Ministry of Education, Youth and Sports of Moldova

Free International University of Moldova

What is a company?

A company is an association or collection of individuals, people or “warm-bodies” or else contrived “legal persons”. Company members share a common purpose and unite in order to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals.

A company or an association of persons can be created at law as legal person so that the company itself can accept limited liability for civil responsibility and taxation incurred as members perform or fail to discharge their duty within the publicly declared “birth certificate” or published policy.

Because companies are legal persons, they also may associate and register themselves as companies – often known as corporate group. When a company closes it may need a “death certificate” to avoid further legal obligations.

The structure of a company

In business, company structure or organization structure means the relationships between positions and people who hold the positions. Organization structure is very important because it provides an efficient work system as well as a system of communication. First of all we should distinguish between the organizing function and organizing structure. The organizing function is the process of breaking down the overall task into small jobs along with delegated authority to do those jobs and then putting them back together in units, or departments, of an optimal size according to some consistent bases. Thus we can describe the organizing function as dividing task into jobs, delegating authority, determining appropriate bases for departmentalizing jobs, and deciding the optimal number of jobs in a particular department. It helps to coordinate effort and create authority relationships. Organizing structure is considered by many to be “the anatomy of the organization, providing a foundation within which the organization functions”. So the idea of a structure is a frame work – differentiation of position, prescriptions of authority. So structure helps to regulate the behavior of employees. There are different kinds of organization structure, and firms can change their organization structure by becoming more or less centralized. The main principle of modern management is that there isn't a structure that's the best – every appropriate structure depends on situation.

Most companies have a hierarchical or pyramidal structure, with one person or a group of people at the top, and an increasing number of people below them at each successive level. There is a clear line or chain of command running down the pyramid. All the people in the company know what decisions they are able to make, who their superior (or boss) is (to whom they report), and who their immediate subordinates are (to whom they can give instructions).

Types of Organizational Structure

Functional structure. Yet the activity of most companies is too complicated to be organized in a single hierarchy. Shortly before the First World War, the French industrialist Henry Fayol organized his coal-mining business according to the functions that it had to carry out. He is generally

credited with inventing functional organization. Today most manufacturing organizations have a functional structure, including (among others) production, finance, marketing, sales, and personnel or staff departments. This means, for example, that the production and marketing departments cannot take financial decisions without consulting the finance department. The functional structure works very well for small businesses in which each department can rely on the talent and knowledge of its workers and support itself. However, one of the drawbacks to a functional structure is that the coordination and communication between departments can be restricted by the organizational boundaries of having the various departments working separately.

Functional organization is efficient, but there are two standard criticisms. Firstly, people are usually more concerned with the success of their department than that of the company, so there are permanent battles between , for example, finance and marketing, or marketing and production, which have incompatible goals. Secondly, separating functions is unlikely to encourage innovation.

Divisional structure. A large organization manufacturing a range of products, having a single production department is generally inefficient. Consequently, most large companies are decentralized, following the model of Alfred Sloan, who divided General Motors into separate operating divisions in 1920. Each division had its own engineering, production and sales departments, made a different category of car (but with some overlap, to encourage internal competition), and was expected to make a profit.

Divisional structure typically is used in larger companies that operate in a wide geographic area or that have separate smaller organizations within the umbrella group to cover different types of products or market areas. The benefit of this structure is that needs can be met more rapidly and more specifically; however, communication is inhibited because employees in different divisions are not working together. Divisional structure is costly because of its size and scope. Small businesses can use a divisional structure on a smaller scale, having different offices in different parts of the city, for example, assigning different sales teams to handle different geographic areas.

Business that cannot be divided into autonomous divisions with their own markets can simulate decentralization, setting up divisions that deal with each other using internally determined transfer prices. Many banks, for example, have established commercial, corporate, private banking, international and investment divisions.

Board of directors

Sales & Marketing Production

Component Manufacture

Product Assembly

Human Resources Finance

Management Accounting

Financial Accounting

Research & Development Purchasing

Matrix function. An inherent problem of hierarchies is that people at the lower levels are unable to make important decisions, but have to pass on responsibility to their boss. One solution to this is matrix management which is a hybrid of divisional and functional structure. Typically used in large multinational companies, the matrix structure allows for the benefits of functional and divisional structures to exist in one organization. For example, a project manager with an idea might be able to deal directly with managers responsible for a certain market segment and for a geographical region, as well as the manager responsible for the traditional functions of finance, sales and production. This is one way of keeping authority at lower levels, but it is not necessarily an efficient one.

