For this reason, it is a decision that should be made in consultation with

experienced business lawyers in Melbourne to obtain expert advice on

which legal structure will be most suitable for the specific and unique
requirements of your business.

In Australia the main legal structures for businesses are:

 Sole trader
 Partnership
 Trust
 Company
 Cooperative

The following seven factors differ across these main legal structures and are
therefore important to understand when choosing a legal structure for your
business.

1. Control

An important factor to consider when selecting your legal structure is the

level of control you wish to have over your business. For example, if you
wish to own and operate the enterprise completely alone then being a sole
trader would be the most appropriate structure. Your choice of legal
structure will affect what aspects of the business you will control and what
aspects you will legally own.

2. Limitation of liability

Your choice of legal structure will have important implications on your

potential legal liability. Considering the extent you need to be protected
from personal legal liability is important before choosing a business
structure, as a considerable advantage of a complex legal structure such as a
company, is the protection from your personal assets becoming liable from
any debts and losses incurred.

3. Cost and complexity of formation and legal structure

The different legal structures each have differing set up procedures, cost
and complexities involved. For example, while a sole trader is simple to set
up and requires few reporting requirements, a more complex structure like
a trust involves strict reporting requirements and must be set up by a
solicitor or an accountant.

4. Flexibility and future needs

It is important when considering a legal structure to also reflect on where

you envision your business going in the future. For example, the expansion
of a trust is subject to legal penalties so is not an appropriate structure to
choose should expansion be a goal in mind for your business.

5. Tax implications

The legal structure of your business will have significant effects on the
amount of tax you pay and the kinds of tax that you must pay. For example,
a sole trader enjoys tax benefits from being able to claim on a personal tax
return and those in a trust do not pay income tax on profits.

6. Ongoing administration

Whilst a sole trader legal structure has few reporting and administrative
requirements, the complex legal structures such as a company have strict
and difficult record keeping and paperwork requirements. In fact, an
important consideration before setting up a complex legal structure is
ensuring that you have the time, people and ability to abide by the strict
recordkeeping requirements that are legally enforceable.

7. Continuity of existence

It is important to consider how you see the business coming to a

conclusion. If you wish for the business to be terminated when you
personally wish for it to end, then becoming a sole trader is the most
appropriate option. However, if you wish to secure your family’s financial
future, it is more appropriate to select a legal structure that does not come
to an end if you are incapacitated.

Choosing an appropriate legal structure is a very important decision to

make for your business. It is therefore important to consult with an
experienced business lawyer. In such a way you will ensure that your legal
structure will suit your business and personal needs.

For a new or proposed business, the selection of a suitable form of

ownership business organisation is generally governed by the following
factors!
The selection of a suitable form of ownership organisation is an important
entrepreneurial decision because it influences the success and growth of a business
— e.g., it determines the decision of profits, the risk associated with business, and so
on. As discussed earlier, the different forms of private ownership organisation differ
from each other in respect of division of profit, control, risk, legal formalities,
flexibility, etc.

Therefore, a thoughtful consideration should be given to this problem and only that
form of ownership should be chosen. Since the need for the selection of ownership
organisation arises both initially, while starting a business, and at a later stage for
meeting the needs of growth and expansion, it is desirable to discuss this question at
both these levels.

For a new or proposed business, the selection of a suitable form of ownership

organisation is generally governed by the following factors:

1. Nature of business activity:

This is an important factor having a direct bearing on the choice of a form of
ownership. In small trading businesses, professions, and personal service trades,
sole-proprietorship is predominant.

Examples are Laundromats, beauty parlours, repair shops, consulting agencies,

small retail stores, medicine, dentist accounting concerns, boarding-house,
restaurants, speciality ships, jobbing builders, painters, decorators, bakers,
confectioners, tailoring shops, small scale shoe repairers and manufactures, etc. The
partnership is suitable in all those cases where sole proprietorship is suitable,
provided the business is to be carried on a slightly bigger scale.

Besides, partnership is also advantageous in case of manufacturing activities on a

modest scale. The finance, insurance, and real estate industries seem to be suited to
partnership form of organisation. Some of the financial businesses that find this
form advantageous are tax, accounting, and stockbrokerage firms, and consulting
agencies.

Service enterprises like hotels and lodging places; trading enterprises, such as
wholesale trade, large scale retail houses; manufacturing enterprises, such as small
drug manufacturers, etc. can be undertaken in the form of partnership.
Manufacturing contains the highest percentage of companies among all industries.
Similarly large chain stores, multiple shops, super-bazaars, engineering companies
are in the form of companies.

