What Corporate Structure Means for Your Business
By: Mark Little
Tags: Business, Law, Corporate

Corporate structure refers to the management and ownership of any business. Both are related and distinct. Use the right structure for your business.

Why create a corporate structure?

An effective corporate structure delivers three benefits:

Segmented financial reporting, Risk management, and Better regulatory compliance.

Corporate structures can be simple or complex, but they all factor in management and ownership decisions.

Difference between management and ownership structures

Management and ownership combine to form a corporate structure. Management and ownership are related, but distinct for our purposes.

Management structure

The management structure of a business starts with the roles created in the organizational documents for the entity. These are typically called “officers.” It is common, for example, that US corporations have the following officers:

- President and Chief Executive Officer

- Treasurer

- Secretary

There might be more officers. Each officer’s roles and responsibilities come from the relevant statute and the organizational documents.

We will discuss the legally significant roles more thoroughly in the Legal Form section. Wait! What about the Board of Directors? The Board of Directors represents the intersection of the ownership structure and the management structure.

The board appoints the top officer of the business and is responsible for monitoring the performance of the officers. The board also represents the ownership structure as the instrument the owners use to manage the management.

Some jurisdictions require a dual board structure: one board is supervisory; one is managerial.

Management structure includes another layer beyond the officers created with the entity. Management includes the organizational chart of job titles and reporting relationships. In this context, management is focused on business operations.

These relationships are not “legally significant” in that the organizational documents do not mention them. There is no “Director of Product Marketing” in the Bylaws.

The internal management structure is meaningful for the business. The internal, non-legal, management structure correctly receives the most attention.

Management structure includes matrix, divisional, and functional designs. Whatever the HR org chart shows from the CEO on down is the internal management structure.

Ownership structure

With a few exceptions, businesses have owners. The nature and number of owners vary widely.

Owners can be individuals or other businesses. To complicate matters, an owner’s rights to the business can be split between management and economic rights. Management rights refer to the ability to influence the appointment of officers. Economic rights include the right to receive proceeds of the business.

Many businesses also own other business. There are basically three levels of ownership in a corporate structure: parents, affiliates, and subsidiaries.

Parents own subsidiaries. The amount of ownership interest can range from a fraction of a percent to 100%. In the org chart here, Sonoma, Inc. is a parent of Great NewCo, Inc.

An affiliate is a sibling legal entity. For example, Maker Group is an affiliate of New Lux Example in this image. Conversely, New Lux Example is an affiliate of Maker Group.

This approach to ownership structure includes situations like joint ventures, outside investors, closely held companies, and publicly traded firms.

Factors that determine a corporate structure

Business leaders and lawyers make decisions about the corporate structure to achieve specific objectives or deal with identified risks.

Consider these four factors for corporate structures:

Legal form of the entity, Governing jurisdictions, Type of ownership, and Strategy or business objectives.

Legal form

The legal form of the entity in question can influence the terminology for both internal and external structures.

The terms for owners and managers in various corporate structures are listed in this table.