research on business structure

Fitter, flatter, faster: How unstructuring your organization can unlock massive value

Serves clients on a broad array of topics ranging from strategy to organizational design and transformation across industries, including consumer goods, retail, and fashion; leads our organization design work and helps companies through multiyear organizational transformations, focusing on bringing operating models in line with the realities of the markets, strategic shifts, and other success factors

Helps clients in multiple industries pursue enterprise agility and flexible organization models; establishes breakthrough accountability to reduce complexity and applies change management approaches to mobilize organization-wide transformation

August 24, 2020 The majority of organizations still use a hierarchical model, where each role is carefully documented and cemented through a system of boxes and lines. In this paradigm, accountability gets buried in the depth of complex organizational structures. With businesses and government agencies alike facing unprecedented disruption, having the flexibility and speed to quickly make decisions  and get work done has never been more important.

Digging out from under the many management layers and antiquated hierarchies may seem impossible, but it’s not. Some organizations have successfully “unstructured” to become fitter, flatter, and faster , unlocking massive value. Many organizations are experimenting with dynamic operating models, such as the “ helix ” model and the agile “ network of teams ,” enabling them to move at the pace of change around them. This blog post highlights what these organizations have done right and what others can learn from them.

Leaders can take five actions to implement a structure that will help them organize for the future .

Cumbersome management layers are the enemy of speed and agility. Leaders should throw out the old rules about the most effective ratios for spans and layers. In a highly digitally enabled world—where bosses are there to empower  and enable  their employees, not micromanage them, we see often spans as around 1:30. Even the largest organizations shouldn’t have more than six layers; in truly agile organizations, we often see only three layers.

Whether a global pandemic or some other crisis, organizations of all kinds are faced with emerging, fast-moving disruptions in their industries. They need to be able to stand up and dissolve agile teams quickly, easily, and effectively—and with minimal requirements on leadership time and resources.

The helix  model has gained traction recently. Its key idea lies in disaggregating the traditional split of management tasks into two distinct parallel lines of accountability. The capability line is organized in stable skill-pools, where managers are responsible for the long-term care, development, and training of employees . The value creation line, made up of the highest-priority initiatives, is where employees work on a day-to-day basis. The value creation manager ensures that people know what to do on a day-to-day basis.

The organizational structure of the future is designed to ensure that critical people close to the front lines—therefore to the customer or constituent and the product or service—have a voice and are heard. These people typically are close to where value is created or where risks are borne. Empowering these employees to speak up and get involved often requires a cultural shift and close collaboration with the leadership team.

Effective decision making is one of the most important elements of the post-pandemic organization . The flattened structure can accelerate decision making by minimizing unnecessary management layers; ensuring people are clear about their roles, responsibilities, and decision rights; and empowering the front lines to make decisions within guardrails.

For the new structure to be effective, other enablers must be present. For example, leaders should ensure the organization has an effective performance management system, clear strategic planning and resource allocation processes, a transparent and dynamic talent marketplace, and a corporate center that facilitates long-term performance and organizational health .

Organizations should build on the momentum gained from their response to the pandemic and ensure their organizational structures are set up to enable and supercharge their strategic goals—not hold them back.

This blog post is part of a series on Future of work , which explores a set of new principles such as anti-fragility and experimentation that are becoming increasingly critical for today’s organizations as they build more creative, adaptable, and human systems.

Learn more about our People & Organizational Performance Practice

4 Types of Business Structures — and Their Tax Implications

When starting, a new business must select a business structure, which will have both legal and tax implications. And, the choice of business structure is a monumental step for a new company. It can affect ongoing costs, liability and how your business team can be configured. This topic becomes particularly timely during tax season, as your business’ structure has direct tax implications.

Have no fear: Below, we outline the most common types of business structures and their respective tax ramifications.

What Is a Business Structure?

A business structure is a type of legal organization of a business. When starting a new business, it’s important to take time to decide on the right type of business entity. The business structure you choose doesn’t have a lot of impact on the day-to-day operation of your business, but it is extremely important in defining ownership, limiting personal liability, managing business taxes, and preparing for future growth.

At a basic level, business entities establish the business as a legal entity that can have bank accounts, enter into contracts, and conduct business without putting everything in your own name. For some very small businesses, working under your own name may be okay, but if you plan to earn a full-time income from the business, sign contracts, or hire employees, it’s likely in your best interest to choose a business structure and register with your state.

Key Takeaways

• A business structure is a form of legal organization for a business.
• The right business structure may offer personal liability protection and other benefits.
• Most businesses should choose a business structure and register with their state.
• There are unique pros and cons of each type of business structures for every business.

Business Structures Explained

If you’ve ever had a job, rented a home, or bought a car, you likely signed a contract where you were acting as yourself. However, on the other side of the contract, the signature lines may show someone signing on behalf of a business. For that business to enter into a contract, it must use a recognized business structure and maintain an active registration with the state government.

When you sign a contract or do business as yourself, which is the default if you start a business and don’t register, you are personally liable for anything that goes wrong. If you make a mistake with a client or someone is injured by your product or service, you could be personally liable for any financial damages. That means they can sue you and go after your personal bank accounts, investments, home, and other assets in the suit. When you operate a registered business and follow best practices, your personal assets are protected.

By default, your business is considered a sole proprietorship, where you are the business and transact under your own name. When you create an LLC, corporation, or partnership, that new entity takes your place on contracts. Once you reach a certain income level, if you’re running the business full-time, there are additional tax benefits as well.

However, business entities are not free. Every state requires different fees to start and maintain a business. You may be able to file the registration paperwork on your own, but many people choose to hire a lawyer to ensure the business is created correctly and stays in compliance with local, state, and federal laws. Because every business and business owner is unique, it may be worthwhile to consult with a legal or tax professional for advice on choosing the best business structure for your long-term goals.

What Are the Four Types of Business Structures?

1. sole proprietorship.

A sole proprietorship is the most common type of business structure. As defined by the IRS (opens in new tab) , a sole proprietor “is someone who owns an unincorporated business by himself or herself.” The key advantage in a sole proprietorship lies in its simplicity. Here, there is no distinction between the business and the individual who owns it — which means that the owner is entitled to all profits. However, it also means that the sole proprietor is responsible for all the business’s debts, losses and liabilities. This means that creditors or lawsuit claimants may have access to the business owner’s personal accounts and assets if the business accounts cannot cover the debt. Examples of sole proprietorship include freelance writers, independent consultants, tutors and caterers.

Overview of liabilities

Liabilities are defined as a company’s financial debts or obligations that arise during business operations.

Limited liability is a type of legal structure where a corporate loss will not exceed the amount invested in a partnership or LLC. In other words, investors’ and owners’ private assets are not at risk if the company fails. So, if a company with limited liability is sued, then the claimants are suing the company; personal assets can’t be touched.

Whereas personal liability is when a business owner’s assets can be used to satisfy any business debts.

However, "piercing the corporate veil" is the most common in close corporations to settle debts and can occur when serious misconduct takes place. This is when courts put aside limited liability and hold a company’s shareholders personally liable for the corporation’s actions or debts.

Pass-through entity

In terms of tax implications, sole proprietorships are considered a “pass-through entity.” Also known as a “flow-through entity” or “fiscally transparent entity,” this means that the business itself pays no taxes. Instead, taxes are “passed through” to the owner. Pass-through entities are not subject to corporate income tax. Profits pass through to owners who pay them in their personal returns under ordinary income tax rates on the typical Tax Day, usually April 15.

• No cost to start — You are a sole proprietor by default.
• Easy to maintain — There are no ongoing registration or legal requirements to start, maintain, or shut down a sole proprietorship.
• Personal liability: You are personally liable for anything that goes wrong related to the business.
• No tax benefits: You must pay self-employment tax on all earnings and include business earnings on your personal tax return using Schedule C.
• Less professional: Clients and customers may find you to be unprofessional unless you operate a legally registered business. You may also struggle to get business financing.

2. Partnership

In business structure, a partnership is (opens in new tab) “the relationship existing between two or more persons who join to carry on a trade or business.” Partnerships have three common types of classifications: a general partnership (opens in new tab) , limited partnership (opens in new tab) or a limited liability partnership (opens in new tab) .

• General partnership: Consists of two or more partners who share all liability and responsibility equally. This means the partners both take part in the day-to-day operations of the business. It also means that the partners are equally liable for any debts generated by the business. All partners are considered “general partners.”
• Limited partnership (LP): Has at least one “general partner” and one “limited partner.” A general partner assumes ownership of the business operations and unlimited liability. A limited partner, also known as a silent partner, invests capital in the business. However, limited partners are not involved in the day-to-day operations and don’t have voting rights (opens in new tab) and therefore have limited liability.
• Limited liability partnership (LLP): In this arrangement, all partners have limited personal liability, which means they are not liable for wrongdoings (i.e. acts of malpractice or negligence) committed by other partners. All partners in an LLP can be involved in the management of the business. It tends to be more flexible than the previous partnership forms because partners can determine their own management structure.

Like a sole proprietorship, partnerships are considered a pass-through entity when it comes to taxation. In many ways, a partnership is like an expanded sole proprietorship — but with the advantages and disadvantages that comes with a partner. A partner can provide expertise, skills and capital for the business. But while they can affect the business positively, they can also impact it negatively. You should be comfortable with whomever you enter into business with.

Partnership tax returns are due the fifteenth day of the third month after the end of the entity’s tax year, which is typically March 15 (or March 16 in 2020). However, while the taxes are filed in March, partners don’t tend to pay taxes on the business until the April deadline (July 15 in 2020) since it passes through to their personal tax return.

• Relatively easy to create: Creating a partnership with your state is a relatively simple process.
• May offer liability protections: Limited Partnerships and Limited Liability Partnerships may offer personal financial and legal liability protection.
• May not protect from all liabilities: Partnerships may not shield all personal liability depending on the specific business structure and operations.
• More complex tax requirements: Partnerships must file their own tax returns and supply additional forms to partners for personal taxes.

3. Limited liability company

Now, a limited liability company (LLC) is where things start to get a little dicey. The IRS states that an LLC is a “business structure allowed by state statute.” That means it is formed under state law and the regulations surrounding LLCs vary from state to state. Depending on elections made by the LLC and its characteristics, the IRS will treat an LLC as either a corporation, partnership or as part of the LLC’s owner’s tax return (i.e. a “ disregarded entity (opens in new tab) ” with many of the characteristics of a sole proprietorship).

An LLC is considered a hybrid legal entity because it has traits of numerous other business structures, depending on the elections made by the owners. This lends it more protections and flexibility than some of its business structure counterparts. From a protections perspective, members of an LLC are not personally liable. Because the LLC is an entity created by state statute, it has flexibility in regards to federal tax treatment. For instance, a single-member LLC (opens in new tab) can be taxed as a sole proprietorship or a corporation. A multi-member LLC (opens in new tab) can be taxed as a partnership or a corporation.

The aforementioned flexibility causes some discrepancies when it comes to the federal tax due date.

• An LLC that chooses to be viewed federally as a sole proprietorship or C corporation (find more on C corporations types below) will typically have a federal tax filing and payment due date of April 15.
• However, an LLC being taxed as an S corporation or partnership will typically have a federal tax filing due date of March 15 and a payment deadline in line with their individual income return.
• Liability protection for one or more owners: When established and operated correctly, an LLC offers liability protection for owners, including a single owner.
• Choose between two taxation methods: Choose between pass-through taxation or S Corp taxation depending on which is more beneficial to owner finances.
• Potential for major tax savings: Owners who work in the business full-time may save on self-employment taxes with S Corp taxation.
• Costs to establish and maintain: LLCs require government forms and fees to establish and maintain.
• More complex tax requirements: Tax preparation may be more complex, particularly if you opt for S Corp taxation.