2. Scale of operations:
The second factor that affects the form of ownership organisation is the scale of
operations. If the scale of operations of business activities is small, sole
proprietorship is suitable; if this scale of operations is modest — neither too small
nor too large — partnership is preferable; whereas, in case of large scale of
operations, the company form is advantageous.
 Image Courtesy : emeraldinsight.com/content_images/fig/1600090502001.png

The scale of business operations depends upon the size of the market area served,
which, in turn, depends upon the size of demand for goods and services. If the
market area is small, local, sole-proprietorship or partnership is opted. If the
demand originates from a large area, partnership or company may be adopted.

3. Capital requirements:
Capital is one of the most crucial factors affecting the choice of a particular form of
ownership organisation. Requirement of capital is closely related to the type of
business and scale of operations. Enterprises requiring heavy investment (like iron
and steel plants, medicinal plants, etc.) should be organised as joint stock
companies.

Enterprises requiring small investment (like retail business stores, personal service
enterprises, etc.) can be best organised as sole proprietorships. Apart from the initial
capital required to start a business, the future capital requirements—to meet
modernisation, expansion, and diversification plans —also affect the choice of form
of ownership organisation.

In sole proprietorship, the owner may raise additional capital by borrowing, by

purchasing on credit, and by investing additional amounts himself. Banks and
suppliers, however, will look closely at the proprietor’s individual financial resources
before sanctioning loans or advances.

Partnerships can often raise funds with greater ease, since the resources and credit
of all partners are combined in a single enterprise. Companies are usually best able
to attract capital because investors are assured that their liability will be limited.

4. Degree of control and management:

The degree of control and management that an entrepreneur desires to have over
business affects the choice of ownership organisation. In sole proprietorship,
ownership, management, and control are completely fused, and therefore, the
entrepreneur has complete control over business. In partnership, management and
control of business is jointly shared by partners.

They have equal voice in the management of partnership business except to the
extent that they agree to divide among themselves the business responsibilities.

Even then, they are legally accountable to each other. In a company, however, there
is divorce between ownership and management. The management and control of
company business is entrusted to the elected representatives of shareholders.

Thus, a person wishing to have complete and direct control of business prefers
proprietary organisation rather than partnership or company. If he is prepared to
share it with others, he will choose partnership. But, if he is just not bothered about
it, he will go in for company.

5. Degree of risk and liability:

The size of risk and the willingness of owners to bear it is an important consideration
in the selection of a legal form of ownership organisation. The amount of risk
involved in a business depends, among other, on the nature and size of business.
Smaller the size of business, smaller the amount of risk.

Thus, a sole proprietary business carries small amount of risk with it as compared to
partnership or company. However, the sole proprietor is personally liable for all the
debts of the business to the extent of his entire property. Likewise, in partnership,
partners are individually and jointly responsible for the liabilities of the partnership
firm.

Companies have a real advantage, as far as the risk goes, over other forms of
ownership. Creditors can force payment on their claims only to the limit of the
company’s assets. Thus, while a shareholder may lose the entire money he put into
the company, he cannot be forced to contribute additional funds out of his own
pocket to satisfy business debts.

6. Stability of business:
Stability of business is yet another factor that governs the choice of an ownership
organisation. A stable business is preferred by the owners insofar as it helps him in
attracting suppliers of capital who look for safety of investment and regular return,
and also helps in getting competent workers and managers who look for security of
service and opportunities of advancement. From this point of view, sole
proprietorships are not stable, although no time limit is placed on them by law.

The illness of owner may derange the business and his death cause the demise of the
business. Partnerships are also unstable, since they are terminated by the death,
insolvency, insanity, or withdrawal of one of the partners. Companies have the most
permanent legal structure. The life of the company is not dependent upon the life of
this member. Members may come, members may go, but the company goes on
forever.

7. Flexibility of administration:
As far as possible, the form of organisation chosen should allow flexibility of
administration. The flexibility of administration is closely related to the internal
organisation of a business, i.e., the manner in which organisational activities are
structured into departments, sections, and units with a clear definition of authority
and responsibility.

