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Corporate Organizational Structure

The various corporate structures highlighted in the previous lesson each organized in different forms designed to maximize efficiency.

The Organization of Partnerships

There are essentially two different types of partnerships.

General Partnership - Each partner is equal in stature and risk. While different partners may have invested different amounts each has accepted equal risk. Reward, or profits are distributed equally amongst the partners.

Limited Partnership - Each partner has assumed a different element of control, investment and risk. The same is true for reward. Every partnership draws up a contract that dictates elements of control and reward. Typically a partner that assumes greater financial risk corresponding with greater investment demands greater control. Usually in this type of partnership there is someone called the managing partner. This is the partner who has assumed managerial control. While the managing partner typically has invested the most, this may not be so.

Silent Partnerships - A silent partner may exist in either a general or limited partnership. Essentially the silent partner is an investor who is putting up money but who wishes no control over operations. The questions always remains, how long while a silent partner remain silent?


There are two basic types of corporations; private corporations and public corporations.

Private Corporations - Corporations that are owned by an individual or group of individuals that do not offer ownership shares for purchase by the general public.

Public Corporations - Corporations that are owned by large numbers of investors. Ownership shares known as "stock" are offered for sale to the general public. These shares can be purchased through a licensed broker or trader at a stock exchange.

There are two different types of stock offered for sale:

Common Stock - Most shares are common stock. Common stock holders are entitled to a voting share in the company and a portion of the dividend (a percentage of profits) if the company pays dividends to stockholders.

Preferred Stock - Limited stock issues that have no voting share. These stock holders, however, are paid a dividend, if one is offered, before common stock holders. In some cases a dividend is paid to preferred stock holders and not common stock holders. In the event a company must divest (break apart) preferred stock holders are paid off before common stock holders.

Corporate Structure - Public Corporations are typically organized in a hierarchical manner. Typically the stockholders elect a board or directors. These boards run in an election as a "slate" much like the candidates of political parties in a political election. Most times slates are not opposed since the consist of the stock holders who own the most shares. Sometimes, however, an opposition slate will run for control of the corporation. This slate will be headed be a person who has begun purchasing large amounts of stock and is now trying to wrest control of the corporation away from the present directors. Such an attempt is called a hostile takeover.

The board of directors appoints a President who is also known as the CEO (Chief Executive Officer). The President then hires a treasurer known as a CFO (Chief Financial Officer) and a secretary. Sometimes they also appoint an operations officer known as the COO (Chief Operations Officer).

Underneath this level the officer level are Vice Presidents, then Managers and finally employees.

See the chart below for a schematic of a typical corporate hierarchy.

There are a variety of different corporations worth discussing. They are referred to as horizontal, vertical conglomerates.

Vertical Corporations (mergers) - These are corporations that have purchased the component businesses that make their product. For example, if Apple Computers bought Intel (the chip manufacturer), a plastics company (for the cases) a shipping company, a CD Rom maker, etc, they would be limiting their costs by purchasing the companies that they used to purchase component products from.

Horizontal Corporations (mergers) - These are corporations that have purchased competing companies in an attempt to eliminate the competition and gain market share. It would be like IBM purchasing Compaq, Dell and Gateway. The FTC (Federal Trade Commission) watches this very carefully to ensure that anti trust laws are not violated. Some horizontal mergers are illegal and are halted.

Conglomerates - This is when one company buys other companies that are unrelated to their core business in an attempt to diversify. Corporations may become conglomerates after becoming very large through mergers and acquisitions of a variety of businesses. Diversification is one of the main reasons for conglomerate mergers. By having component businesses each making unrelated products, the overall sales and profits will be protected. For example, isolated economic events, such as bad weather or the sudden change of consumer tastes, may affect some product lines at some point, but not all at one time. One classic conglomerate is ITT which at one point owned international long distance phone service (their original core business), the Sheraton Hotel chain, a large insurance company, a defense contractor and others.

Take a look at the graph below. The vertical merger expand the company upwards and down, the horizontal from side to side and the conglomerate moves off and does neither.

This attempt to grow larger and thus make more profit is known as the "economy of scale."

The business of corporate mergers and acquisitions is an exciting and profitable one. Today giant mergers and acquisitions range in the tens of billions of dollars. Some mergers are hostile takeovers as we discussed earlier. These are more commonly known as LBO's (Leveraged Buy Outs). In an LBO one company buys out the outstanding stock of another. Some mergers are mutual mergers and corporate spin offs. Either way, there is alot of money at stake.

Some corporations become so large that they do business in many countries. These are known as multinationals, or MNC's.


A multinational corporation is a very large firm with a head office in one country and several branches operating overseas.

Advantages of Multinationals
  • Investment by multinationals creates jobs for the host country.
  • The multinational will introduce new production techniques and managerial skills.
  • New or better goods may now become available in the host country.
  • Ability to move resources, goods, services, and financial capital across national borders
  • Widespread market opportunities
  • Help spread new technology worldwide
  • Generate new jobs in areas where jobs are needed
  • Produce tax revenues for the host country
  • Help to improve the economies of developing nations


Disadvantages of Multinationals
  • Profits are returned to the overseas head office.
  • The multinational may operate against the interest of the host country.
  • The multinational may force its overseas branches to buy supplies from the head office.
  • Because they are large and wealthy, they may influence the political life of a host nation
  • May exploit the economy of the host nation by paying low wages to workers, by exporting scarce natural resources or by adversely interfering with the development of local businesses
  • Workers in major industrialized nations argue that building a plant abroad takes away jobs at home

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