4. Corporation

Corporations are a company or group of people authorized to act as a single legal entity. This means that the company is considered separate and distinct from its owners (i.e. there’s no personal liability here). However, a corporation is eligible for many of the rights that individuals possess, hence why it is sometimes referred to as a “legal person.” (opens in new tab) For instance, a corporation can sue or be sued, enter into contracts and is entitled to free speech.

The IRS splits corporations into two separate classifications: the “C corporation” and the “S corporation.”

• C corporation (C corp): A C corporation is considered the default designation for corporations. All corporations start in the “C” classification when filing articles of incorporation with the state’s business filing agency. Unlike our preceding business structures, C corporations are not a pass-through entity. They are taxed twice at a corporate and personal income level, which is referred to as double taxation.
• S corporation (S corp): An S corporation is distinctively different from a C corporation because it is a pass-through entity, allowing it to avoid double taxation. However, the IRS institutes strict standards (opens in new tab) for companies looking to qualify for S corporation status, particularly around shareholders. For instance, an S corporation can only have 100 shareholders, and they must be U.S. citizens/residents. (It’s not unusual for startups to issue 100,000 shares of stock (opens in new tab) at their outset.)

Like partnerships, an S corporation must always file its annual federal tax return by the fifteenth day of the third month following the end of the tax year, generally March 15. The income is then passed down to its members individual returns, which adhere to the normal April Tax Day.

Corporations are the only business tax structure allowing for perpetual existence. This means that its continuance is not affected by the coming and going of shareholders, officers and directors.

• Extensive liability protections: S Corp and C Corp owners are shareholders and receive more extensive legal protection if the business operates correctly.
• Corporation acts as a legal person: The corporation can enter contracts and transact as its own legal entity.
• Can have unlimited shareholders: S Corporations may have up to 100 shareholders. C Corporations can have unlimited shareholders.
• More costly to establish and maintain: Corporations typically require more work and higher fees to establish and maintain.
• Detailed ongoing requirements: Corporations have requirements such as annual meetings, appointing a board of directors, and other state-imposed regulations.

What Are the Tax Pros and Cons of Each Business Structure?

Choosing a business structure.

The best business structure for your company depends on your long-term goals, ownership, plans to hire employees, and legal risk. While some very small businesses and side hustles may operate safely as a sole proprietorship, most businesses are better off registering a business with their state.

The best business structure for businesses that don’t plan to bring in outside investments is often an LLC, as it works for one or more owners with lower startup and maintenance requirements than a full corporation. If your business employs one or more owner full-time, it could make sense to register as an LLC and opt for taxation as an S Corporation.

If you plan to bring in outside investment rounds and may grow into a publicly traded company in the future, the best business structure is a C Corporation, as that structure allows for 100 or more shareholders.

Because of the important tax and legal implications, it’s often well worth the cost to consult with an attorney or tax expert for advice on the best business structure for your needs and goals.

#1 Cloud ERP Software

Choosing a legal business structure is a critical step in your business's lifecycle. It affects everything from the ability to attract investors to personal liability and government paperwork.

Businesses owners should weigh their own personal circumstances and long-term business goals against the costs to pick the best possible legal structures. Once you have that important decision locked in, it's back to focusing on what's most important: running your day-to-day operation for maximum business profits.

Business Strategy

What Are Business Metrics? 35 Metrics Businesses Need to Track

Companies can improve their profitability in three ways: generate more revenue for a given cost, generate the same revenue for a lower cost or both. All methods require measuring and tracking operational performance meticulously…

More On This

Trending Articles

Learn How NetSuite Can Streamline Your Business

NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.

Before you go...

Discover the products that 37,000+ customers depend on to fuel their growth.

Before you go. Talk with our team or check out these resources.

Want to set up a chat later? Let us do the lifting.

NetSuite ERP

Explore what NetSuite ERP can do for you.

Business Guide

Complete Guide to Cloud ERP Implementation

• Credit cards
• View all credit cards
• Banking guide
• Loans guide
• Insurance guide
• Personal finance
• View all personal finance
• Small business
• Small business guide
• View all taxes

You’re our first priority. Every time.

We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.

So how do we make money? Our partners compensate us. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners .

Business Structure: How to Choose the Right One

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .

Designing a killer website, prototyping your product, talking your way to your first big order — these parts of starting your business likely stir your entrepreneurial passions.

The business structure of your new enterprise? Not so exciting.

But hold on. Careful consideration of which structure is right for you is crucial because it will have implications for how the IRS taxes your business profits. It’ll also determine whether your personal property is protected when others demand money from your business. Other considerations, including the management of the new business and your long-term plans for it, come into play as well.

Below, we’ve outlined types of business structures and what to consider before choosing one.

ZenBusiness

$0 + state fees  

Business structure options

Business structures are largely creations of state law, so there are minor variations on the details from state to state. Here are five common models:

Sole proprietorship

An unincorporated business that is owned by one person who reports business profits on his or her individual tax return. A sole proprietorship is the simplest business structure and is straightforward to start.

Partnership

An unincorporated business owned by multiple owners, either people or other businesses. Profits are divided among its owners and reported on their tax returns. Common partnership types include general partnerships , limited partnerships, limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs).

Limited liability company (LLC)

An LLC is a hybrid business structure that limits the personal liability of its owners — called members — like a corporation but allows the profits to be taxed on either a member level or the corporate level.

S corporation

An S corporation has one class of stock and no more than 100 shareholders, none of whom can be another for-profit business or a person without a green card who doesn’t meet IRS residency requirements . Profits are taxed on shareholders’ tax returns, and shareholders have limited liability.

C corporation

A corporation whose profit is taxed once on the business level and a second time on an individual basis when earnings are distributed to shareholders, who have limited liability for the business’s debts. C corporations can have multiple classes of stock and an unlimited number of shareholders.

Switching business structures is possible, but it's best to decide early on which one you'll need for the next few years. It can get complicated — not to mention pricey, in terms of legal fees — to change structures, and the effort could distract from running your business.

Choosing your business structure: What to consider

What’s your tolerance for risk to personal assets.

When you run a business, you’re at greater risk for a lawsuit. Why? Businesses interact with the world — other businesses, government, regular people — much more than most individuals, and when they do, there’s a good chance money’s involved.

In a sole proprietorship, if your business is sued and loses, your personal assets — real estate, cars, bank accounts — can be targets for the parties seeking to collect damages. The same can be said, in some cases, if you default on a business loan and you signed a personal guarantee, or the lender placed a lien on your assets. The lender can attempt to recover its investment from your personal property.

In a general partnership, creditors can go after any of the partners’ personal assets to recoup the whole debt. It’s different in a limited partnership, where only the general partners are personally liable for the debts of the business, while limited partners are liable for the business’s debts only up to the amount of their investment. More common among lawyers are limited liability partnerships, which limit partners’ liability for the firm’s debts but still hold them individually liable for their professional activities. There are also limited liability limited partnerships, a sort of limited partnership that extends limited liability to general partners, not just limited partners.

LLCs and corporations limit their members’ or shareholders’ liability, so personal assets are protected.

» MORE: LLC vs. corporation

How do you want the IRS to tax your business profits?

Sole proprietorships, partnerships and S corporations are pass-through entities , as are some LLCs. In a pass-through entity, profits are passed directly to the owners of the business. Come tax time, it is reported on the owners’ individual returns.

By default, the IRS views LLCs as pass-through entities unless they opt to be taxed as a corporation.

C corporations are separate entities from their owners, so their profits are taxed at the corporate level. If a corporation pays out dividends, which come out of its after-tax income, shareholders also must pay taxes on their proceeds.

How formal do you want your management structure to be?

If multiple owners are involved, structuring the business can be more complicated.

Partnerships are typically governed by agreements that specify how profits from the business are divided among parties and what happens when a partner retires, becomes disabled, declares bankruptcy or dies.

An S corporation or C corporation is required by law to have a board of directors to oversee the company’s direction on behalf of the shareholders.

An LLC structure generally allows the choice between being managed by members or overseen by a management team, which can include members or nonmembers. LLCs typically draw up an operating agreement that specifies roles.

How much administrative complexity can you handle?

For noncorporation business structures, initial paperwork and fees are relatively light, and are simple enough for owners to handle without special expertise (though it’s a good idea to consult a lawyer or an accountant for help). Ongoing requirements usually come on an annual basis.

For S and C corporations, the administrative complexity increases, and you will almost certainly need a lawyer and accountant. In every state, there are tax and legal hoops to jump through for corporations to become and remain compliant. Failure to meet deadlines, pay certain fees and file the proper forms can result in penalties.

What are your long-term goals for the business?

The right structure doesn’t just depend on the state of your business today; it also depends on where you would like to be in three to five years, or even longer.

If you’re looking for fast growth, which takes cash, C corporations allow for multiple classes of stock and don’t restrict the number or type of shareholders. They’re the best fit if you’re seeking investments from venture capitalists, or if you plan on becoming a publicly traded company, rather than a privately owned one, in the near- or mid-term.

Another consideration is what happens when you or another owner dies, goes bankrupt or withdraws. Corporations live on after these events, but generally the other types of business structure dissolve unless specified otherwise beforehand.

On a similar note...

• Tools and Resources
• Customer Services
• Business Education
• Business Law
• Business Policy and Strategy
• Entrepreneurship
• Human Resource Management
• Information Systems
• International Business
• Negotiations and Bargaining
• Operations Management
• Organization Theory
• Organizational Behavior
• Problem Solving and Creativity
• Research Methods
• Social Issues
• Technology and Innovation Management
• Share This Facebook LinkedIn Twitter

Article contents

Institutional theory in organization studies.

• Robert J. David , Robert J. David Department of Management, McGill University
• Pamela S. Tolbert Pamela S. Tolbert Department of Organizational Behavior, Cornell University
•  and  Johnny Boghossian Johnny Boghossian Department of Management, Laval University
• https://doi.org/10.1093/acrefore/9780190224851.013.158
• Published online: 23 December 2019

Institutional theory is a prominent perspective in contemporary organizational research. It encompasses a large, diverse body of theoretical and empirical work connected by a common emphasis on cultural understandings and shared expectations. Institutional theory is often used to explain the adoption and spread of formal organizational structures, including written policies, standard practices, and new forms of organization. Tracing its roots to the writings of Max Weber on legitimacy and authority, the perspective originated in the 1950s and 1960s with the work of Talcott Parsons, Philip Selznick, and Alvin Gouldner on organization–environment relations. It subsequently underwent a “cognitive turn” in the 1970s, with an emphasis on taken-for-granted habits and assumptions, and became commonly known as “neo-institutionalism” in organizational studies. Recently, work based on the perspective has shifted from a focus on processes involved in producing isomorphism to a focus on institutional change, exemplified by studies of the emergence of new laws and regulations, products, services, and occupations. The expansion of the theoretical framework has contributed to its long-term vitality, though a number of challenges to its development remain, including resolving inconsistencies in the different models of decision-making and action ( homo economicus vs. homo sociologicus ) that underpin institutional analysis and improving our understanding of the intersection of socio-cultural forces and entrepreneurial agency.

• institutional theory
• institutional entrepreneurship
• institutional logics
• institutional change
• market categories
• organizational forms
• organizational structure

In contemporary organization studies, research under the banner of institutional theory encompasses a large body of theoretical and empirical work connected by a common emphasis on social norms and shared expectations as key sources of organizations’ structures, actions, and outcomes. While institutional theory is widely recognized as one of the most prominent approaches to organizational research today (David & Bitektine, 2009 ; Greenwood, Oliver, Sahlin, & Suddaby, 2008 ), substantial differences exist among scholars about both the referents of key concepts and the core assumptions regarding how social norms and expectations affect organizations. For example, some use “institution” to denote a specific organizational practice or requirement (Meyer & Rowan, 1977 ), while others use the term to refer to whole organizations (Selznick, 1949 ) or to broad systems of norms and values that characterize a given sector of society (Friedland & Alford, 1991 ). Likewise, classic formulations have been criticized as providing little or no room for individual agency (DiMaggio, 1988 ), while others assert that key arguments (e.g., about decoupling) imply highly strategic actors (Tolbert & Zucker, 1996 ).