Image Courtesy : tampa-job-links.org/dotnetnuke/Portals/0/PDF/Group.jpg

The internal organisation of a sole proprietary business, for instance, is very simple,
and therefore, any change in its administration can be effected with least
inconvenience and loss. To a large extent, the same is true of a partnership business
also. In a company organisation, however, administration is not that flexible because
its activities are conducted on a large scale and they are quite rigidly structured.
Any substantial change in the existing line of business activity — say from cotton
textiles to sugar manufacturing — may not be permitted by law if such a provision is
not made in the ‘objects clause’ of the Memorandum of Association of the company.

Even when it is permitted by the Memorandum, it might have to be endorsed by the

shareholders at the general meeting of the company. Thus, from flexibility point of
view, sole proprietorship has a distinct edge over other forms.

8. Division of profit:
Profit is the guiding force of private business and it has a tremendous influence on
the selection of a particular form of ownership organisation. An entrepreneur
desiring to pocket all the profits of business will naturally prefer sole proprietorship.

Of course, in sole proprietorship, the personal liability is also unlimited. But, if he is

willing to share the profits partnership is best. In company organisation, however,
the profits (whenever the Board of Directors decides) are distributed among
shareholders in proportion to their shareholding, but the liability is also limited. The
rate of dividend is generally quite low.

9. Costs, procedure, and government regulation:

This is also an important factor that should be taken into account while choosing a
particular form of organisation. Different forms of organisation involve different
procedure for establishment, and are governed by different laws which affect the
immediate and long-term functioning of a business enterprise. From this point of
view, sole proprietorships are the easiest and cheapest to get started. There is no
government regulation. What is necessary is the technical competence and the
business acumen of the owner.

Partnerships are also quite simple initiated. Even a written document is not
necessarily a prerequisite, since an oral agreement can be equally effective. Company
form of ownership is more complicated to from.

It can be created by law, dissolved by law, and operate under the complicated
provisions of the law. In the formation of a company, a large number of legal
formalities is to be gone through which entails, at times, quite a substantial amount
of expenditure.

For example, the cost incurred on the drafting of the Memorandum of Association,
the Articles of Association, the Prospectus, issuing of share capital, etc. This cost is
however, small in case of private companies. Besides, companies are subjected to a
large number of anti-monopoly and other economic laws so that they do not hamper
the public interest.

The consideration of the various factors listed above clearly shows that:

(a) These factors do not exist in isolation, but are interdependent, and they are all
important in their own right. Nevertheless, the factors of nature of business and
scale of operations are the most basic ones in the selection of a form of ownership.

All other factors are dependent on these basic considerations. For instance, the
financial requirements of a business will depend on the nature of business and the
scale of operations planned. To take an example, if a business wants to set up a
trading enterprise (say, a retail store) on a small scale, his financial requirements
will be small.

(b) The various factors listed above are only major factors, and in no case they
constitute an exhaustive list. Depending upon the requirements of the business and
the demands of the situation and sometimes even the personal preference of the
owner, the choice of a form of ownership is made.

(c) The problem in choosing the best form of ownership is one of analysing and
weighing relative advantages and disadvantages to find the one that will yield the
highest net advantage. And for that, weights may be assigned to different factors
depending upon their importance in each form of organisation, and the organisation
that obtains the maximum weights may be ultimately selected.

There are different forms or ways of getting into a business. An entrepreneur therefore should consider
all the factors, such as liability for the business’ debts, before choosing the best form of ownership. The
four major forms of owning a business legally in the United States are sole proprietorship, limited
liability company, partnership and corporation.

Legal Liability

The reason why most owners incorporate their businesses is to guard their individual assets. That way,
if your company files bankruptcy proceedings in a court of law, no one can take away your personal
property. Investors choose to incorporate their businesses depending on the potential and risk involved
in the venture. Certain form of ownership offer business owners greater protection from personal
liability for the financial problems. Entrepreneurs must weigh the potential for legal and financial
liabilities for their companies' obligations. A limited liability company, or LLC, is a separate entity from
its owner; hence, the owner is not liable for its debts.

Tax

Business owners should also consider tax laws, because some businesses are taxed heavily than
others. Tax rates for each form of ownership constantly change due to amendments to the tax code.
These fluctuations affect the amount of tax a company pays to the government. Sole proprietorships
and partnerships pay income tax based on their net earnings, while corporations usually have more tax
options.

Expenses

Sole proprietorships and partnerships are easier to form than other forms of business. They require
less time and money to register. They also do not have strict operating rules. Limited liability companies
pay more incorporation fees, are required to comply with tough rules and make annual returns and a
few other formalities. LLCs are also costly to run because managers and directors have to be hired to
ensure that the company operates smoothly.

