master partner retains at least 50%
ownership & runs the business, and minority shares have no management
voice.
Dr. Ruth Mwai
 PARTNERSHIP

COOPERATIVES
• Groups of sole proprietorships or partnerships work together for their
common benefit by forming cooperatives.
• Cooperatives combine the freedom of sole proprietorships with financial
power of corporations.
• Cooperatives give members greater production power, greater marketing
power, or both.
• On the other hand, they are limited to serving the specific needs of their
members.
• Cooperative is a form of ownership in which a group of sole proprietorships
or partnerships agree to work together for common benefits.
Dr. Ruth Mwai
 CORPORATIONS (COMPANY)

• A corporation is a business that is legally considered an entity

separate from its owners & is liable for its own debts; owners’
liability extends to the limit of their investment.
• Corporations have legal status as separate entities, property rights
& obligations, & indefinite lifespan.
• Corporations perform the following activities:
• Sue & be sued.
• Buy, hold, & sell property.
• Make and sell products.
• Dr. Ruth Mwai
Commit crimes & be tried & punished for them.
 CORPORATIONS (COMPANY)
Advantages Disadvantages
Limited legal liability Double taxation – income of
corporation & dividends are
taxed
Continuity Founder can lose control if
ownership is less than 51%

Money can be raised through issuance It is more expensive

of stocks

Ownership can be transferred Subject to many government

regulations
Lenders are more willing to grant loans Can be taken over against the
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will of its managers
 CORPORATIONS (COMPANY)

TYPES OF CORPORATIONS:
1. Closely held or private corporation – stock is held by a few
people; not available for sale to the public.
2. Publicly held or private corporation – shares are publicly
issued; subject to corporate taxation.
3. The S corporation – hybrid of a closely held corporation & a
partnership; it operates like a business but treated like a
partnership for tax purposes.
Dr. Ruth Mwai
 CORPORATIONS (COMPANY)

4. Limited liability corporation (LLC) – hybrid structure

combining pass through taxation of sole proprietorship, or
partnerships with limited liability of a corporation.
5. Professional corporation – composed of doctors, lawyers,
accountants, etc; corporate structure is protected from
unlimited liability but not the members.
6. Multinational corporation – spans across borders & stock
traded on exchanges of several countries.
Dr. Ruth Mwai
 SUMMARY OF THREE FORMS OF BUSINESS
OWNERSHIP
Business Form Liability Continuity Managemen Sources of
t Investment
Proprietorship Personal Ends with Personal, Personal
unlimited death or unrestricted
decision of
owner
General Personal Ends with Unrestricted Personal by
partnership unlimited death or or depends partnership
decision of on
any partner partnership
agreement
Corporation Capital As stated in Under Purchase of
invested charter, control of stock
perpetual or board of
for specified directors,
period of which is
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years selected by
stockholders
 INTERNAL STRUCTURES OF
BUSINESS

• Organizational structure is defined as the specification of the jobs

to be done within an organization & the ways in which those jobs
relate to one another.

• The easiest way to understand structure is in terms of an

organizational chart.

Dr. Ruth Mwai

 INTERNAL STRUCTURES OF
BUSINESS

ORGANIZATION CHART
• Organization chart clarifies structure & shows employees where
they fit into a firm’s operations.
• It shows a chain of command or reporting relationships within
the company – in theory from highest level to the lowest.
• Organization chart of large firms are more complex compared to
small organizations.
• Virtually, no two organizations will have the same structure –
what works for one organization will not work for another.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
• Organizations can structure themselves in many ways, for instance, according to:
• Specialization.
• Departmentalization.
• The decision making hierarchy.
• However, it is possible to identify four basic forms of organizational structure that
reflect the general trends followed by most firms:
1) Functional.
2) Divisional.
3) Matrix.
4) International.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Functional Organizational Structure
• Relationships between group functions & activities determine authority.
• Functional structure is used by SMEs; usually structured around basic business
functions: a marketing, operations, & a finance department.
• The benefits of this approach include specialization within functional areas & smoother
coordination among them.
• In large firms, coordination across functional departments becomes more
complicated.
• Functional structures also foster centralization & makes accountability more
difficult.
• As organizations grow, they tend to shed this form & move toward one of the
other three structures.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Functional Structure