This overview of institutional theory in organization studies begins with a general summary of key ideas and arguments from foundational work in this tradition. 1 This is followed by a discussion of two research streams that arose from the critiques and controversies that developed around the concepts and implicit theoretical assumptions contained in foundational work: one on institutional entrepreneurship and the other on institutional logics. Two areas of inquiry garnering increasing attention within the tradition—the emergence of new market categories and the role of the state in institutional change—are then discussed. Some thoughts about the continued promise and attractiveness of the perspective and suggestions for further theoretical and empirical development are offered in conclusion.

Foundations

Early analyses of organizations by sociologists used the term “institutional” to refer broadly to aspects of organizations involved in mediating relations with external constituencies, and more specifically to securing favorable perceptions of an organization by constituents as a way, ultimately, of ensuring flows of necessary resources. This is exemplified in an early statement by a key proponent of structural-functionalist theory, Talcott Parsons ( 1956 ), who elaborated a “cultural-institutional” view of organizations in the first issue of the Administrative Science Quarterly . Parsons ( 1956 , p. 67) argued that, as components of a larger social system (society), organizations need to demonstrate “basic acceptance of the more generalized values of the superordinate system.” In this context, he distinguished three broad organizational levels, each with distinctive functions: technical (production activities), managerial (coordination and control), and institutional (managing external relations) (Parsons, 1960 ). In Parsons’s view, the institutional level was critical to articulating the connection between an organization’s espoused goals and the functioning of the larger society, thus providing the organization with general legitimacy—a process that would become a central theme in institutional research on organizations.

Philip Selznick ( 1957 ), drawing on both Parsons’s work and Barnard’s ( 1938 ) earlier analysis of the functions of top management, amplified this argument by identifying institutionalization as a key task of organizational leaders. In his exposition, institutionalization entailed linking an organization to larger societal values in the public’s mind, thus enhancing its long-run survival. “Organizations become infused with value as they come to symbolize the community’s aspirations, its sense of identity … An organization that does take on this symbolic meaning has some claim on the community to avoid liquidation or transformation on purely technical or economic grounds” (Selznick, 1957 , p. 19). Thus, Selznick equates “institution” to an organization that has come to be seen as embodying key societal values (Kraatz & Flores, 2015 ). His emphasis on leaders’ role in this process reflects his earlier research (Selznick, 1949 ) on the highly contentious founding of an organization by the U.S. government in the 1930s, the Tennessee Valley Authority (TVA). Characterized as the country’s only serious flirtation with socialism (Perrow, 1972 ), at the outset the TVA faced strong criticism from political opponents, leading it to focus on one element of its mandate, embodying grassroots democracy in its governance structure, thus tying itself to a basic societal value.

This approach to organizational analysis was largely eclipsed from the late 1950s through the 1970s by the rise of what came to be known as contingency theory (Donaldson, 2001 ). Scholars in this tradition focused on explaining variations in different aspects of organizations’ formal structure, relying (at least implicitly) on a few key theoretical assumptions (Schoonhoven, 1981 ). One was that elements of formal structure in an organization, such as average job specialization, codification of work procedures, and the relative proportion of supervisors to line workers, resulted from efforts to maximize the efficiency of production activities. A second assumption was that the efficiency of particular structures depended on (i.e., was contingent on) organizational attributes such as the size and dominant technology of an organization (see Scott, 1975 ). By the 1970s, an increasing number of studies in this tradition had begun to shift focus from internal organizational attributes to environmental relations as important contingencies, but the underlying theoretical assumptions of earlier work were retained (e.g., Lawrence & Lorsch, 1967 ): formal structure was treated as the outcome of decisions by autonomous actors, driven primarily by concerns of efficient production.

In the late 1970s, a now-classic paper by Meyer and Rowan ( 1977 ) significantly challenged this view, marking the beginning of contemporary institutional theory, sometimes denoted as “neo-institutional theory.” A key insight underpinned their analysis, namely that formal structures have symbolic properties as well as action-generating ones. Thus, specific structures—for example, formalized hiring requirements (Tolbert & Zucker, 1983 ), a human resources office (Baron, Dobbin, & Jennings, 1986 ), or a chief financial officer (Zorn, 2004 )—can be invested with cultural meaning, signifying values such as rationality, equal opportunity, or the importance of shareholders as a constituency. Under this condition, organizations may adopt such structures as a way of signaling a commitment to the associated values. Importantly, and in contrast to Selznick’s ( 1957 ) older conception of “institutions” as specific organizations that had acquired the patina of broad social values, post-Meyer and Rowan, the term came to be identified with particular sub-organizational elements of formal structure (policies, practices, job titles, etc.) that had such a patina. Such elements could diffuse across communities of organizations, a process that attracted considerable empirical attention within institutional theory. The diffusion of elements was equated with their “institutionalization,” now used to refer to increasing acceptance of an element as an appropriate component of well-managed, legitimate organizations. Thus, diffusion and institutionalization were theorized to be reinforcing: as more organizations adopted a particular structural element, it gained greater social acceptance (became progressively institutionalized). This, in turn, led to increasing conformity pressures on organizations that had not yet adopted it to do so, accelerating its diffusion (Tolbert & Zucker, 1983 ). These arguments were reflected in a spate of studies examining the diffusion of various practices across organizations (e.g., Baron et al., 1986 ; Zorn, 2004 ; Okhmatovskiy & David, 2012 ) but were soon to be challenged as insufficiently nuanced because they neglected consideration of forces mitigating against such pressures for increased diffusion (Abrahamson, 1996 ; Ahmadjian & Robinson, 2001 ; David & Strang, 2006 ; Oliver, 1991 , 1992 ).

In sharp contrast to the then-dominant approach of contingency theory, this approach implied that the creation of formal structures in an organization may be independent of any concern related to quality or costs of production. It also challenged the assumption, common to economics-based explanations of organizational behavior, that efficiency and quality of output are necessarily the most important determinants of organizational survival (see Meyer & Zucker, 1989 ; Sine, David, & Mitsuhashi, 2007 ; Zucker, 1983 ).

Similarly, it directed organizational scholars’ attention to external factors unrelated to production processes, such as the passage of legislation, political pressure by social movement activists, and the development of strong norms within an organizational network, in explaining formal structure. In this context, DiMaggio and Powell ( 1983 ) argued for more attention by researchers to forces producing high levels of homogeneity among organizations rather than those producing variation. Elaborating on Meyer and Rowan ( 1977 , pp. 347–348), they identified three key forces. One was coercive pressures, often created by government-sponsored mandates that affect organizations, but also by the demands of powerful, resource-controlling organizations. A second was imitative pressures, resulting from decision-makers’ reliance on other organizations’ observed behavior as a guide for their own organization. The third was normative pressure, social expectations generated through the implicit or explicit lobbying efforts of professionals and other actors for the adoption of particular policies and practices. In fact, as Zucker ( 1977 ) showed in a lab experiment using the autokinetic effect, conformity pressures of this kind could be produced in organizations with relative ease. Scott ( 1995 ) expanded further on these pressures for homogenization, describing three “pillars” of institutions, which he labeled regulatory, cultural-cognitive, and normative. Notably, DiMaggio and Powell’s ( 1983 , p. 148) theory of organizational homogeneity directed attention to the “organizational field” as both a construct and a unit of analysis. Fields, defined as the “totality of relevant actors” surrounding any focal organization or constituting any sphere of organizational life, thus became a potential object of study for institutional theorists.

This approach to thinking about organizations fit well with the growing interest of scholars in exploring environmental relations as sources of organizations’ actions, and meshed with a cumulating body of work on organizational decision-making that stressed inherent limits on decision-makers’ ability to make highly rational choices (Cyert & March, 1963 ; March & Simon, 1958 ; Simon, 1947 ; Weick, 1969 ). In this context, the rapid acceptance and spread of institutional theory as a framework for organizational analysis is perhaps unsurprising. Its continued dominance in the field of organizational studies is evinced in a variety of ways. For example, three foundational studies in this tradition—by Meyer and Rowan ( 1977 ), Zucker ( 1977 ), and DiMaggio and Powell ( 1983 )—have garnered over 70,000 citations to date, according to Google Scholar. Likewise, a steady stream of special journal issues and edited volumes dedicated to the tradition attests to its continued vitality (e.g., Dacin, Goodstein, & Scott, 2002 ; Greenwood et al., 2008 ; Greenwood, Oliver, Lawrence, & Meyer, 2017 ; Powell & DiMaggio, 1991 ; Zucker, 1988 ).

In part, institutional theory’s continued prominence reflects extensions of the framework over time, aimed at addressing perceived problems and limitations of early theoretical formulations. These generated a number of different streams of work, most notably work on institutional entrepreneurship and institutional logics.

Institutional Entrepreneurship

One of the earliest critiques of foundational work was offered by DiMaggio ( 1988 , p. 4), concerning institutional theory’s inattention to the problem of “agency.” In his words, “institutional theory has no explicit or formal theory of the role that interests play in institutionalization and … [thus] distracts attention from the ways in which variations in the strategies and practices of goal-directed actors may be related to variation in organizational structures, practices and forms.” As he noted, in part, this problem reflects the incorporation of a phenomenological perspective on social interaction (e.g., Berger & Luckmann, 1967 ; Garfinkel, 1967 ) into theoretical arguments. For phenomenologists, a key issue is to explain how social interaction can be sustained over time. Explanations typically emphasize processes through which individuals develop shared interpretations of particular behaviors, and the way in which such shared meanings serve to constrain behavior. The constraining effects occur in part because the behaviors become habitual (taken for granted), and in part because actors seek to avoid anticipated negative social reactions to nonconformity. Foundational work in institutional theory often referenced phenomenological arguments in explaining why organizations adopted practices once they had reached some threshold of institutionalization (see DiMaggio & Powell, 1983 ; Meyer & Rowan, 1977 ; Tolbert & Zucker, 1983 ; Zucker, 1977 ).

It is worth noting that Meyer and Rowan’s ( 1977 , pp. 356–357) discussion of decoupling, suggesting that organizations are apt to segregate or minimize the impact of institutionalized structures on day-to-day organizational activities and operations (thus treating them as largely ceremonial), implies a high degree of strategic behavior by organizational decision-makers. How this strategic view could be reconciled with a phenomenological emphasis is not made clear in their work, however, as Tolbert and Zucker ( 1996 ) observed.

To rectify this limitation, DiMaggio proposed a focus on studying institutionalization processes (rather than consequences). He urged that such processes be treated as a “product of the political efforts of actors to accomplish their ends” ( 1988 , p. 13) and called on researchers to recognize that “the success of the institutionalization project and the form that the resulting institution takes depend on the relative power of the actors who support, oppose, or otherwise strive to influence it.” This call to arms laid the foundation for a line of work on “institutional entrepreneurship,” typically concerned with the purposeful activities of individuals and groups that lead (directly or indirectly) to the adoption of various policies and practices by organizational targets, or even the founding of entirely new forms of organizations.

