Small business organizational chart for sole proprietorship

A small business can use one of three primary organization structure options: functional, divisional or matrix. Essentially, the organizational structure creates a business hierarchy to increase the efficiency and effectiveness of the business operations. Different small businesses operate in different ways, so there is no one-size-fits-all solution every small business should choose for an organizational structure. You can, however, determine which of the most common structures works for your business.

Functional Organizational Structure

When you establish a functional organizational structure, you are building a hierarchy based on the job role of each employee. Functional organizational structure groups together employees who work toward a common goal.

For example, all of your marketing employees would be in the same group. Even if you only have two or three employees who fulfill the marketing role of your small business, you would structure it so one person is in charge, such as the vice president of marketing. His team would consist of a marketing manager and a public relations manager.

The functional structure provides focus to the employees, because they know they are working toward a common goal. In this example, the common goal is marketing and promoting the business.

Divisional Organizational Structure

Divisional organizational structures decentralize the functional organizational structure because the roles of the employees are divided by product or region, rather than function, within your business.

For example, you could divide the United States into four divisions: north, east, south and west. Each division would then have its own employees. This provides each region with specialist in each area for that region. If your business sells different products, you can also separate roles by the product under a divisional organizational structure.

Matrix Organizational Structure

Matrix organizational structures combine the characteristics of a functional and divisional organizational structure. The matrix organizational structure works more like a team. Instead of department heads, each team has a leader. Matrix organizational structures bring together employees who focus on a project, but fill different roles from across your business.

The matrix organizational structure has the most decentralization, which means it can confuse employees about who is in charge. The matrix organizational structure is appropriate if your business operates on an international level, or serves different geographic regions.

Changing Organizational Structures

Many small business owners start off by structuring the business by trial and error, or in a haphazard manner. You could start the business with just you and an assistant until you learn more about the roles employees must fill within the organization.

When your business starts small and then grows, it is not uncommon to start with one organizational structure and then transition to another structure. For example, if your business starts out by only serving the local city where the business operates, but eventually serves the state, you might start with one structure and change to another one to better fit the needs of your business and its customers.

A sole proprietorship has a simple organizational structure; it is are owned and operated by a single individual who has the final say about strategic, financial and marketing matters. Even if a sole proprietor hires employees, a sole proprietorship is, in effect, a benevolent dictatorship. The business owner does not have to answer to anyone regarding decisions about business operations. He only needs to keep business operations safe and legal and run a business that is profitable enough to meet its financial obligations.

Ownership

A sole proprietorship is owned 100 percent by the single individual whose name is listed on its business licenses. If he decides to share equity, he'll have to change his business structure. To do so, he registers his sole proprietorship with state and local revenue officials as closed and then creates a new business entity that is either a partnership, an LLC, or a C or an S corporation. He must do this even if the new business entity will use the same name and serve the same customers as the old one.

Decision Making

Decision making in a sole proprietorship is ultimately the responsibility of the sole owner. Although a shrewd sole proprietor will hire consultants with knowledge and experience who can help him make sound decisions, in the end, it is the owner's decision whether to implement any of the suggestions that his advisers make. A sole proprietor can authorize employees to make certain types of decisions, typically those with limited scope such as making inventory purchases. While sole proprietors typically handle all decision making processes, forming outside committees and consulting with legal and accounting experts is common practice for important decisions.

Financial Operations

The financial workings of a sole proprietorship are intimately connected with the owner's personal financial situation. When he applies for business credit, lending institutions will consider his personal credit and personal collateral. From the standpoint of the Internal Revenue Service, the net profit on a sole proprietor's Schedule C tax form reporting profit and loss from business activities is the same as the owner's income from the business. When the business fails to make a profit, the capital to supplement its cash flow often comes directly from the owner's personal bank account. Sole proprietors are often working under a self employed business model where they have the control mix personal accounts with business accounts or completely separate accounts while maintaining full control and liability.

Financial Obligations

The owner of a sole proprietorship is responsible for all the company's financial obligations. Creditors will ask him to personally guarantee loans, and he will be responsible for these loan amounts even if the sole proprietorship is dissolved as a business. If the business is found liable for hurting an individual, such as if someone slips and falls in a sole proprietor's storefront, then all his personal financial assets are at risk when compensating the victim.

References

Writer Bio

Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.

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