Introduction
The experience and success of companies can largely depend on the organization of their business. However, in some cases, firms may find it necessary to change the type of organizational structure from one type of organization to another. Given this process, it is necessary to thoroughly assess all aspects that can be changed, their positive and negative sides. This can be accompanied by a better understanding of how organizational changes are necessary and important in the company’s work.
Partnership to Corporation
Partnerships and corporations are different organizational arrangements with certain pros and cons. The benefits of moving from a partnership to a corporation include limited liability. In financial troubles, crises, or litigation, corporate shareholders are not liable for personal asset liabilities (Brunnermeier & Krishnamurthy, 2020). This can provide greater reliability and protection from potential financial problems.
Another advantage of changing the organizational structure is a more active capital injection when the corporation attracts shareholders (Kretschmer & Khashabi, 2020). A public offering can allow a company to simultaneously accumulate a large enough amount of capital that can be allocated to improve existing strategic directions or invest in new developments. However, there are some downsides to moving from a partnership to a corporate organization.
The main ones include more complex taxation, which means an increased volume of document flow (Milios, 2021). This can lead to additional difficulties in doing business. In addition, the large volume of new corporate data can be challenging to manage. A large number of business partners can disperse a company’s strategy in the absence of a common agreement.
Sole Proprietorship to Corporation
One of the main benefits of changing the company from a sole proprietorship to a corporation is increased customer confidence. This is because corporate status can mean more reliability. After all, it usually means a larger organization (Wassouf et al., 2020). In this regard, it affects the minds of clients and investors who can more easily invest their capital in a corporation rather than a sole proprietorship.
Another plus is continuity and the possibility of business transfer. In addition, such opportunities open up new ways to raise capital by selling shares. Thus, it can popularize the company and give it the necessary impetus for development. The corporation’s structure provides that the business can be transferred to other people by planning an inheritance or selling shares.
Among the disadvantages of changing the registration of the type of activity of the organization is the increase in the complexity of the vision of the business. A corporation’s business involves some additional legal and administrative procedures that must be followed (Hanelt et al., 2021). In some situations, the company may have difficulties in declaring income and reporting. This could lead to additional litigation and increased regulatory pressure.
Another significant disadvantage is the loss of broad autonomy. In a sole proprietorship, it is understood that the director can make all business decisions. At the same time, the transition to corporate activities will oblige us to consult with partners and major shareholders regarding all major decisions in the company. Thus, the separation of powers will mean restrictions on the owner of a large part of the organization.
Reasons to Change the Organizational Structure
Firstly, decisions about changing the type of organization should be based on several external and internal factors. This considers the many variations of events that can lead to outcomes that motivate people to change their form of entrepreneurship (Andersson et al., 2019). There are several main points regarding when it is most beneficial for a company to move from a sole proprietorship to another form of business.
One of the main factors that indicates that an organization should change its form of business from a sole proprietorship to another is active and rapid growth. This means that, in this case, the company will be able to realize its growth potential much better. This will allow us to start selling company shares and thus attract new investments to develop the organization.
Another reason for changing the organization’s registration type is its work in an area with increased financial risks. As mentioned above, a sole proprietorship means the business owner is responsible for the company’s obligations with their property. At the same time, the corporate structure is different in that the shareholders do not bear personal responsibility for the company’s bankruptcy (Rakova et al., 2021). Thus, this form of structure is safer in higher-risk markets.
Another reason an organization may change from sole proprietorship to another form is if a certain level of development has been reached where more complex structuring may be required. The change in formalization will allow the creation of a board of directors, which will open up opportunities for more effective adoption of strategic corporate decisions.
Conclusion
In conclusion, transitioning from various forms of corporate structure to a corporation can significantly improve performance in some cases. For such decisive action, however, certain triggers may make it necessary to decide whether it is worth changing the form of activity. In some cases, this may be due to the emergence of additional risks or the company’s rapid growth. Thus, a change in the form of activity can increase the organization’s growth by attracting more investment.
References
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Brunnermeier, M., & Krishnamurthy, A. (2020). Corporate debt overhang and credit policy. Brookings Papers on Economic Activity, 447-502. Web.
Hanelt, A., Bohnsack, R., Marz, D., & Antunes Marante, C. (2021). A systematic review of the literature on digital transformation: Insights and implications for strategy and organizational change. Journal of Management Studies, 58(5), 1159-1197. Web.
Kretschmer, T., & Khashabi, P. (2020). Digital transformation and organization design: An integrated approach. California Management Review, 62(4), 86-104. Web.
Milios, L. (2021). Towards a circular economy taxation framework: Expectations and challenges of implementation. Circular Economy and Sustainability, 1-22. Web.
Rakova, B., Yang, J., Cramer, H., & Chowdhury, R. (2021). Where responsible AI meets reality: Practitioner perspectives on enablers for shifting organizational practices. Proceedings of the ACM on Human-Computer Interaction, 5(CSCW1), 1-23. Web.
Wassouf, W. N., Alkhatib, R., Salloum, K., & Balloul, S. (2020). Predictive analytics using big data for increased customer loyalty: Syriatel Telecom Company case study. Journal of Big Data, 7, 1-24. Web.