Empirical work on institutional entrepreneurship began in earnest only in the 2000s, however, starting with a notable special issue on institutional change in the Academy of Management Journal (Dacin et al., 2002 ). In that special issue, Zilber ( 2002 ) conceptualized institutionalization as “an interplay between actions, meanings, and actors” and showed how times of crisis provide opportunities for agency and institutional change. In a now well-cited paper, Greenwood, Suddaby, and Hinings ( 2002 ) developed a process model for institutional change driven by institutional entrepreneurs, using the case of field-level change in the accounting profession in Canada. Building on the conceptual work of Strang and Meyer ( 1993 ) and Tolbert and Zucker ( 1996 ), they argued that the core activity of institutional entrepreneurs is theorization, or “the rendering of ideas into understandable and compelling formats” (Greenwood et al., 2002 , p. 75). In their study, large accounting firms (the institutional entrepreneurs) justified changes in the structures and activities of accounting firms in general by exposing contradictions in the accounting field’s rationales for existing practices and emphasizing how those changes were aligned with the profession’s prevailing values. In a similar way, Maguire, Hardy, and Lawrence ( 2004 , pp. 669, 671) described how institutional entrepreneurs in the emerging HIV/AIDS treatment field theorized new practices of consultation and information exchange between community organizations and pharmaceutical firms by “assembling a wide array of arguments that translate the interests of diverse stakeholders” and by building coalitions of these stakeholders through “bargaining, negotiation, and compromise.”

More recently, David, Sine, and Haveman ( 2013 ) developed a model of institutional entrepreneurship directed at legitimating new forms of organization in emerging fields. Significantly, these authors argued that institutional entrepreneurship involves more than persuasive discourse and includes building affiliations and engaging in collective action. Empirically, they showed how the proponents of early management consulting organizations affiliated with prestigious universities, scientific communities, and social elites to gain legitimacy. These proponents of “professional” management consulting also created an association to “collectively define a social code of prescribed and proscribed behaviors” that contrasted with those of competing forms and provided a template for replication (David et al., 2013 , p. 370). Building on these ideas, Canales ( 2016 , p. 1548) explained how actors promoting the small and medium enterprise credit market in Mexico engaged in “work to suspend existing institutions” and “recruit allies, find resources, experiment with new practices, coordinate strategies of action, and build political toolkits.” In summary, institutional entrepreneurship has become closely associated with institutional change projects driven by actors exercising agency in the pursuit of their interests. As a vibrant area of research (see Hardy & Maguire [ 2017 ] for a full review), it has largely overcome the critique that agency is underexplored within institutional theory. 2

Institutional Logics

In their generative paper, Friedland and Alford ( 1991 ) questioned institutional theory’s importation of an assumption made by structural-functionalists about the general congruence of social values. Foundational papers by Zucker ( 1977 ) and by Meyer and Rowan ( 1977 ) had implied a shared commitment to a particular social value—rationality—as an underlying precondition of the institutionalization of organizational practices, but Friedland and Alford argued that institutionalized practices could rest on a variety of values, which could in fact conflict with one another. This provided a key point of departure for a growing literature on institutional logics.

Similar to structural-functionalist theorists, Friedland and Alford proposed a view of society as constituted by different sectors (e.g., economic, political, familial, etc.), each characterized by a distinctive “institutional logic,” in their words. Comprising both material practices and symbolic constructions, logics provide organizing principles, or broad guidelines for action (Friedland & Alford, 1991 , p. 248). In contrast to previous work, however, they suggested that not all logics were necessarily compatible ( 1991 , p. 248): “The institutional logic of capitalism is accumulation and the commodification of human activity. That of the state is rationalization … That of democracy is participation … That of the family is community …” Such competing logics offer a basis for individuals to perceive and justify resistance to a prevailing structural arrangement, and to propose alternatives that reflect a different institutional logic.

These arguments provided a foundation for a large stream of organizational studies that illuminate the existence of multiple logics within different communities, and examine tensions stemming from the coexistence of competing logics within a given organization (Greenwood et al., 2011 ; Kraatz & Block, 2008 ). Early research in this area focused on how one logic replaces another. In a landmark paper, Thornton and Ocasio ( 1999 , p. 804) explained how the dominant logic in the U.S. higher education publishing field changed from an editorial to a market focus, and how this affected changes in executive succession. Rao, Monin, and Durand ( 2003 ) described how a logic of “nouvelle cuisine” replaced one of “haute cuisine” in French gastronomy, while Sine and David ( 2003 ) explained how a natural monopoly logic was replaced by an entrepreneurial logic in the field of electricity generation.

Other notable research has focused not on logic replacement but instead on logic coexistence. In his study of mutual funds, Lounsbury ( 2007 , p. 302) showed how the “trustee logic” (originating in Boston) and the “performance logic” (originating in New York) provided “distinct forms of rationality that informed the behavior of different kinds of mutual funds” and “facilitated the creation of variation in the subpopulation of professional money management firms” (i.e., growth versus non-growth funds). Also highlighting geographic differences in logics, Greenwood, Díaz, Li, and Lorente ( 2010 ) described how regional logics and family logics impact organizational responses to an overarching market logic. Specifically, in their study of Spanish manufacturing firms, they concluded that poorer-performing organizations downsize more readily than more successful firms, indicating the significance of the market logic, but that at the same time the state and family logics temper the influence of the market logic.

In their study of state offices of dispute resolution, Purdy and Gray ( 2009 ) identified conditions that enabled multiple practices supported by conflicting logics (judicial logic, social services logic) to be institutionalized, including the presence of multiple resource pools associated with different institutional actors and the lack of a dominant, overarching regulatory or professional framework that could impose field-level standards. Reay and Hinings ( 2009 ) elaborated on the “mechanisms of collaboration” in Alberta health care that allowed the conflicting logics of business-like health care and medical professionalism to coexist. Also focusing on the medical field, Dunn and Jones ( 2010 , p. 114) found that the “plural logics of care and science in medical education are supported by distinct groups and interests, fluctuate over time, and create dynamic tensions about how to educate future professionals.” They concluded that in fields where distinct logics are needed yet advocated by different groups, these logics may oscillate over time rather than reach a state of dominance.

Finally, a more recent but burgeoning stream of research at the intra-organizational level has examined the presence of multiple logics within organizations. In a theory piece, Besharov and Smith ( 2014 ) proposed a framework for categorizing types of logic multiplicity within firms based on two key dimensions: (1) the degree of consistency in the logics’ prescriptions for actions (“compatibility”) and (2) the extent to which practices tied to different logics are central to organizational functioning (“centrality”). Organizations that comprise logics with low compatibility but high centrality are often dubbed “hybrid” organizations (Battilana & Dorado, 2010 ; Besharov & Smith, 2014 ; Jay, 2012 ; Pache & Santos, 2013 ) and have been the subject of recent research on how tensions arising from logic conflict are managed. One approach focuses on integrating logics (Battilana & Dorado, 2010 ), for example by developing performance metrics (Mair, Mayer, & Lutz, 2015 ), incentive systems (Battilana & Lee, 2014 ; Ebrahim, Battilana, & Mair, 2014 ), product designs (Dalpiaz, Rindova, & Ravasi, 2016 ), and organizational identities (Battilana & Dorado, 2010 ) that do not reflect any one of the prevailing logics but rather combine logics in ways unique to the organization. Another approach focuses on structural differentiation (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury, 2011 ), whereby organizations segregate logics into different organizational elements, but find unique and creative ways to assure mutual understanding and collaboration across the elements (Battilana & Lee, 2014 ; Battilana, Sengul, Pache, & Model, 2015 ; Smets, Jarzabkowski, Burke, & Spee, 2015 ). For example, Pache and Santos ( 2013 , p. 972) found that “organizations selectively coupled intact elements prescribed by each logic … allow[ing] them to project legitimacy to external stakeholders without having to engage in costly deceptions or negotiations.”

Building on this research, Ramus, Vaccaro, and Brusoni ( 2017 ) suggested that it is the combination of collaboration and formalization that allows organizations to successfully reconcile the conflicting demands arising from multiple logics; specifically, logic integration can be enabled by an initial phase of formalizing and separating each competing logic, followed by building collaboration (Ramus et al., 2017 , p. 1254). More recently, Smith and Besharov ( 2019 ) explained how logic hybridity within organizations can be sustained over time through a combination of continually developing novel approaches to ongoing tensions while at the same time maintaining stable features that act to bound these adaptive processes.

New Market Categories

While the research streams on institutional entrepreneurship and institutional logics are now large and well developed, institutional theorists have more recently turned their attention to the question of how new market categories emerge. Defined as “economic exchange structure[s] among producers and consumers” (Navis & Glynn, 2010 , p. 441), market categories represent consensus over labels and meanings among the actors and audiences involved (Durand & Paolella, 2013 ; Kennedy, 2008 ). In studying new market categories, institutional theorists often invoke research from the two former streams on institutional logics and institutional entrepreneurship, as well as theory on social movements. In this research, new market categories are seen as emerging through a process of social construction, whereby collections of objects—products or services—come to be perceived as being “of the same type” or close substitutes for each other (Durand & Boulogne, 2017 ; Glynn & Navis, 2013 ; Navis & Glynn, 2010 , p. 440).

Social movements have been seen as generative of new market categories. In an early elucidation of this process, Swaminathan and Wade ( 2001 ) argued that social movements help create new markets by providing collective action frames and by facilitating resource mobilization by entrepreneurs. Building on this idea, Lounsbury, Ventresca, and Hirsch ( 2003 ) described how the social movement promoting recycling practices contributed to changes in interorganizational relations and discourse that altered the existing U.S. solid waste management field, thereby enabling the emergence of a for-profit recycling industry. Weber, Heinze, and DeSoucey ( 2008 , p. 543) showed how the social movement for grass-fed beef motivated entrepreneurs to produce this product and increased their commitment in the face of obstacles because they “obtained emotional energy from connecting their work to a sense of self and moral values” represented by the movement. Hiatt, Sine, and Tolbert ( 2009 ) described how the Temperance Movement in the United States at once deinstitutionalized breweries, created demand for a new category of “soft” drinks, and increased the availability of resources for entrepreneurs in the nascent category. Sine and Lee ( 2009 ) showed how the environmental movement mobilized members and non-members alike to support the emerging wind power sector.

In sum, institutional theory suggests social movement actors can promote shared notions of the kinds of organizational activities that are “right” through proselytizing and other techniques of moral suasion; this can motivate entrepreneurs who are sympathetic to the values of a given movement, persuade consumers to accept certain products and services as valuable (thus creating market opportunities that even non-sympathizing entrepreneurs may pursue), and affect policies and create infrastructures that facilitate certain entrepreneurial activities (Tolbert, David, & Sine, 2011 ).

A related thread of research takes a more actively social-constructivist view of new market categories and sees the emergence of a new category as the purposeful creation of common meanings and identities (Glynn & Navis, 2013 ; Jones, Maoret, Massa, & Svejenova, 2012 ; Pontikes & Kim, 2017 ). In this vein, Wry, Lounsbury, and Glynn ( 2011 , p. 450) focus on the “collective identity stories” employed by entrepreneurial actors to help project an image of themselves “as a coherent category with a meaningful label and identity.” The identity claims of entrepreneurs are evaluated by other field actors, who then accord (or not) resources and legitimacy to the new category. As such, entrepreneurs in new market categories who elaborate identities that are both distinct from those of existing categories yet aligned with prevalent “institutional understandings” are more likely to receive favorable judgments from investors (Hargadon & Douglas, 2001 ; Navis & Glynn, 2011 ). For example, in their research on the emergence of satellite radio as a new market category, Glynn and Navis ( 2010 ; see also Navis & Glynn, 2010 ) analyzed the public statements of executives from start-up firms XM and Sirius, and found these statements helped construct a distinctive identity for new ventures, and, in the process, lent credibility to the nascent market category. Khaire and Wadhwani ( 2010 , p. 1281) explained how art historians and critics shaped the construction of meaning in the Modern Indian Art category by “reinterpreting historical constructs in ways that enhanced commensurability and enabled aesthetic comparisons and valuation.”