Future Capital Requirements

Some forms of ownership differ in their ability to raise capital. Corporations require large amounts of
capital to finance their operations. As a business grows, its capital requirements rise. Corporations may
find it easier to raise capital than sole proprietorships because they can issue additional shares or table
rights issues. Banks also prefer giving loans to corporations over partnerships due to their perceived
stability.
An organizational chart, also called organigram or organogram, is a diagram that shows the structure
of an organization and the relationships and relative ranks of its parts and positions/jobs.

What is an Organizational Chart?

The definition of an organization chart or "org chart" is a diagram that displays a reporting or relationship
hierarchy. The most frequent application of an org chart is to show the structure of a business,
government, or other organization.

Org charts have a variety of uses, and can be structured in many different ways. They might be used as a
management tool, for planning purposes, or as a personnel directory, for example. Perhaps your
organization doesn't operate in a "command and control" style, but instead relies on teams.
Here are some ideas and examples to help you design the perfect organisational chart for your needs.
How Organization Chart Are Used

Organizational charts are useful in a number of ways. Here are a few of the ways your company or group
can benefit from an org chart.

 Show work responsibilities and reporting relationships.

 Allow leadership to more effectively manage growth or change.
 Allow employees to better understand how their work fits into the organization's overall scheme.
 Improve lines of communication.
 Create a visual employee directory.
 Present other types of information, such as business entity structures and data hierarchies.
 Hierarchy is a way to structure an organization using different levels of authority and a vertical link, or chain
of command, between superior and subordinate levels of the organization. Higher levels control lower levels
of the hierarchy. You can think of an organizational hierarchy as a pyramid. The highest level of authority is
at the top of the pyramid, and orders flow from this top level down to the next level where it continues to
move on down until it reaches the level where the order is supposed to be carried out.
 Information and directions flow vertically in a hierarchical structure. Information flows up through each level
until it reaches the top. After all the information has been received and assessed, a decision will be made at
the top and will flow down through the levels of the hierarchy until it reaches the level where the decision will
be implemented. Also, note that the top level of the hierarchy often coordinates all the activities and
communication of the various parts of the organization.

A hierarchical organizational structure contains a direct chain of command from the top of the organization to the

bottom. Senior management makes all critical decisions, which are then passed down through subsidiary levels of

management. If someone at the bottom of this organizational pyramid wants to make a decision, they pass the

request up through the chain of command for approval, for which a decision will eventually be returned. A

hierarchical structure operates well when there are few products that are sold in high volume, so that tight control

can be maintained over the design, quality, production, and distribution of goods.
 For example, Horton Corporation develops a wildly popular super widget that is in strong demand in many

countries. This widget is the only product that Horton sells. The president decides to tightly control the quality of

this super widget by producing it in a single, large-scale facility, and selling it through a chain of distributors. This

calls for a hierarchical structure to control all aspects of production and distribution. The distributors are allowed to

engage in their own marketing activities, so this portion of the business is essentially localized and not under the

control of Horton.

Advantages of the Hierarchical Structure

A hierarchical system allows a few people to control all aspects of an organization, which has the following

advantages:

 Control orientation. When there are just a few key products being sold, or there is a specific marketing

message to be distributed, the hierarchical system works well. For example, a high-end women’s handbag

manufacturer will likely need to employ a hierarchical system in order to closely monitor the design and production

of handbags. Similarly, a high-volume consumer products company needs to maintain a consistent worldwide brand

image, and so needs to control all aspects of production, distribution, and marketing.

 Career path. There is a clear career path through this type of organization, with employees gradually

advancing through the various levels of management over a number of years. Those reaching senior positions tend to

have built up massive experience with the company.

 Clear reporting. Since power is so centralized, it is easy to determine who is authorized to make a decision.

 Specialization. Employees are more likely to have niche positions that allow them to become in-depth

specialists. If their expertise is used effectively, this means that a company can have a number of centers within the

organization where best practices are employed.

Disadvantages of the Hierarchical Structure

Though the higher level of coordination associated with the hierarchical system is useful in some instances, there are

also a number of problems with it relating to the flow of information, the speed of decision making, and added costs.

Consider the following issues:

 Restricted information. Information tends to flow toward the top of the organizational structure, so that the

management team has a complete set of information with which to run the business. However, the reverse is not the

case. There is very little downward flow of information to the lower levels of the organization, which tends to cramp

any initiatives that might otherwise originate in these areas.

