What to Consider When Choosing an Organizational Structure
Although the ideal time to decide the structure of your organization is before you establish it, there may be reasons to consider restructuring your business once its established (and by restructuring your business and organizational structure, I’m referring to the arrangement of roles and responsibilities; for example, hierarchical, flat, etc.). Even a company operating for decades can benefit from taking a closer look at how it is structured and determine the best structure for meeting the organization’s present and future needs.
On its surface, choosing a structure may appear to be a simple exercise. For a one-owner/one-business operation, that is typically the case; however, more complex businesses have a variety of issues to consider when structuring the organization. When deciding how to structure your business, be sure to make the following key considerations:
The future of the business: Whether it is a new venture or a well-developed brand, looking to the future is necessary. The future may change or be uncertain, but having some idea of the long-term objectives and goals will drive the conversation in a positive direction. Organizational structure is affected by the purpose of your company. For example, are you mass-producing a product or focused on one service? If one aspect of your business creates more risk than other operations, you should consider structures that isolate high risk from other assets.
The interests of the various stakeholders: Considerations in this category may include who can be an investor, whether an investor will be able to invest in the entire company or only in individual business units or locations. You should also consider how lenders or significant vendors would be affected or utilized. For example, an investor may be enamored with one aspect of the business and be willing to invest in a targeted manner. This may alleviate capital concerns in the specific business, and also allow you to divert overall resources to other areas of the business where investment or borrowing may be more difficult or costly.
Liability protection: One of the main reasons to create a business entity is to protect investors from operational liability. Liabilities can take the form of lawsuits, environmental liability, personnel matters or product defects. Looking at this issue on a deeper level, you will want to look into asset protection. For example:
- A proper structure can provide liability protection and improve operational risk efficiency.
- Segregating different operations by type of work or location, or some other natural business division, will cleave off liability from one area of operations with a proper entity and organizational structure and protect one set of assets that may be more high risk from negatively impacting other lower risk assets.
- The most often seen example of this is the separation of real estate assets from operational assets to avoid potential environmental liability from affecting business operations.
Use of human capital and resources: Organizations need to look at how to use talent on different levels of a business. Identifying what talent a company has, as well as the best way to use the talent sounds intuitive, but in practice it can be difficult. Your organization may have a person talented in project management who is able to take multi-faceted projects and make them flow easily and efficiently. This person may be working in one area of the business while the skill may be needed across many areas. In other words, it may be better to house the talent at a holding or management company, so all business operations, not just the one business unit that hired her, can benefit from the talent.
This consideration applies to not only large multi-faceted business operations, but also to individual operating points. The organizational work may be on an entity scale in a large operation or be broken up into individual duties for small operations.
Carefully evaluating human capital and how to use it is an invaluable exercise for any sized company. As companies grow there will be an influx of new talent, and current employees may bloom and thrive in new environments. The controller for one operation may discover that he has skills in contract management that were not needed before, but with the addition of four additional business units, this management skill set is crucial. Your business organization should account for these employee issues.
As your business and various aspects of your business change over time, be prepared to reconsider the structure of your organization. It may be advantageous to restructure. If so, when reevaluating your company’s structure, be sure to consider these four factors when making your assessment.
Disclaimer: The information in this blog post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Stephen Dietrich, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
About The Author: Stephen Dietrich is an attorney and author who has a passionate interest in the human side of business. His distinctive combination of legal and business knowledge, human insight, and dedication to clients makes him uniquely qualified to help corporate leaders and other C-level executives navigate high-value mergers and acquisitions, restructure transactions, and manage day-to-day operations. Through this blog, Stephen shares his extensive experience and unique personal and professional insights in the hope of stirring thought and dialogue that leads to ever deepening insights and understanding. For more information, please visit www.StephenDietrich.com.
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