It is important to note, however, that identity building and legitimation in new market categories can involve more than persuasive discourse from producers. David et al. ( 2013 ) identified a number of symbolic elements deployed by entrepreneurs in the early management consulting industry to legitimate their identity as “professionals,” such as ties to prestigious universities and scientific associations. Similarly, Khaire ( 2014 ) found that entrepreneurs in the emergent high-end fashion industry in India incorporated traditional textiles and clothing styles to signal that their activities were consistent with “ancient skills and traditions,” thereby increasing acceptance among a population skeptical of elitist fashion. And sometimes, “empty” categories are created by actors other than producers, only to be filled (or not) by the latter. Sine and David ( 2003 ) showed how regulators in the United States created the category of “alternative electricity producer” through legislation, a category that was later filled with thousands of small producers. Edman and Ahmadjian ( 2017 ) described how external actors—including the media, think tanks, local prefectural governments, consultants, and tourism companies—created the “ji-biru” (local beer) market category in Japan. This category, however, failed to develop a clear meaning, and was eventually eclipsed by the craft beer category.

The Role of the State in Institutional Change

The state figured prominently in early institutional accounts of organizations, dating back to Selznick’s ( 1949 ) discussion of the pivotal role of the state in the founding and development of the TVA. Building on Weber ( 1978 ), neo-institutionalists subsequently conceptualized the state as the primary rationalizer of social life, particularly in disseminating the bureaucratic organizational form. In their seminal paper, Meyer and Rowan ( 1977 , p. 342) explained that “one of the central problems in organization theory is to describe the conditions that give rise to rationalized formal structure,” and proposed the quest for legitimacy as the cause of rationalization, of which the centralized state was the primary vehicle. In a similar vein, DiMaggio and Powell argued that through the enactment and enforcement of laws and regulations, the state is among the “great rationalizers of the second half of the twentieth century” (DiMaggio & Powell, 1983 , p. 147). In their discussion of institutional logics, Friedland and Alford ( 1991 , p. 248) included the state logic among the central logics of Western societies and defined it as the “rationalization and the regulation of human activity by legal and bureaucratic hierarchies.”

The role of the state has received renewed attention in recent years, and contemporary research has discussed its capacity to act on all three “pillars” of institutionalization identified by (Scott, 1995 ): regulative, normative, and cognitive. From the standpoint of the regulative pillar, the state has the capacity to define the rules of the game by enacting laws and regulations. State policies and regulations have been credited with the development of a wide variety of industries, including railroads (Dobbin & Dowd, 1997 ), farm wineries (Swaminathan, 1995 ), and wind power (Sine & Lee, 2009 ). Anti-trust laws and interventionist policies affect firms’ cooperative and competitive behaviors (Fligstein, 1990 , 1996 ; Haveman, Russo, & Meyer, 2001 ; Mezias & Boyle, 2005 ). The state can dictate the scope of firm activity by codifying industry boundaries, which affect inter-industry competition (Amburgey, Dacin, & Kelly, 1994 ; Dobbin & Dowd, 2000 ; Haveman, 1993 ; Haveman et al., 2001 ). Changes in laws or regulations can also lead to changes in the distribution of organizational forms: Sine, Haveman, and Tolbert ( 2005 ) showed that a law requiring electric utilities to purchase and distribute power from independent power plants in the heavily regulated U.S. power industry increased founding of independent power plants, especially those using novel technologies. Dowell and David ( 2011 ) found that the number of private liquor stores in Alberta increased dramatically in the wake of an abrupt regulatory change. Closer to the internal functioning of organizations, the state may demand the adoption of specific organizational practices (Tolbert & Zucker, 1983 ) or codes of behavior (Okhmatovskiy & David, 2012 ), or may require particular outcomes without specifying the means by which they are to be achieved (Chuang, Church, & Ophir, 2011 ; Dobbin & Sutton, 1998 ; Kelly, 2003 ).

In terms of the normative pillar, the state has the capacity to confer sociopolitical legitimacy, which represents an evaluation of fit with prevailing norms and values (Aldrich & Fiol, 1994 ; Bitektine, 2011 ). This may take the form of state-sponsored certifications (Baum & Oliver, 1991 , 1992 ; Sine et al., 2005 ). For example, Sine et al. ( 2007 ) found that in the emergent independent power sector, projects having a government-issued certification—which was purely symbolic and could have been obtained by any qualified firm for a nominal fee—were more likely to reach the start-up phase. The state may even legitimate by its own patterns of consumption, as was the case for management consulting during the early years of that profession, when the state represented an important client for consultants (David, 2012 ).

Finally, in terms of the cognitive pillar, the state can influence the classification schemes by which we apprehend and organize the social world. This is most evident in the context of nascent markets, where entrepreneurs may lack even the basic vocabularies to define the contours of their markets and convey the value of their novel products, to hesitant investors, partners, and employees alike (Aldrich & Fiol, 1994 ). If, as discussed previously, new market categories rely on some degree of consensus among market participants, by virtue of its powerful position the state can promote such consensus and allow market construction to proceed. For example, during the emergence of the market for cochlear implants, there were two competing approaches to the technology, each informed by different sets of values and beliefs with regard to deafness (Garud, 2008 ). Ultimately, the National Institutes of Health in the United States played a central role in shaping the market that later developed, including through conferences that led to the dominance of one technology and the marginalization of the other (Garud, 2008 ). When states regulate and codify nascent spheres of organizational activity as distinct market categories, the organizations that comprise them enjoy greater audience attention and access to resources (Sine & David, 2003 ). Returning to the independent power example cited previously, in their selection of the projects that would qualify under a government program, government administrators drew the boundaries of the “independent power” category by defining the types of technologies the new category would come to encompass (Sine et al., 2007 ).

Conclusion and Suggestions for Future Research

While the substantive foci of studies drawing upon institutional theory are wide-ranging, there are common assumptions and preoccupations reflected in the work we have described. One key connecting theme is the importance of understanding ideational or cultural sources of existing organizational arrangements and of organizational change. This theme ties work in this tradition to a Weberian approach ( 1978 ) to studying social phenomena, and distinguishes it from more economic-based approaches that emphasize constraining market demands for efficiently produced goods and services as critical influences. As we noted, the relative neglect of the influence of social norms and interpretations in organizational analyses from the late 1950s onward (when organizational studies began to evolve as a distinctive area of social sciences) helps to account for the receptivity of researchers to institutional theory in the late 1970s, and for its continued popularity today as an alternative to more materialist approaches.

While both approaches offer valid insights into organizational phenomena, they have yet to be integrated or reconciled and are rarely, if ever, adopted simultaneously in a given analysis. This may be due to differences in underlying assumptions about the nature of individual decision-making and action on which each approach rests, differences captured by the (satirically offered) distinction between homo economicus and homo sociologicus (Dahrendorf, 1968 ). The former term denotes a view of individuals as continually calculating, interest-maximizing actors, while the latter rests on an opposing view, non-optimizing, habit-following actors who are driven largely by commitments to internalized values.

Critiques and extensions of institutional theory often reflect concerns that original formulations rested too much on the latter view (DiMaggio, 1988 ; Oliver, 1991 ). (One could quibble about whether conformity to social expectations is not agentic, though it is an unlikely response of powerful actors who are pursuing arrangements that enhance their own interests.) The streams of work we have described on institutional entrepreneurship and institutional logics have sought to address this concern. Work on institutional entrepreneurship has provided a much more elaborate answer to a critical question for the institutional perspective: how are institutions created and changed? Likewise, studies based on the notion of competing logics provide an explanation for variation in structural arrangements and forms of organization within the general framework of institutional theory. Thus, both streams have added substantially to the general theoretical perspective.

But important questions, ones relating to the role of agency within the perspective (i.e., the integration of homo economicus and homo sociologicus models of action), remain. Work on institutional entrepreneurship struggles to identify the key conditions under which individuals are most likely to transcend the constraints of cultural prescriptions and envision alternative arrangements, and the conditions under which others are likely to embrace such alternative visions (rather than sanctioning such entrepreneurs as wild-eyed deviants). (For notable exceptions, see Seo & Creed [ 2002 ] and Lawrence & Suddaby [ 2006 ].) Similarly, the conditions under which actors can successfully promote a given logic as a viable competitor to an existing logic, or when actors might subscribe to a logic that is not aligned with their interests (per Marx’s notion of false consciousness), remain to be addressed.

We suggest that progress in answering these questions may come from explicit theorizing across (as opposed to within) the four streams we have outlined here. For example, elucidating the strength of prevailing institutional logics and the presence of conflicting logics in studies of institutional entrepreneurship would contextualize such activities and avoid accounts of unbridled agency. Conversely, a better understanding of the agency that occurs during logic conflict can provide a fuller account of how institutional logics evolve at the field level. In brief, studies that offer full accounts of agency (institutional entrepreneurship) while at the same time accounting for institutional context (logics and their interaction) may be best positioned to avoid the caricatures of homo economicus and homo sociologicus .

Similarly, work that bridges research on the state, or more broadly on political processes, and research on institutional entrepreneurship seems potentially fruitful. Currently, reassertions of national sovereignty, such as Brexit, are challenging previously unquestioned institutions involving globalized trade, immigration, and long-standing international relations. This opens interesting avenues of inquiry for institutional theorists. How might such political changes cascade down to the organizational level? For example, because market categories can become vehicles for national identity, as is the case for many foods in Europe (DeSoucey, 2010 ) and country music in the United States (Peterson, 1997 ), we may find corporate and political interests collaborating to strategically activate patriotic sentiment, as in the case of NASCAR (Newman & Giardina, 2010 ). The formulation of international strategies may be influenced by perceived historical ties between nations (Cooper, Greenwood, Hinings, & Brown, 1998 ), opposition to acquisitions by foreign firms may mount if nationalist sentiment is stirred (Riad & Vaara, 2011 ; Tienari, Vaara, & Björkman, 2003 ; Vaara & Tienari, 2002 ), and post-acquisition success may depend on overcoming nationalistic biases among international employees (Ailon-Souday & Kunda, 2003 ; Vaara & Tienari, 2011 ). As such, beliefs about the role of the state and the “nation” it represents can have far-reaching implications that have largely gone understudied. And more generally, in a context of increasing interest in corporate political activity (Mellahi, Frynas, Sun, & Siegel, 2016 ), future scholarly work may investigate how market actors attempt to influence state policies, or the diverse ways the state may then favor some sets of market actors over others.

As neo-institutional theory enters its fifth decade since Meyer and Rowan ( 1977 ), we marvel at its growth and resilience as a perspective while at the same time wondering how it might continue to thrive. As other prominent approaches within organization theory—contingency theory and population ecology come to mind—have lost vigor, how might institutional theory remain vibrant? The following three pieces of advice may help.

First, clarity (and possibly restraint) is needed in the use of the terms “institution” and “institutional.” Studies should be clear about what the focal institution is, its basis for institutionalization, and the social setting in which it is institutionalized. This should include clarity about level of analysis—is the institution under study an organization, organization form, sub-organizational element, or inter-organizational structure? And of course, scholars should resist using the label institutional when doing so provides little theoretical traction.

Second, institutional scholars must not lose sight of the tangible impact of institutions and institutionalization. Often enthralled by rich descriptions of historical processes, institutionalists should emphasize the practical relevance of their studies, whether for managers, policymakers, or societal outcomes. For example, if new market categories require consensus on meanings and labels, the state can promote such consensus through regulated certification systems, or alternatively, emergent industries may pursue consensus through self-regulation.