 Slow decision making. The hierarchical system takes time for management decisions to percolate down

through the various levels of management and be enacted. If a company operates in a swiftly-changing environment,

this can mean that the business is slow to react to competitive and environmental pressures, and so can lose  market

share.

 Added costs. A hierarchical system requires a considerable amount of corporate overhead to support the

senior management group, including extra layers of management, internal auditors, budgeting and control

departments, and so forth. This can be an excessive burden on profits when the bureaucracy is especially bloated.

 SPAN OF CONTROL
  
 Span of Control means the number of subordinates that can be managed
efficiently and effectively by a superior in an organization. It suggests how
the relations are designed between a superior and a subordinate in an
organization.
  
 Factors Affecting Span of control:
  
 Capacity of Superior:
  
 Different ability and capacity of leadership, communication affect
management of subordinates.
  
 Capacity of Subordinates:
  
 Efficient and trained subordinates affects the degree of span of management.
  
 Nature of Work:
  
 Different types of work require different patterns of management.
  
 Degree of Centralization or Decentralization:
  
 Degree of centralization or decentralization affects the span of management
by affecting the degree of involvement of the superior in decision making.
  
 Degree of Planning:
  
 Plans which can provide rules, procedures in doing the work higher would
be the degree of span of management.
  
 Communication Techniques:
  
 Pattern of communication, its means, and media affect the time requirement
in managing subordinates and consequently span of management.
  
 Use of Staff Assistance:
  
 Use of Staff assistance in reducing the work load of managers enables them
to manage more number of subordinates.
  
 Supervision of others:
  
 If subordinate receives supervision form several other personnel besides his
direct supervisor. In such a case, the work load of direct superior is reduced
and he can supervise more number of persons.
  
 Span of control is of two types:
  
 1. Narrow span of control: Narrow Span of control means a single manager
or supervisor
  
 oversees few subordinates. This gives rise to a tall organizational structure.


 Advantages:
  
 Close supervision
  
 Close control of subordinates
  
 Fast communication
  
 Disadvantages:
  
             Too much control

  
             Many levels of management

  
             High costs

  
             Excessive distance between lowest level and highest level

  
  
 Wide span of control: Wide span of control means a single manager or
supervisor oversees a large number of subordinates. This gives rise to a flat
organizational structure.


 Advantages:
  
 More Delegation of Authority
  
 Development of Managers
  
 Clear policies
  
 Disadvantages:
  
   
 Overloaded supervisors
  
 Danger of superiors loss of control
  
 Requirement of highly trained managerial personnel
  
 Block in decision making
  
  
An organization’s span of control can be determined by the number of employees
reporting to the manager/ supervisor. A narrow span of control refers to a structure with
few employees reporting to the manager, while a wide span of control refers to a
structure with many employees reporting to a supervisor.

The advantages of a narrow span of control include the following:

 A narrow span of control increases the level of contact between the manager and
members of the team. The increased contact improves the ability to supervise activities
carried out by the employees effectively, which may increase productivity.
 A narrow span of control enhances communication between the supervisor and
the team members. The team members can easily access the supervisor for assistance.
Enhanced communication also helps in faster decision-making and problem-solving.

The disadvantages of a narrow span of control include the following:

 A narrow span of control may be expensive to implement depending on the

number of teams in the organization.
 A narrow span of control may limit the ability of team members to exercise
independence in decision-making and problem-solving processes.

Difference Between Tall and Flat Organizational Structure

The concept of organization is born when two or more people work together in order to achieve a common
goal. Purpose of an organisation is to create responsibilities and positions by which an organisation can carry
out the work. Organisation may be formed in different sizes. All people working in the same organisation have
their own functions, attitudes and techniques to apply for achieving their common goal.  In order to manage and
control the resources, an organisation needs to be structured. Organization structure is formal system that
makes the organisation to run smoothly and helps to focus the common goals and objectives. It gives a clear
idea about the chain of command that need to be prioritized when a problem arise. It also defines what people
are responsible in the organisation for different reasons. A solid structure provides the framework to deliver
on business strategy. The structure of an organisation can be done by function, by product, by environment, by
customers, by process. This structure can be tall/flat, formal/informal, centralized/decentralized,
organic/mechanistic etc. So the structure of an organisation is the formal representation of how the
organisation is managed and it is very important. Therefore the importance can be immeasurable for any
organisation attempting to function towards a single goal.
Flat Organizational Structure

Flat organisational structure is a structure where there are no levels or very few levels between managers and
staff. In this structure the most trained employees get involved with decision making process. Employees are
not supervised by many levels of management. It is designed to minimize bureaucracy. Flat structure is also
known as horizontal structure.