Dr. Ruth Mwai

 INTERNAL STRUCTURES OF
BUSINESS
Divisional Structure
• A divisional structure relies on product departmentalization.
• Organization using this approach are structured around several
product-based divisions.
• The head of each division may be a corporate vice president, if
the organization is large enough, a divisional president.
• In addition, each division has its own identity & operates as a
relatively autonomous business under the larger corporate
umbrella.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Divisional Structure
• For example, Johnson & Johnson organizes its company into three
major divisions:
• Consumer health care products -
• Medical devices & diagnostics.
• Pharmaceuticals.
• Each major division is broken further – the consumer health care
products division relies on product departmentalization to separate
baby care, skin & hair care, topical health care, oral health care,
women’s health, over-the-counter medicines, & nutritionals.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Divisional Structure
• Consider that Johnson & Johnson’s over-the-counter pain management
medicines are in competition for their pain management pharmaceuticals.
• Divisions can maintain healthy competition among themselves by sponsoring
separate advertising campaigns, fostering different corporate entities, etc.
• They can also share certain corporate level resources (e.g., marketing research
data).
• However, if too much control is delegated to divisional managers, corporate
managers may lose touch with daily operations.
• Also, competition between divisions can become disruptive, & efforts in one
division may duplicate those of another.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Divisional Structure

Dr. Ruth Mwai

 INTERNAL STRUCTURES OF
BUSINESS
Geographic Organizational Structure
• In the case of organizations with nationwide or worldwide
markets, geography dictates structural format.
• Geographic dispersion of resources may encourage the use of
geographic formats to put administrators “closer to the action”.
• Global competition is pressuring managers to organize along
geographical lines. This structure allows multinational companies
to serve local markets better.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Geographic Organizational Structure

Dr. Ruth Mwai

 INTERNAL STRUCTURES OF
BUSINESS
Matrix Organizational Structure
• A matrix structure is an organizational structure created by
superimposing one form of structure into another.
• An organization can use one underlying “permanent” organizational
structure (e.g., divisional structure) & then superimposing a different
organizational framework on top of it (e.g. functional form).
• This structure was pioneered by NASA (National Aeronautics and
Space Administration) for use in developing specific space programs.
• It was originally called project management & it became popular in
construction & aerospace industries.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
Matrix Organizational Structure
• In a matrix organization, vertical & horizontal lines of authority are
combined. Authority flows both down & across the organization
structure.
• A company using a functional structure wanting to develop a new
product as a one-time special product can create a team drawn from
existing functional departments so that all viewpoints are represented.
• In some organizations, a matrix structure is a temporary measure
installed to complete a specific project. End of the project means end
of the matrix.
• E.g. Ford uses a matrix structure to design new models.
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS

Dr. Ruth Mwai

 MATRIX ORGANIZATIONAL
STRUCTURES
Advantages Disadvantages
Efficient use of resources Power struggles
Project integration Heightened conflict
Improved information flow Slow reaction time
Flexibility Difficulty in monitoring and
controlling
Discipline retention Excessive overhead.
Improved motivation and Experienced stress
commitment
Dr. Ruth Mwai
 INTERNAL STRUCTURES OF
BUSINESS
International Structure:
• International organizational structures approaches are developed in response to the need to
manufacture, purchase, & sell in global markets.
• An example of Walmart:
• Opened its first store outside the US in 1992 & set up a special project team.
• Mid-1990s – created a small international department to handle overseas expansion.
• 1999 – International sales & expansion became a major part of operations that a separate
international division headed by a senior vice-president was created.
• 2002 – International operations had become so important that the international division was
further divided into geographic areas (Mexico & Europe).
• As the firm expands into more foreign markets, such as Russia & India, new units are
created to oversee those operations.

Dr. Ruth Mwai

 INTERNAL STRUCTURES OF
BUSINESS

International Structure:

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 ORGANIZATION DESIGN FOR
THE 21st CENTURY
• As the world grows increasingly complex & fast-paced, organizations also
continue to seek new forms of organization that permit them to compete
effectively.
• Among the most popular of these new forms are:
• Team organization – relies on project-type teams, with little or no
underlying functional hierarchy.
• The virtual organization – has little or no formal structure; uses both
permanent & temporary staff; applicable more to research/consulting.
• The learning organization – integrates continuous improvement with
life-long learning & personal development.
Dr. Ruth Mwai
 ORGANIZATION DESIGN FOR
THE 21st CENTURY

Dr. Ruth Mwai