Finally, institutional theory must maintain its unifying focus on cultural forces as key drivers of organizational behaviors and outcomes. Indeed, institutional theorists are often alone in schools of business/management in their cultural approach to organizations, while their colleagues in functional areas—finance, marketing, strategy, operations management, and so forth—emphasize organizational efficiency as both an independent and a dependent variable. Institutional theory’s prominence, and we believe its future, lie in serving as a compelling and coherent counterpoint to this “cult of efficiency.” 3

Further Reading

• Dacin, M. T. , Goodstein J. , & Scott, W. R. (2002). Institutional theory and institutional change: Introduction to the special research forum. Academy of Management Journal , 45 , 43–46.
• David, R. J. , & Bitektine, A. (2009). The deinstitutionalization of institutional theory? Exploring divergent agendas in institutional research. In D. Buchanan & A. Bryman (Eds.), The Sage handbook of organizational research methods (pp. 160–175). London: SAGE.
• Durand, R. , & Boulongne, R. (2017). Advancing category research: Theoretical mapping and under-researched areas. In R. Greenwood , C. Oliver , T. B. Lawrence , & R. E. Meyer (Eds.), The Sage handbook of organizational institutionalism (2nd ed., pp. 647–668). London: SAGE.
• Durand, R. , & Paolella, L. (2013). Category stretching: Reorienting research on categories in strategy, entrepreneurship, and organization theory. Journal of Management Studies , 50 (6), 1100–1123.
• Friedland, R. , & Alford, D. (1991). Bringing society back in: Symbols, practices, and institutional contradiction. In W. W. Powell & P. M. DiMaggio (Eds.), The new institutionalism in organizational analysis (pp. 232–263). Chicago, IL: University of Chicago Press.
• Glynn, M. A. , & Navis, C. (2013). Categories, identities, and cultural classification: Moving beyond a model of categorical constraint. Journal of Management Studies , 50 , 1124–1137.
• Greenwood, R. , Díaz, A. M. , Li, S. X. , & Lorente, J. C. (2010). The multiplicity of institutional logics and the heterogeneity of organizational responses. Organization Science , 21 (2), 521–539.
• Greenwood, R. , Oliver, C. , Lawrence, T. , & Meyer, R. (Eds.). (2017). The Sage handbook of organizational institutionalism (2nd ed.). London: SAGE.
• Hardy, C. , & Maguire, S. (2017). Institutional entrepreneurship. In R. Greenwood , C. Oliver , T. Lawrence , & R. Meyer (Eds.), Handbook of organizational institutionalism (2nd ed., pp. 261–280). London: SAGE.
• Kraatz, M. , & Block, E. (2008). Organizational implications of institutional pluralism. In R. Greenwood , C. Oliver , K. Sahlin , & R. Suddaby (Eds.), The Sage handbook of organizational institutionalism (pp. 243–275). London: SAGE.
• Lawrence, T. B. , & Suddaby, R. (2006). Institutions and institutional work. In S. Clegg , C. Hardy , T. Lawrence , & W. Nord (Eds.), The Sage handbook of organizational studies (pp. 215–254). London: SAGE.
• Meyer, J. W. , & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology , 83 , 340–363.
• Powell, W. W. , & DiMaggio, P. J. (Eds.). (1991). The new institutionalism in organizational analysis . Chicago, IL: University of Chicago Press.
• Scott, W. R. (1995). Institutions and organizations . Thousand Oaks, CA: SAGE.
• Tolbert, P. S. , David, R. J. , & Sine, W. D. (2011). Studying choice and change: The intersection of institutional theory and entrepreneurship research. Organization Science , 22 (5), 1332–1344.
• Tolbert, P. S. , & Zucker, L.G. (1996). The institutionalization of institutional theory. In S. R. Clegg , C. Hard , & W. R. Nord (Eds.), Handbook of organization studies (pp. 175–190). Thousand Oaks, CA: SAGE.
• Abrahamson, E. (1996). Management fashion. Academy of Management Review , 21 , 254–285.
• Ahmadjian, C. , & Robinson, P. (2001). Safety in numbers: Downsizing and the deinstitutionalization of permanent employment in Japan. Administrative Science Quarterly , 46 , 622–654.
• Ailon-Souday, G. , & Kunda, G. (2003). The local selves of global workers: The social construction of national identity in the face of organizational globalization. Organization Studies , 24 , 1073–1096.
• Aldrich, H. E. , & Fiol, C. M. (1994). Fools rush in? The institutional context of industry creation. Academy of Management Review , 19 , 645–670.
• Amburgey, T. L. , Dacin, T. , & Kelly, D. (1994). Disruptive selection and population segmentation: Interpopulation competition as a segregating process. Evolutionary Dynamics of Organizations , 240 , 254.
• Barnard, C. I. (1938). Functions of the executive . Cambridge, MA: Harvard University Press.
• Baron, J. N. , Dobbin, F. R. , & Jennings P. D. (1986). War and peace: The evolution of modern personnel administration in U.S. industry. American Journal of Sociology , 92 , 350–383.
• Battilana, J. , & Dorado, S. (2010). Building sustainable hybrid organizations: The case of commercial microfinance organizations. Academy of Management Journal , 53 , 1419–1440.
• Battilana, J. , & Lee, M. (2014). Advancing research on hybrid organizing: Insights from the study of social enterprises. Academy of Management Annals , 8 , 397–441.
• Battilana, J. , Sengul, M. , Pache, A.-C. , & Model, J. (2015). Harnessing productive tensions in hybrid organizations: The case of work integration social enterprises. Academy of Management Journal , 58 , 1658–1685.
• Baum, J. A. C. , & Oliver, C. (1991). Institutional linkages and organizational mortality. Administrative Science Quarterly , 36 , 187–218.
• Baum, J. A. C. , & Oliver, C. (1992). Institutional embeddedness and the dynamics of organizational populations. American Sociological Review , 57 , 540–559.
• Berger, P. L. , & Luckmann, T. (1967). The social construction of reality . New York, NY: Doubleday.
• Besharov, M. L. (2014). The relational ecology of identification: How organizational identification emerges when individuals hold divergent values. Academy of Management Journal , 57 , 1485–1512.
• Besharov, M. L. , & Smith, W. K. (2014). Multiple institutional logics in organizations: Explaining their varied nature and implications. Academy of Management Review , 39 , 364–381.
• Bitektine, A. (2011). Toward a theory of social judgments of organizations: The case of legitimacy, reputation, and status. Academy of Management Review , 36 , 151–179.
• Callahan, R. E. (1962). Education and the cult of efficiency: A study of the social forces that have shaped the administration of the public schools . Chicago, IL: University of Chicago Press.
• Canales, R. (2016). From ideals to institutions: Institutional entrepreneurship and the growth of Mexican small business finance. Organization Science , 27 , 1548–1573
• Chuang, Y.-T. , Church, R. , & Ophir, R. (2011). Taking sides: The interactive influences of institutional mechanisms on the adoption of same-sex partner health benefits by Fortune 500 corporations, 1990–2003. Organization Science , 22 , 190–209.
• Cooper, D. J. , Greenwood, R. , Hinings, B. , & Brown, J. L. (1998). Globalization and nationalism in a multinational accounting firm: The case of opening new markets in Eastern Europe. Accounting, Organizations and Society , 23 , 531.
• Cyert, R. , & March, J. G. (1963). A behavioral theory of the firm . Englewood Cliffs, NJ: Prentice Hall.
• Dahrendorf, R. (1968). Essays in the theory of society . Stanford, CA: Stanford University Press.
• Dalpiaz, E. , Rindova, V. , & Ravasi, D. (2016). Combining logics to transform organizational agency: Blending industry and art at Alessi. Administrative Science Quarterly , 61 , 347–392.
• David, R. J. (2012). Institutional change and the growth of strategy consulting in the United States. In M. Kipping & T. Clark (Eds.), The Oxford handbook of management consulting (pp. 71–92). Oxford University Press.
• David, R. J. , Sine, W. D. , & Haveman, H. A. (2013). Seizing opportunity in emerging fields: How institutional entrepreneurs legitimated the professional form of management consulting. Organization Science , 24 , 356–377.
• David, R. J. , & Strang, D. (2006). When fashion is fleeting: Transitory collective beliefs and the dynamics of TQM consulting. Academy of Management Journal , 49 , 215–233.
• DeSoucey, M. (2010). Gastronationalism: Food traditions and authenticity politics in the European Union. American Sociological Review , 75 , 432–455.
• DiMaggio, P. J. (1988). Interest and agency in institutional theory. In L. G. Zucker (Ed.), Institutional patterns and organizations (pp. 3–22). Cambridge, MA: Ballinger.
• DiMaggio, P. J. , & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review , 48 , 147–160.
• Dobbin, F. , & Dowd, T. J. (1997). How policy shapes competition: Early railroad foundings in Massachusetts. Administrative Science Quarterly , 42 , 501–529.
• Dobbin, F. , & Dowd, T. J. (2000). The market that antitrust built: Public policy, private coercion, and railroad acquisitions, 1825 to 1922. American Sociological Review , 65 , 631–657.
• Dobbin, F. , & Sutton, J. R. (1998). The strength of a weak state: The rights revolution and the rise of human resources management divisions. American Journal of Sociology , 104 , 441–476.
• Donaldson, L. (2001). The contingency theory of organizations . Thousand Oaks, CA: SAGE.
• Dowell, G. , & David, R. J. (2011). Effects of ancestral populations on entrepreneurial founding and failure: Private liquor stores in Alberta, 1994–2003. Industrial and Corporate Change , 20 (3), 825–853
• Dunn, M. B. , & Jones, C. (2010). Institutional logics and institutional pluralism: The contestation of care and science logics in medical education, 1967–2005. Administrative Science Quarterly , 55 , 114–149.
• Ebrahim, A. , Battilana, J. , & Mair, J. (2014). The governance of social enterprises: Mission drift and accountability challenges in hybrid organizations. Research in Organizational Behavior , 34 , 81–100.
• Edman, J. , & Ahmadjian, C. L. (2017). Empty categories and industry emergence: The rise and fall of Japanese ji-biru. In M.-D. Seidel & H. Greve (Eds.), Emergence (Research in the sociology of organizations) (Vol. 50, pp. 109–140). Bingley, U.K.: Emerald Group.
• Fligstein, N. M. (1990). The transformation of corporate control . Cambridge, MA: Harvard University Press.
• Fligstein, N. M. (1996). Markets as politics: A political-cultural approach to market institutions. American Sociological Review , 61 , 656–673.
• Garfinkel, H. (1967). Studies in Ethnomethodology . Englewood Cliffs, NJ: Prentice Hall.
• Garud, R. (2008). Conferences as Venues for the Configuration of Emerging Organizational Fields: The Case of Cochlear Implants. Journal of Management Studies , 45 , 1061–1088.
• Glynn, M. A. , & Navis, C. (2010). Entrepreneurship, institutional emergence, and organizational leadership: Tuning in to “the next big thing” in satellite radio. In W. D. Sine & R. J. David (Eds.), Institutions and entrepreneurship: Research in the sociology of work (Vol. 21, pp. 257–286). Bingley, U.K.: Emerald Group.
• Greenwood, R. , Oliver, C. , Sahlin, K. , & Suddaby, R. (Eds.). (2008). The Sage handbook of organizational institutionalism . London: SAGE.
• Greenwood, R. , Oliver, C. , Sahlin, K. , & Suddaby, R. (2008). Introduction. In R. Greenwood , C. Oliver , K. Sahlin , & R. Suddaby (Eds.), The Sage handbook of organizational institutionalism (pp. 1–46). London: SAGE.
• Greenwood, R. , Raynard, M. , Kodeih, F. , Micelotta, E. R. , & Lounsbury, M. (2011). Institutional complexity and organizational responses. Academy of Management Annals , 5 (1), 317–371.