A further possibility is to have wholly autonomous, temporary groups or teams that are responsible for an entire project, and are split up as soon as it is successfully completed. Teams are often not very good for decision-making, and they run the risk of relational problems, unless they are small and have a lot of self-discipline. In fact they still require a definite leader, on whom their success probably depends.

Types of companies

Companies limited by guarantee. This is an alternative type of corporation used primarily for non-profit organizations that require legal personality. A company limited by guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of winding up of the company. It is often believed that such a company cannot distribute its profits to its members but (depending on the provision of the articles) this is not actually true. However, a company that is limited by guarantee that distributes its profits to members would not be eligible for charitable status.

Common uses of companies limited by guarantee include clubs, membership organizations, including students’ unions, residential property management companies, sport associations, workers’ co-operatives, other social enterprises, non-governmental organizations (NGOs), and charities. One of the largest companies limited by guarantee is Bupa, the healthcare company, which has 10.7 million customers in more than 190 countries and which employs more than 52,000 people around the world.

Companies limited by shares. This is the most common form of company used for business ventures. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company.

“Limited by shares” means that the company has shareholders, and the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal values of the shares and any premium paid in return for the issue of the shares by the company. A shareholder’s personal assets are thereby protected in the event of the company’s insolvency, but money invested in the company will be lost.

A limited company may be “private” or “public”. A private limited company’s disclosure requirements are lighter but for this reason its shares may not be offered to the general public (and

therefore cannot be traded on a public stock exchange). This is the major distinguishing feature between a private limited company and a public limited company. Most companies, particularly small companies, are private. A private company by shares and an unlimited company with a share capital may re-register as a public limited company.

Companies limited by guarantee with a share capital. A hybrid entity usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.

Unlimited companies with or without a share capital. A hybrid company incorporated either with or without a share capital but where the liability of the members or shareholders is not limited – that is, its members or shareholders have a joint, several unlimited obligation to meet any insufficiency in the assets of the company in the event of the company’s formal liquidation. The joint, several and unlimited liability of the members or shareholders of the company to meet any insufficiency in the assets of the company only applies upon the formal liquidation of the company. Therefore, prior to any such formal liquidation of the company, any creditors or security holders of the company may only have recourse of the assets of the company and not to those of its members or shareholders.

Until such event occurs (formal liquidation) - an unlimited company is similar with its counterpart the limited company where its members or shareholders have no direct liability to the creditors or security holders of the company during its normal course of business or existence.

An unlimited company has the benefit and status of incorporation same as its limited company counterpart. Situations where an unlimited company will be preferred to an alternative business model or its limited company counterpart include:

Secrecy concerning financial affairs is desired, effectively shielding and protecting its financial affairs from its competitors and making them non-public information including shareholder dividend payments.

The company is trading in an area where limited liability is not acceptable, vital or practical. Extending, in general, a greater assurance and confidence to creditors - in contrast to its limited

company counterpart. There is a low risk of insolvency. The company or its trading activities has or generates sufficient capital, funds or financing

without need to approach general lenders such as high-street retail banks. Developing more advantageous company and business capital strategies in an ever increasing

irreversible trend of bank disintermediation by companies and their management. A focused higher standard of board of directors and executive management behavior (or probity)

and business model for risk management.Once formed or incorporated, an unlimited company can in some jurisdictions also re-register and designate itself to limited company status at any time with few formalities, the same also extends to a limited company which may at any time re-register and designate itself to an unlimited company status.

Limited-liability companies (LLC). “ A company – statutorily authorized in certain states – that is characterized by limited liability , management by members or managers, and limitations on

ownership transfer” A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.

LLC members are subject to the same alter ego piercing theories as corporate shareholders. However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. So long as the LLC and the members do not commingle funds, it would be difficult to pierce its veil. Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.

Moldovan legislation contemplates LLCs as Societate cu Răspundere Limitată, abbreviated "S.R.L.", and are regulated member(s)-founder(s), and other non-founder members, minimum one member-founder and maximum total of 50 members, at least one of them must be the founder of the company, but all of the 50 could be also founders.