Business Plan Center

Organizational structure: What's the best model for your business?

Consider these organizational frameworks as you look to grow your business.

Published: September 04, 2015
Updated: May 14, 2019

Your business may be relatively small and easy to manage now, but as it grows it is important to set up a formal organizational structure. Defining the structure and processes for your business can help establish clear channels of communication, empower employees and enhance your operating performance.

Consider one of these organizational structures when organizing or reorganizing your staff — then include an organizational chart in your business plan to keep track of your chain of command and hiring plans.

Functional organizational structure

What is it? The functional structure — the most common among small businesses — groups employees by line of work and creates efficient, logical reporting chains. For example, accountants report to the financial manager, salespeople report to the sales manager, and product developers report to the product manager. Managers report to the business owner.

Why? Functional organizational structures work best for employees with very specific responsibilities and for businesses that sell a single product or service. Employees can become experts in their functions, and the specialization encourages greater consistency in the development and delivery of products and services.

Why not? A potential drawback is a lack of communication and collaboration between departments.1

Divisional organizational structure

What is it? A divisional structure — more common for larger businesses — groups employees into self-sufficient teams, such as two product groups or two locations. For example, the production, accounting, and sales staff based in location A would report to one manager, while the production, accounting, and sales staff based in location B would report to a different manager. Managers report to the business owner.

Why? This model works well for businesses with multiple locations, multiple products or services, or even separate customer groups (an office supply store might target consumers as well as small businesses, for example). Decision-making for each division is often fast and flexible, and strategies can be targeted to each division's goals.

Why not? A potential drawback: There can be inconsistency in products and services, and competition rather than collaboration may break out between divisions.

There’s also the matrix structure, which is more common for larger businesses. That structure incorporates elements of both the functional and the divisional systems, assigning employees a functional manager as well as a product manager.2 

YYour organizational structure does not need to be set in stone, which will allow you to adapt to circumstances as your business evolves and grows.

Once you're ready to structure your staff, consider these three models to help you get started.


1 "Functional Structure of an Organization: Advantages, Disadvantages & Example."

2 "Matrix Organizational Structure: Advantages, Disadvantages & Examples."