• Greenwood, R. , Suddaby, R. , & Hinings, C. (2002). Theorizing change: The role of professional associations in the transformation of institutionalized fields. Academy of Management Journal , 45 (1), 58–80.
• Hargadon, A. B. , & Douglas, Y. (2001). When innovations meet institutions: Edison and the design of the electric light. Administrative Science Quarterly , 46 , 476–501.
• Haveman, H. A. (1993). Follow the leader: Mimetic isomorphism and entry into new markets. Administrative Science Quarterly , 38 , 593–627.
• Haveman, H. A. , Russo, M. V. , & Meyer, A. D. (2001). Organizational environments in flux: The impact of regulatory punctuations on organizational domains, CEO succession, and performance. Organization Science , 12 , 253–273.
• Hiatt, S. R. , Sine, W. D. , & Tolbert, P. S. (2009). From Pabst to Pepsi: The deinstitutionalization of social practices and the creation of entrepreneurial opportunities. Administrative Science Quarterly , 54 (4), 635–667.
• Jay, J. (2012). Navigating paradox as a mechanism of change and innovation in hybrid organizations. Academy of Management Journal , 56 , 137–159.
• Jones, C. , Maoret, M. , Massa, F. G. , & Svejenova, S. (2012). Rebels with a cause: Formation, contestation, and expansion of the de novo category “modern architecture,” 1870–1975. Organization Science , 23 (6), 1523–1545.
• Kelly, E. (2003). The strange history of employer sponsored child care: Interested actors, uncertainty, and the transformation of law in organizational fields. American Journal of Sociology , 109 , 606–649.
• Kennedy, M. T. (2008). Getting counted: Markets, media, and reality. American Sociological Review , 73 , 270–295.
• Khaire, M. (2014). Fashioning an industry: Socio-cognitive processes in the construction of worth of a new industry. Organization Studies , 35 , 41–74.
• Khaire, M. , & Wadhwani, R. D. (2010). Changing landscapes: The construction of meaning and value in a new market category—Modern Indian Art. Academy of Management Journal , 53 (6), 1281–1304.
• Kraatz, M. , & Flores, R. (2015). Reinfusing values. In M. S. Kraatz (Ed.), Institutions and ideals: Philip Selznick’s legacy for organizational studies (Research in the sociology of organizations) (Vol. 44, pp. 353–381). Bingley, U.K.: Emerald Group.
• Lawrence, P. R. , & Lorsch, J. W. (1967). Differentiation and integration in complex organizations. Administrative Science Quarterly , 12 , 1–47.
• Lounsbury, M. (2007). A tale of two cities: Competing logics and practice variation in the professionalizing of mutual funds. Academy of Management Journal , 50 , 289–307.
• Lounsbury, M. , Ventresca, M. , & Hirsch, P. (2003). Social movements, field frames and industry emergence: A cultural-political perspective on U.S. recycling. Socio-Economic Review , 1 (1), 71–104.
• Maguire, S. , Hardy, C. , & Lawrence, T. (2004). Institutional entrepreneurship in emerging fields: HIV/AIDS treatment advocacy in Canada. Academy of Management Journal , 47 (5), 657–679.
• Mair, J. , Mayer, J. , & Lutz, E. (2015). Navigating institutional plurality: Organizational governance in hybrid organizations. Organization Studies , 36 , 713–739.
• March, J. G. , & Simon, H. (1958). Organizations . New York, NY: Wiley.
• Mellahi, K. , Frynas, J. G. , Sun, P. , & Siegel, D. (2016). A review of the nonmarket strategy literature: Toward a multi-theoretical integration. Journal of Management , 42 (1), 143–173.
• Meyer, M. W. , & Zucker, L. G. (1989). Permanently failing organizations . Newbury Park, CA: SAGE.
• Mezias, S. J. , & Boyle, E. (2005). Blind trust: Market control, legal environments, and the dynamics of competitive intensity in the early American film industry, 1893–1920. Administrative Science Quarterly , 50 , 1–34.
• Navis, C. , & Glynn, M. (2010). How new market categories emerge: Temporal dynamics of legitimacy, identity, and entrepreneurship in satellite radio, 1990–2005. Administrative Science Quarterly , 55 , 439–471.
• Navis, C. , & Glynn, M. A. (2011). Legitimate distinctiveness and the entrepreneurial identity: Influence on investor judgments of new venture plausibility. Academy of Management Review , 36 , 479–499.
• Newman, J. I. , & Giardina, M. D. (2010). Neoliberalism’s last lap? NASCAR nation and the cultural politics of sport. American Behavioral Scientist , 53 , 1511–1529.
• Okhmatovskiy, I. , & David, R. J. (2012). Setting your own standards: Internal corporate governance codes as a response to institutional pressure. Organization Science , 23 (1), 155–176.
• Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review , 16 , 145–179.
• Oliver, C. (1992). The antecedents of deinstitutionalization. Organization Studies , 13 , 563–588.
• Pache, A. , & Santos, F. (2013). Inside the hybrid organization: Selective coupling as a response to competing institutional logics. Academy of Management Journal , 56 , 972–1001.
• Parsons, T. (1956). Suggestions for a sociological approach to the theory of organizations—I. Administrative Science Quarterly , 1 , 63–85.
• Parsons, T. (1960). Some ingredients of a formal theory of organization. In T. Parsons (Ed.), Structure and process in modern society (pp. 56–97). Glencoe, IL: Free Press.
• Perrow, C. M. (1972). Complex organizations: A critical essay . Glenview, IL: Scott Foreman.
• Peterson, R. A. (1997). Creating country music: Fabricating authenticity . Chicago, IL: University of Chicago Press.
• Pontikes, E. , & Kim, R. (2017). Strategic Categorization. In R. Durand , N. Granqvist , & A. Tyllstrom (Eds.), From Categories to Categorization: Studies in Sociology, Organizations and Strategy at the Crossroads (Vol. 51, pp. 71–111). Bingley, U.K.: Emerald Publishing Limited.
• Purdy, J. M. , & Gray, B. (2009). Conflicting logics, mechanisms of diffusion, and multilevel dynamics in emerging institutional fields. Academy of Management Journal , 52 (2), 355–380.
• Ramus, T. , Vaccaro, A. , & Brusoni, S. (2017). Institutional complexity in turbulent times: Formalization, collaboration, and the emergence of blended logics. Academy of Management Journal , 60 (4), 1253–1284.
• Rao, H. , Monin, P. , & Durand, R. (2003). Institutional change in Toque Ville: Nouvelle cuisine as an identity movement in French gastronomy. American Journal of Sociology , 108 (4), 795–843.
• Reay, T. , & Hinings, C. R. (2009). Managing the rivalry of competing institutional logics. Organization Studies , 30 (6), 629–652.
• Riad, S. , & Vaara, E. (2011). Varieties of national metonymy in media accounts of international mergers and acquisitions. Journal of Management Studies , 48 , 737–771.
• Schoonhoven, C. B. (1981). Problems with contingency theory: Testing assumptions hidden within. Administrative Science Quarterly , 26 , 349–377.
• Scott, W. R. (1975). Organizational structure. Annual Review of Sociology , 1 , 1–20.
• Seo, M.-G. , & Creed, W. E. D. (2002). Institutional contradictions, praxis, and institutional change: A dialectical perspective. Academy of Management Review , 27 , 222–247.
• Selznick, P. (1949). The TVA and the grass roots . Berkeley: University of California Press.
• Selznick, P. (1957). Leadership in administration . New York, NY: Harper and Row.
• Simon, H. (1947). Administrative behavior . New York, NY: Free Press.
• Sine, W. D. , & David, R. J. (2003). Environmental jolts, institutional change, and the creation of entrepreneurial opportunity in the US electric power industry. Research Policy , 32 , 185–207.
• Sine, W. D. , David, R. J. , & Mitsuhashi, H. (2007). From plan to plant: Effects of certification on operational start-up in the emergent independent power sector. Organization Science , 18 , 578.
• Sine, W. D. , Haveman, H. A. , & Tolbert, P. S. (2005). Risky business? Entrepreneurship in the new independent-power sector. Administrative Science Quarterly , 50 , 200–232.
• Sine, W. D. , & Lee, B. H. (2009). Tilting at windmills? The environmental movement and the emergence of the U.S. wind energy sector. Administrative Science Quarterly , 54 (1), 123–155.
• Smets, M. , Jarzabkowski, P. , Burke, G. , & Spee, P. (2015). Reinsurance trading in Lloyd’s of London: Balancing conflicting yet complementary logics in practice. Academy of Management Journal , 58 , 932–970.
• Smith, W. K. , & Besharov, M. L. (2019). Bowing before dual gods: How structured flexibility sustains organizational hybridity. Administrative Science Quarterly , 64 , 1–44.
• Strang, D. , & Meyer, J. (1993). Institutional conditions for diffusion. Theory and Society , 22 (4), 487–511.
• Swaminathan, A. (1995). The proliferation of specialist organizations in the American wine industry, 1941–1990. Administrative Science Quarterly , 40 (4), 653–680.
• Swaminathan, A. , & Wade, J. B. (2001). Social movement theory and the evolution of new organizational forms. In C. Schoonhoven & E. Romanelli (Eds.), The entrepreneurship dynamic (pp. 286–313). Stanford, CA: Stanford University Press.
• Thornton, P. , & Ocasio, W. (1999). Institutional logics and the historical contingency of power in organizations: Executive succession in the higher education publishing industry, 1958–1990. American Journal of Sociology , 105 , 801.
• Tienari, J. , Vaara, E. , & Björkman, I. (2003). Global capitalism meets national spirit: Discourses in media texts on a cross-border acquisition. Journal of Management Inquiry , 12 , 377–393.
• Tolbert, P. S. , & Zucker, L. G. (1983). Institutional sources of change in the formal structure of organizations: The diffusion of civil service reform, 1880–1935. Administrative Science Quarterly , 28 , 22–39.
• Tolbert, P. S. , & Zucker, L. G. (1996). The institutionalization of institutional theory. In S. R. Clegg , C. Hard , & W. R. Nord (Eds.), Handbook of organization studies (pp. 175–190). Thousand Oaks, CA: SAGE.
• Vaara, E. , & Tienari, J. (2002). Justification, legitimization and naturalization of mergers and acquisitions: A critical discourse analysis of media texts. Organization , 9 , 275–304.
• Vaara, E. , & Tienari, J. (2011). On the narrative construction of multinational corporations: An antenarrative analysis of legitimation and resistance in a cross-border merger. Organization Science , 22 , 370–390.
• Weber, K. , Heinze, K. L. , & DeSoucey, M. (2008). Forage for thought: Mobilizing codes in the movement for grass-fed meat and dairy products. Administrative Science Quarterly , 53 (3), 529–567.
• Weber, M. (1978). Economy and society: An outline of interpretive sociology ( G. Roth & C. Wittich , Eds.; E. Fischoff et al., Trans.; 2 vols.). Berkeley: University of California Press. Original work published 1921–1922.
• Weick, K. (1969). Social psychology of organizations . Reading, MA: Addison-Wesley.
• Wry, T. , Lounsbury, M. , & Glynn, M. A. (2011). Legitimating new categories of organizations: Stories as distributed cultural entrepreneurship. Organization Science , 22 (2), 339–463.
• Zilber, T. (2002). Institutionalization as an interplay between actors, meanings and actions: The case of a rape crisis center in Israel. Academy of Management Journal , 45 , 234–252.
• Zorn, D. M. (2004). Here a chief, there a chief: The rise of the CFO in the American firm. American Sociological Review , 69 , 345–364.
• Zucker, L. G. (1977). The role of institutionalization in cultural persistence. American Sociological Review , 42 , 726–743.
• Zucker, L. G. (1983). Organizations as institutions. Research in the Sociology of Organizations , 2 , 1–47.
• Zucker, L. G. (1988). Institutional patterns and organizations: Culture and environment . Cambridge, MA: Ballinger.