This structure generally occurs in a small organization or in a small part within a large organization.
Communication between employees and managers are held on regular that allows rapid change and problem
resolution. Every feedback and opinions of employees are considered. There is an understanding bonding that
takes place in this structure.

Characteristics of Flat Organizational Structure

A flat organisational structure is basically a hierarchical structure that can be pointed by a pyramid shape. But
the base of the pyramid is much wider with few layers between the top management and bottom line
employees. The command chain in this structure is short but the span of control is wide. The leading position in
this structure is president or chief executive officer.

Advantages of Flat Organizational Structure

Flat organisation structure has many advantages. Some of the advantages are mentioned below:

 As there are minimum management levels, flat structure is cost effective as the company is paying
fewer people to get the work done.
 Improved communication between managers and employees.
 Having fewer levels, employees can directly report to managers and share new ideas which helps the
managers to make decision quickly.
 All employees along the manager have full control of every task that is required to be completed.
 Managers and employees stay close to customers and therefore can respond quickly to changes of
customer demands and changes.

Disadvantages of Flat Organizational Structure

Besides the advantages, flat organisational structure has some disadvantages as well. Some of the
disadvantages are stated below:

 Flat structure may hold back the growth of an organisation to a certain level.
 Employees may have more than two bosses which can confuse them during the time of reporting.
They may be confused thinking of which of the bosses will be the best to report.
 In situation where there is more than one boss, there could be a power struggle of having maximum
control on employees.
 Flat organisational structure is mainly for small organisation e.g. Partnerships, some private limited
companies, cooperatives.

Tall Organizational Structure

Tall organisational structure consists of many management levels and supervision. The chain of command is
long. Employees are only related to the department managers. All managers and employees are supervised by
their senior managers. Because of many numbers of levels in this structure, it cause problems with
communication and therefore takes long time for decision making. The top of all the management level is
usually called chief executive officer.

Characteristics of Tall Organizational Structure

A tall organisational structure is a hierarchical representation with many levels. However, tall organisational
structures not often cross more than eight levels of management. In this structure the command chain is long
but span is narrow relatively to flat structure. Top level management holds most power and as a result
employees are more controlled.

Advantages of Tall Organizational Structure

There are many advantages of tall organisational structure. Some of the advantages are noted below:

 All employees are closely supervised as the span of control is narrow. Each manager manages small
number of employees.
 Management structure is clear.
 The responsibilities of each level manager are clear and different.
 The success of every employee including managers is clear and therefore, tall organisational structure
has clear promotional ladder.

Disadvantages of Tall Organizational Structure

Besides advantages tall organisational structures have many disadvantages as well. Some of the
disadvantages are given below:

 As the employees are closely supervised by their managers, so the employees have less freedom and
responsibilities.
 Decision making process could be slow as approval may be required from various levels of managers.
 Every communication needs to take place through different levels of management.
 As there are many management levels, tall structure is expensive as the organisation need to pay
more money to managers than subordinates.
 Any changes are responded slowly as employees are the only person who stays closer to customers
and therefore to report any changes employees have to go through different levels of management.
Tall vs Flat Organisational Structure

Tall organisational structures are mostly adopted by mature companies as roles, tasks, accountability,
responsibilities and even governance are clear. A company needs to be concerned of what the employees are
doing and why they are doing it. Tall structure has two purposes: transparency of roles and objectives, and
controlling cost. All managers in every level manage small number of employees. As a result employees have
clear concept of their works. Different management level has different works to do. Most big companies like
Tesco, Sony, and Apple are the examples who have adopted tall structure. This has helped the company to
gain success. Tesco PLC is such one of the successful companies. It is a retail chain which was founded in
1919. They have more than 2484 stores in UK. In order to manage and run smoothly Tesco is following tall
organisational structure. With an interview with one of the store managers of Tesco it has known that they have
six management levels in their structure from checkout assistant to chief executive officer. After the chairman,
the top position is CEO. All managers in every level have small number of employees. As a result the duties of
every staff are clear and focused. Any major decision in Tesco is announced by the top management. By
adopting tall organisational structure Tesco is able to focus their goals more effectively and gain enormous
success.

