1.7 - Organization, Roles, and Responsibilities
Major Types of Business Organization
The main types of business structure are sole proprietorship, partnership, limited liability company (LLC), and corporation.
In sole proprietorships, partnerships, and LLCs, owners keep control over both decision-making and profits, but they typically have less access to funding and may be more limited in how much they can grow compared to a corporation.
Liability differs across these too. Sole proprietors and partners are personally liable for all business debts and obligations. An LLC helps owners avoid that personal liability, since it's generally limited to whatever they've invested in the business.
Corporations work differently. Once a business becomes a corporation, the owners give up control over decision-making to shareholders and an elected board of directors. The company itself, not individual owners, controls the profits and is liable for business debts. In exchange, corporations usually get greater access to funding and more room to grow than other business types.
Personal liability means the owner's own money and belongings are on the line. If a sole proprietor's bakery closes owing a supplier $50,000, the supplier can go after the owner's personal savings, car, or even home to get paid. If the same bakery were an LLC, the owner could lose the money they put into the business, but their personal belongings would generally be protected.
Type | Who owns and controls it | Liability for business debts | Access to funding and growth |
Sole proprietorship | One owner, who makes every decision and keeps all the profits | Owner is personally liable | Limited: the owner's savings, loans, friends and family |
Partnership | Two or more partners, who share decisions and profits | Partners are personally liable | Limited, though more owners can pool more money |
LLC | One or more owners, who keep control and profits | Owners generally aren't personally liable; they can lose what they invested | Limited compared with a corporation |
Corporation | Shareholders, who elect a board of directors to oversee the company | The company itself is liable; shareholders can lose only what they invested | Greatest: can raise money by selling shares of stock |
Owners of sole proprietorships, partnerships, and LLCs earn income from the business's profits, usually by taking money out of the business (an owner's draw) instead of getting a regular paycheck. If the business has a great year, the owner's income goes up; if it has a bad year, it goes down. Partners usually sign a partnership agreement that spells out how they split profits, who makes which decisions, and what happens if a partner wants out.
Becoming a corporation trades control for money. Selling shares can raise far more money than any owner could, but now the board, elected by the shareholders, makes the big decisions and can even replace the founder. In 1985, Apple's board backed CEO John Sculley in a power struggle with cofounder Steve Jobs, who lost his leadership role and left the company. Any profit belongs to the corporation, and the board decides whether to reinvest it or pay part of it to shareholders as dividends (see 3.5).
Roles and Responsibilities of Sole Proprietors and Partners
Sole proprietors carry the primary responsibility for every part of the business, often juggling multiple roles at once, like CEO, marketer, product developer, financial manager, and operations manager all in one person.
Partners share that primary responsibility across the group, but they usually divide roles based on each partner's strengths and interests, so one might focus on sales while another handles finance.
For example, a sole proprietor running a food truck might cook, order supplies, post on social media, and do the bookkeeping, all in the same week. Two friends starting a landscaping business might split it so one meets with customers and handles sales and billing, while the other manages the crews and equipment.
Structure of Large Businesses
As a business grows in size and complexity, it needs more employees with specialized skills, which naturally leads to organizing work into specific departments or teams. Large businesses typically have executive leaders, like a CEO, who oversee overall vision, operations, strategy, and performance, along with managers who lead individual departments and report up to those executives. In a corporation, the executive leaders themselves report to the board of directors and shareholders.
In a corporation, the chain of who reports to whom usually looks like this:
- Shareholders own the company and elect the board of directors.
- The board of directors oversees the company and hires the CEO and other top executives.
- Executive leaders (the CEO and others, like a chief financial officer) set the vision and strategy and oversee the whole business.
- Managers lead each specialized department and report to the executives.
- Employees on each team do the day-to-day work and report to their managers.
Specialized departments exist to handle specific functional areas like marketing, operations, or finance, building expertise in those areas so the business can meet customer needs more efficiently and effectively.
Sometimes businesses choose to outsource certain functions, meaning they hire another company to handle them, usually to increase efficiency or cut costs. Common reasons to outsource include not having employees with the right skills in-house, or facing high labor costs internally.
For example, a small company might outsource payroll to a payroll service instead of hiring its own payroll expert, and a clothing brand might outsource sewing to a factory that already has the machines and trained workers. The trade-off is less control over how the work gets done.
Roles of Specialized Departments
Sales and marketing handles market research, sales strategy, brand management, and customer relationships, all aimed at attracting and retaining customers.
Research and development focuses on innovating new goods, services, and business processes to better meet customer needs.
Operations manages the technical side of manufacturing goods or developing services, making sure products actually get produced and delivered.
Accounting tracks money going out and money coming in, prepares financial statements, and keeps an eye on the business's overall financial health.
Finance secures and manages the business's funds, analyzes financial data, and recommends strategies to improve performance.
Human resources recruits and hires employees, trains them, oversees performance evaluation, and makes sure the business has the workforce it needs to produce its product, market it, sell it, and manage the finances behind it all.
These departments work together all the time. Picture a company launching a new sneaker: research and development designs and tests it, finance secures a loan to pay for the new production line, human resources hires extra factory workers, operations makes the sneakers and ships them to stores, sales and marketing builds the ad campaign and gets retailers to stock them, and accounting tracks what the launch cost and how much it brought in.
Accounting and finance are easy to mix up. Accounting looks back: it records what already happened and reports it in financial statements. Finance looks ahead: it uses that data to decide how to raise and spend money in the future.