Business Organization

What It Means

The term business organization describes how businesses are structured and how their structure helps them meet their goals. In general, businesses are designed to focus on either generating profit or improving society. When a business focuses on generating profits, it is known as a for-profit organization. When an organization focuses on improving the social good through the arts, education, health care, or some other area, it is known as a nonprofit (or not-for-profit) organization and is not typically referred to as a business.

There are different categories of business organizations that relate to how the business is established, owned, and operated. The basic categories of business organization are sole proprietorship, partnership, and corporation. Each type of business organization has benefits as well as disadvantages. For example, a sole proprietor of a small business is able to operate independently of much of the government regulation that affects larger businesses, but he or she is liable (responsible) for all financial risks of the business. Therefore, the owner of a small grocery store is able to keep all the profits for herself, but she is also liable for all of her business debts, even if she must repay a debt with her personal finances.

No matter how a business is organized, it takes on certain risks as it operates. One way to minimize risk is for a business to use its assets and investments wisely, whether these are equipment, knowledge, property, or relationships. The more efficiently a business uses its assets, the greater the chance that it will make a monetary profit.

Business organization affects how a business is treated under the law. State and federal governments provide incentives and rules for every type of business organization. Profitability in industry helps a country’s economy grow, so governments generally support corporations by passing laws that protect investors from liability for the debts of the business.

When Did It Begin?

Contemporary forms of business organization have their roots in the Industrial Revolution. During the Industrial Revolution, manual labor was largely replaced by machine-based labor. Industry developed around factories in which machines, not people, were the primary tools of production. Many individuals, artisans, and family groups ceased working in homes, in small workshops, and on farms and took factory jobs offering pay for unskilled labor. As organizations became more focused around machines, they divided up responsibilities among workers and developed chains of command to organize workers and managers in order of authority. Individual worker’s jobs became more specialized and more routine.

In 1776 Scottish economist Adam Smith (1723–90) published An Inquiry into the Nature and Causes of the Wealth of Nations, which highlighted the division of labor in production. Manufacturers understood that they increased a business’s efficiency and productivity by assigning workers simple, machine-based tasks. Workers were trained to be disciplined and to support the routines of factory production.

English mathematician and inventor Charles Babbage (1791–1871) also studied the division of labor in production. He applied the methods of science and mathematics to his analysis of organization, management, planning, and labor in factories. In the early twentieth century Babbage’s ideas were gathered into a theory of organization and management called scientific management, which profoundly affected how businesses operate.

The theories of scientific management were further developed by American engineer Frederick Taylor (1856–1915), who organized the theory into five essential principals. The first principle called for the shifting of responsibility within a business organization from the worker to the manager. Managers, Taylor believed, needed to plan and design all of the work, and workers needed to carry out assigned tasks. The second principle called for using scientific methods to gain maximum efficiency in the production of goods. This meant that workers needed to complete their tasks in a cost- and time-saving way. The third principle called for the necessity of choosing the best and most qualified person to perform each job so that the skill level of the worker and the demands of the task would be matched. The fourth principle stated that the worker must be trained efficiently. The fifth stated that worker performance had to be monitored so that procedures could be followed and the desired financial results achieved. Taylor’s principles can still be seen at work in such modern businesses as fast-food restaurants.

More Detailed Information

The three main categories of business organization are sole proprietorship, partnership, and corporation. Ownership is one of the most important features of business organization. A sole proprietorship is a business with a single proprietor, or owner. It is the most basic type of for-profit organization and the least regulated by government. The owner of a sole proprietorship makes all the decisions about the business and is free to keep all the profits he or she makes from the business. However, the owner is also solely liable (responsible) for the debts of the business, meaning that his or her personal assets are at risk if the business cannot repay its debts.

When two or more people choose to own and operate a business together, the business is known as a partnership. In a general partnership, all the owners share in the financial profits and losses, and they share the liability for all of the debts. In a limited partnership, one or more of the owners (called the general partners) run the business and have unlimited liability, or are held entirely responsible for the business’s debts. But there may also be limited partners in the business who invest in the business and have only limited personal liability for the business’s debts.

Sole proprietorships and partnerships are popular types of businesses. In fact, there are more sole proprietorships than any other type of business. However, most large businesses in the United States are corporations. Corporations are organized very differently from proprietorships and partnerships. The ownership of a corporation is not connected to one individual or a small group of individuals; ownership of a corporation is represented by shares of stock that can be transferred between owners, or stockholders. A corporation is a legal entity in the same sense that an individual person is, meaning that the corporation has designated rights, responsibilities, and privileges. When a corporation borrows money, it does so in its own name (instead of in the name of its original founders or any other persons). As a result, the liability for the company’s debts is limited; the most a stockholder can lose is the amount he or she has invested. A large corporation can have millions of owners, or stockholders.

To start a corporation, a charter (or articles of incorporation) must be drawn up in the state where the corporation intends to do business. The charter includes the corporation’s name, the forecasted length of its life, its business purpose, and the number of shares of stock that can be distributed or sold. Another requirement for starting a corporation is the creation of bylaws, which are rules that govern the actions of the business. For example, bylaws will state how the business’s directors are to be selected. In large corporations, the stockholders elect a board of directors. The board of directors then elects the company’s managers, who oversee the operations of the corporation in the interest of the stockholders. The result of this arrangement is that stockholders, because they have control over the directors, have control of the corporation.

The managers of a corporation have a responsibility to report to the board of directors of a corporation. The management of a company must ensure that the company is meeting short-term and long-term goals and that it is making a profit. A management team of a small to mid-size corporation might include a chief of operations (CEO), a president, a chief of finance (CFO), and a human resources director. Each of these individuals might lead a team of managers who in turn oversee smaller groups of employees. This cascading organization of leadership and authority is known as a hierarchy.

When a person of higher authority passes the responsibility of a task, project, or other work-related assignment to a person working below him or her in the hierarchy, it is known as delegating. The practice of delegating is important because it allows a manager or head of a department to share his or her workload with those working for him or her. It also allows those in lower positions to take on new responsibilities and to learn about the duties and responsibilities required of higher-up positions. Labor management is the term used to describe the processes of planning which workers will take on which tasks, how workers will be organized, and who will supervise and direct them. Even in small businesses, the complex work of managing individuals, tasks, finances, and schedules demands highly skilled leadership.

Recent Trends

For many decades large corporations have been owned by their stockholders and run by managers who organize and oversee workers to meet the financial and operational goals of the business. In recent years, however, companies have focused on yet another key group that must support the business if it is to succeed: the customer. A rapidly growing global economy means that there is no limit to businesses’ competition for customers. In many industries products and services are similar from manufacturer to manufacturer, and prices do not differ enough to boost the consumption of one manufacturer’s product over another’s. Customer service has grown to be one of the key ways in which a business can differentiate itself from its competitors.

Customer service is the term for building a relationship with customers and making this relationship a high priority for the business. In order to develop a strong customer focus, businesses often conduct market research to find out what their customers want and need. Once they determine customer priorities, these are integrated into the company mission, communicated to all managers and employees, and reinforced on a regular basis.

Many hospitals, airlines, retailers, manufacturers, and other organizations have developed business practices that enhance the purchase, use, and ownership of the products the business develops. Customer-service strategies may include lowering prices on products at certain times of the year, offering free bonus products, extending unlimited or unconditional guarantees on products, and providing free shipping. In the first years of the twenty-first century Dell Computers, one of the top manufacturers and direct suppliers of personal computers in the world, opened stores in shopping malls throughout the United States. These stores gave customers the chance to ask questions about their computers or to have them serviced in person without having to telephone the company or use its website.