On the other side, flat organisational structure is mostly adopted by small organisations. Many big
organisations may also have flat structure at the beginning end of their life cycle. In a flat structure normally
there are well focused employees who know who their boss is. They also have mindset of cooperation,
flexibility, working over boundaries, problem sharing opportunities. Flat organisational structure helps the
companies to save cost and stay close to customers. Small organisations like the local street shops are the
examples that have flatter structure.

Organisations can also have flat structure within their tall structure Starbucks is one of examples. The largest
coffee shop “Starbucks” was first established in Seattle, Washington. Starbucks effectively entered within the
European Union including UK in May 1998. Starbucks specializes in selling coffee, whole coffee beans, hot and
cold drinks. They are one of the successful companies in coffee industry. With an interview with a manager it
has been known that within the whole organization, Starbucks operates both tall and flat structure. In stores
Starbucks maintains flat functional structure where as in corporate sector they operate tall structure. Starbucks
have only two levels in their flat structure which they operate in stores. The manager is the top person and
baristas (Sales assistant) are the staffs. The baristas and managers both work together inside a store and stay
very close to customers. Any problems, changes and feedbacks from baristas or customers are taken into
consideration by the managers and dealt very quickly. Generally senior baristas are promoted to managers
when a manager resigns. By adopting a flat structure within a store has saved cost of the company. The
company is paying less money as there are few managers. Baristas and managers have a good understanding
which helps to get all the jobs done in the store. All baristas have clear concept of what to do and where to
report anything as there are only one manager. On the contrary Starbucks have tall organisational structure in
corporate sector. There are foul levels of management above store management. The top position is the chief
executive officer. By adopting the tall structure in corporate sector has enabled Starbucks to manage all sectors
of the company smoothly and therefore gain success.

To conclude, both organisational structures have some something good and bad sides. If a company wants the
employees to be cooperative, better alignment and engagement across the structure, then flat structure is
better. Employees have strong voice and any changes are easily adapted in this structure. This encourages the
employee’s independent thinking and teamwork. Flat structured companies much need to transform to tall
structures when it begin to grow larger. For organisations that are big in size a tall structure can be good. It
helps the company to manage all division in same pace. But if a tall structure is handled badly it could be
unpleasant and authoritarian. Well handled tall structure is disciplined and liberate.

Organizational Structure Type #1: Functional Organization

In Functional Organization, people are grouped by areas of specialization.

What are the advantages of Functional Organizations?

The first advantage of functional organization is that it makes the management of specialists easier.
Because resources specialized in one area, report to the same manager who knows the domain or
area as well.
Team members report to only one supervisor. This reduces the conflicts or contradictions of
reporting to both project and functional manager.

Similar resources are centralized in groups. For instance, software developers belong to the IT
department or sales specialists belong to the sales department. This ensures the sustainability of the
organization because the knowledge and know-how remain in the department even after the projects
are completed.

The last advantage of Functional organizations is that they define clear career paths for the
staff. Because the staff belongs to a department specialized in an area. And improving skills,
knowledge, and competence in that specialization can be proposed as a career path for the resource.
For instance, for a software developer working in software development department, developer,
senior developer, expert developer, and architect can be a career path as long as he improves his
skills and competence.

What are the disadvantages of Functional Organizations?

The first disadvantage of this organizational structure type, is that people place more emphasis on
their functional specialty to the detriment of the project. Because their ultimate manager is their
functional manager. Although they are assigned to a project, they take the directions of their
functional managers more seriously compared to a project manager’s direction.
There is not a career path in project management. This causes project management to be
underestimated by the staff. And this affects the success of projects respectively.

The last disadvantage of the functional organization is that the project manager has little or no
authority. Because staff mainly reports to the functional manager and therefore,the project manager
does not have that much power and influence on the project team.

Organizational Structure Type #2: Projectized Organization

In Projectized Organization, the entire company is organized by projects.

What are the advantages of Projectized Organizations?

First and the most important advantage of this organizational structure type is the efficient project
organization. Because all resources of the project are dedicated to project tasks and
assignments. This dedication automatically increases the focus and motivation of team members for
the success of the project.
Members of the project team are more loyal in projectized organizations. Because their ultimate
manager is the project manager. The success of the project directly depends on the team members
and this increases the loyalty to the project.

Last advantage is that a more effective communication is ensured in projectized organizations

compared to other organizational structures. Because the team members are dedicated to a project
and their existence in the organization solely depends on the project they are working for. Project
teams work in the same location, even in the same room in projectized organizations. This increases
the effective and efficient communication among the project team.

What are the disadvantages of Projectized Organizations?

The most important disadvantage of this organizational structure type there is no “home” for the
project resources once the project is finished. Since there are not departments for the resources
based on their specialties, if there won’t be a new project, resources are released at the end of the
project. This causes lack of professionalism in disciplines. Let’s consider a software engineer worked
in a project. At the end of the project, if he leaves the organization, his know-how will be lost as well.
This causes the organization to lose its professionalism in disciplines.

Another disadvantage of the projectized organizations is the duplication of facilities and job
functions. Tools and resources of a project belong to only one project in projectized
organizations. Let’s consider that a project needs a testing tool to complete its quality assurance
activities in a project. If the same tool will be needed for a second project in the organization, a new
tool needs to be aligned for the new project team since the existing tool solely belongs to the first
project team. This causes duplication of the same testing tool for the 2nd project and means
additional cost for the organization.

Projectized organizations use resources less efficiently. Since project resources are dedicated to a
project, even if this resource is not 100% utilized, they cannot be allocated to another task. Let’s
consider that project assignments of a software engineer takes 4 out of 5 days of his work week, so
he is 80% utilized. Even if he has enough time to do additional work, he is fully dedicated to the
project and this unutilized time of the resource cannot be used.

Organizational Structure Type #3: Matrix Organization

In Matrix organizations, the team members report to their project manager and also to their
functional managers

What are the advantages of Matrix Organizations?

Project objectives are highly visible in matrix organizations. What needs to be achieved to complete a
project successfully is clearly defined and understandable for the project team.

The project manager has control over resources. Because team members of the project are reporting
to the project manager as well and this gives respective authority to the project manager.
There is more support from functional areas. Because resources are grouped based on their
specialties. In case of a lack of technical knowledge, the resources can consult to their senior
colleagues or managers within the same functional domain.

Matrix organization enables maximum utilization of scarce resources. For instance, if a software
architect needs to support a project for only 2 days, he can be assigned to other projects or activities
for the remaining days of the week.

Matrix organizations enable better coordination, better horizontal and vertical dissemination of
information. Every resource belongs to a function and he has a functional manager. If he is assigned
to a project, he reports to a project manager as well. This structure strengthens the dissemination of
information and better coordination of the staff.

The last advantage of this type of organizational structure is that team members maintain a home. So
even if they are released from projects, they turn back to their department and start doing
departmental work. Or when a new project is initiated, they can be re-assigned to new projects.

What are the disadvantages of Matrix Organizations?

In this type of organizational structure, an extra administration is required. Because there will be two
managers of a resource: functional manager and project manager. Also, there will be several
resources from different functional disciplines in a project. Naturally, this will also bring the need of
additional administration.
More than one boss for project teams. For each resource, there will be two bosses: functional and
project manager.

Matrix organizations are more complex to monitor and control. Because there are several disciplines
and there will be several resources from these several functional departments in a project. This will
require management and coordination of different functional managers. Therefore, it is more
complex.

Tougher problems with resource allocation is another disadvantage of the Matrix organizations. The
main reason of this is, there will be lots of projects needing resources from a single functional
department. For instance, for the software projects of a company, software engineer resources will
be requested from the software development department. If there will be lots of projects to initiate,
this will cause resource allocation problems respectively.

Matrix organizations need extensive policies and procedures. Since there will be lots of functional
departments and resources, these need to be supported with the policies and procedures in order to
avoid conflicts. For instance, how to request a resource for a project, how to prioritize projects if they
need the same resource, how to release a project team member, they all need to be documented
clearly. It’s a must for avoiding any misunderstandings between the departments.

Functional managers may have different priorities than project managers and this causes higher
potential for conflict. Let’s consider that a department has its own works and a project manager is
requiring a new resource from this department. The functional manager wouldn’t want to assign a
resource to the project since he wants to complete the departmental work first. These kinds of
conflicts may arise in matrix organizations.

This kind of organizational structure give fair power balance to both functional manager and project
manager, that’s why Matrix organizations are the most common organizational structure type in the
industry. They enable a more sustainable and healthier corporate environment.
Conclusion: Comparative Overview of Organizational
Structure Types
As you see in this table, the authority of the Project managers, resource availability, who manages the
project budget, project managers role and how project management administrative staff works are
compared and listed for the different organizational structures.