1. The label “institutional theory” is used here while recognizing that the large body of research under this label shares an orienting perspective rather than a formal set of causal propositions, per most definitions of “theory.” Further, the label is used to denote only research within organization studies, and thus does not include institutional research in the fields of economics, political science, or law (for a discussion of how these relate to institutional theory in organization studies, see Scott [ 1995 ]).

2. Institutional entrepreneurship is frequently used synonymously with “institutional work,” a construct originally proposed by Lawrence and Suddaby ( 2006 ). Like institutional entrepreneurship, institutional work has come to be used in practice to describe all agentic activities directed towards creating, maintaining, or changing institutions.

3. The first use of this term is often credited to Callahan ( 1962 ).

Related Articles

• Agency Theory in Business and Management Research
• Business Groups as an Organizational Model

Printed from Oxford Research Encyclopedias, Business and Management. Under the terms of the licence agreement, an individual user may print out a single article for personal use (for details see Privacy Policy and Legal Notice).

date: 30 May 2024

• Cookie Policy
• Privacy Policy
• Legal Notice
• Accessibility
• [66.249.64.20|185.66.15.189]
• 185.66.15.189

Character limit 500 /500

Our Recommendations

• Best Small Business Loans for 2024
• Businessloans.com Review
• Biz2Credit Review
• SBG Funding Review
• Rapid Finance Review
• 26 Great Business Ideas for Entrepreneurs
• Startup Costs: How Much Cash Will You Need?
• How to Get a Bank Loan for Your Small Business
• Articles of Incorporation: What New Business Owners Should Know

How to Choose the Best Legal Structure for Your Business

Small business resources.

• Business Ideas
• Business Plans
• Startup Basics
• Startup Funding
• Franchising
• Success Stories
• Entrepreneurs
• The Best Credit Card Processors of 2024
• Clover Credit Card Processing Review
• Merchant One Review
• Stax Review
• How to Conduct a Market Analysis for Your Business
• Local Marketing Strategies for Success
• Tips for Hiring a Marketing Company
• Benefits of CRM Systems
• 10 Employee Recruitment Strategies for Success
• Sales & Marketing
• Social Media
• Best Business Phone Systems of 2024
• The Best PEOs of 2024
• RingCentral Review
• Nextiva Review
• Ooma Review
• Guide to Developing a Training Program for New Employees
• How Does 401(k) Matching Work for Employers?
• Why You Need to Create a Fantastic Workplace Culture
• 16 Cool Job Perks That Keep Employees Happy
• 7 Project Management Styles
• Women in Business
• Personal Growth
• Best Accounting Software and Invoice Generators of 2024
• Best Payroll Services for 2024
• Best POS Systems for 2024
• Best CRM Software of 2024
• Best Call Centers and Answering Services for Busineses for 2024
• Salesforce vs. HubSpot: Which CRM Is Right for Your Business?
• Rippling vs Gusto: An In-Depth Comparison
• RingCentral vs. Ooma Comparison
• Choosing a Business Phone System: A Buyer’s Guide
• Equipment Leasing: A Guide for Business Owners
• HR Solutions
• Financial Solutions
• Marketing Solutions
• Security Solutions
• Retail Solutions
• SMB Solutions

Choosing the right legal structure is a necessary part of running a business. Whether you're just starting out or your business is growing, it's crucial to understand the options.

Table of Contents

Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued ]

We’ll explore business legal structures and how to choose the right structure for your organization. 

What is a business legal structure?

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Why is a business legal structure important?

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

• Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
• Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
• Paperwork: Each business legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a business partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
• Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies . Other structures lack this closure protection.
• Registration: A business legal structure is also a prerequisite for registering your business in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a business structure.
• Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
• Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your business structure in the future. However, changing your business structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your business. 

Types of business structures

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

Sole proprietorship

A sole proprietorship is the simplest business entity. When you set up a sole proprietorship , one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases , office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers , cleaning service providers and babysitters.

A sole proprietorship business structure has several advantages.

• Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
• Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
• Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions , such as a health insurance deduction.
• Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a day care center and wish to fold the business, refrain from operating the day care and advertising your services.

The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses. These are a few examples:

• Marriott Hotels

Partnership 

A partnership is owned by two or more individuals. There are two types: a general partnership, where all is shared equally, and a limited partnership, where only one partner has control of operations and the other person (or persons) contributes to and receives part of the profits. Partnerships can operate as sole proprietorships, where there’s no separation between the partners and the business, or limited liability partnerships (LLPs), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner – like running a restaurant or agency together,” Sweeney said. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made as well as those actions made by your business partner.”

General partnership costs vary, but this structure is more expensive than a sole proprietorship because an attorney should review your partnership agreement. The attorney’s experience and location can affect the cost. 

A business partnership agreement must be a win-win for both sides to succeed. Google is an excellent example of this. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading global search engine. The co-founders met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 11.4% of Google provides them with a total net worth of nearly $226.4 billion.

Business partnerships have many advantages. 

• Easy formation: As with a sole proprietorship, there is little paperwork to file for a business partnership. If your state requires you to operate under a fictitious name ( “doing business as,” or DBA ), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. You’ll usually need a business license as well.
• Growth potential: You’re more likely to obtain a business loan with more than one owner. Bankers can consider two credit histories rather than one, which can be helpful if you have a less-than-stellar credit score.
• Special taxation: General partnerships must file federal tax Form 1065 and state returns, but they do not usually pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, affecting each partner’s business share and contribution. If you brought the most seed capital for the business, you and your partner may agree that you’ll retain a higher share percentage, making you the majority owner.

Partnerships are one of the most common business structures. These are some examples of successful partnerships:

• Warner Bros.
• Hewlett-Packard
• Ben & Jerry’s

Limited liability company 

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying a partnership’s tax and flexibility benefits. Under an LLC, members are shielded from personal liability for the business’s debts if it can’t be proven that they acted in a negligent or wrongful manner that results in injury to another in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

According to Wolters Kluwer , the cost of forming an LLC comprises the state filing fee and can vary depending on your state. For example, if you file an LLC in New York, you must pay a $200 filing fee, a $9 biennial fee, and file a biennial statement with the New York Department of State .

Although small businesses can be LLCs, some large businesses choose this legal structure. The structure is typical among accounting, tax, and law firms, but other types of companies also file as LLCs. One example of an LLC is Anheuser-Busch, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Here some other well-known examples of LLCs:

• Hertz Rent-a-Car

Corporation 

The law regards a corporation as separate from its owners, with legal rights independent of its owners. It can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. 

There are several types of corporations, including C corporations , S corporations, B corporations, closed corporations, and nonprofit corporations.

• C corporations: C corporations, owned by shareholders, are taxed as separate entities. JPMorgan Chase & Co. is a multinational investment bank and financial services holding company listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies – including Apple, Bank of America and Amazon – file for this tax status.
• B corporations: B corporations, otherwise known as benefit corporations, are for-profit entities committed to corporate social responsibility and structured to positively impact society. For example, skincare and cosmetics company The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
• Closed corporations: Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility than publicly traded companies. For example, Hobby Lobby is a closed corporation – a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; instead, the stocks have been allocated to family members.
• Open corporations: Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motor Co., are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
• Nonprofit corporations: Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These organizations all focus on something other than turning a profit.

Corporations enjoy several advantages. 

• Limited liability: Stockholders are not personally liable for claims against your corporation; they are liable only for their personal investments.
• Continuity: Corporations are not affected by death or the transferring of shares by their owners. Your business continues to operate indefinitely, which investors, creditors and consumers prefer.
• Capital: It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This structure is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative, rate. Additionally, your business could file as an S corporation for the tax benefits. Once your business grows to a certain level, it’s likely in your best interest to incorporate it.

These are some popular examples of corporations:

• General Motors
• Exxon Mobil Corp.
• Domino’s Pizza
• JPMorgan Chase

Learn more about how to become a corporation .

Cooperative 

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits.

Cooperatives offer a couple main advantages.

• Increased funding: Cooperatives may be eligible for federal grants to help them get started.
• Discounts and better service: Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation (e.g., Inc. or Ltd.). The filing fee associated with a co-op agreement varies by state. 

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS reported a net income of $422.4 million for fiscal year 2020. These are some other notable examples of co-ops:

• Land O’Lakes
• Navy Federal Credit Union
• Ace Hardware

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. Consider your startup’s financial needs, risk and ability to grow. It can be challenging to switch your legal structure after registering your business, so give it careful analysis in the early stages of forming your business. 

Here are some crucial factors to consider as you choose your business’s legal structure. You should also consult a CPA for advice.

Flexibility 

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. [Learn how to write a business plan with this template .]

When it comes to startup and operational complexity, nothing is more straightforward than a sole proprietorship. Register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means creditors and customers can sue the corporation, but they can’t gain access to any personal assets of the officers or shareholders. An LLC offers the same protection but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, principal at Rivetr. “The LLC structure prevents that and makes sure you’re not taxed as a company, but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the effect on your return. 

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as those for Social Security and Medicare, on your personal return. 

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding from an investor, venture capitalist or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can obtain funds only through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it’s not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here apply only to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

Max Freedman and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

• Best CRM Software for Nonprofits

Building Better Businesses

Insights on business strategy and culture, right to your inbox. Part of the business.com network.

• Search Search Please fill out this field.

What Is an Organizational Structure?

Understanding an organizational structure, centralized vs. decentralized organizational structures, types of organizational structures, benefits of organizational structures, the bottom line, organizational structure for companies with examples and benefits.

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Investopedia / Julie Bang

An organizational structure is a system that outlines how certain activities are directed in order to achieve the goals of an organization. These activities can include rules, roles, and responsibilities.

The organizational structure also determines how information flows between levels within the company. For example, in a centralized structure, decisions flow from the top down, while in a decentralized structure, decision-making power is distributed among various levels of the organization. Having an organizational structure in place allows companies to remain efficient and focused.

Key Takeaways

• An organizational structure outlines how certain activities are directed to achieve the goals of an organization.
• Successful organizational structures define each employee's job and how it fits within the overall system.
• A centralized structure has a defined chain of command, while decentralized structures give almost every employee receiving a high level of personal agency.
• Types of organizational structures include functional, divisional, flatarchy, and matrix structures.
• Senior leaders should consider a variety of factors before deciding which type of organization is best for their business, including the business goals, industry, and culture of the company.

Businesses of all shapes and sizes use organizational structures heavily. They define a specific hierarchy within an organization. A successful organizational structure defines each employee's job and how it fits within the overall system. Put simply, the organizational structure lays out who does what so the company can meet its objectives.

This structuring provides a company with a visual representation of how it is shaped and how it can best move forward in achieving its goals. Organizational structures are normally illustrated in some sort of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least amount of power are at the bottom.

Not having a formal structure in place may prove difficult for certain organizations. For instance, employees may have difficulty knowing to whom they should report. That can lead to uncertainty as to who is responsible for what in the organization.

Having a structure in place can help with efficiency and provide clarity for everyone at every level. That also means each and every department can be more productive, as they are likely to be more focused on energy and time.

An organizational structure is either centralized or decentralized. Traditionally, organizations have been structured with centralized leadership and a defined chain of command. The military is an organization famous for its highly centralized structure, with a long and specific hierarchy of superiors and subordinates. In a centralized organizational system, there are very clear responsibilities for each role, with subordinate roles defaulting to the guidance of their superiors.

There has been a rise in decentralized organizations, as is the case with many technology startups . This allows companies to remain fast, agile, and adaptable, with almost every employee receiving a high level of personal agency. For example, Johnson & Johnson is a company that's known for its decentralized structure.

As a large company with many business units and brands that function in sometimes very different industries, each operates autonomously. Even in decentralized companies, there are still usually built-in hierarchies (such as the chief operating officer operating at a higher level than an entry-level associate). However, teams are empowered to make their own decisions and come to the best conclusion without necessarily getting "approval" from up top.

Functional Structure

Four types of common organizational structures are implemented in the real world. The first and most common is a functional structure. This is also referred to as a bureaucratic organizational structure and breaks up a company based on the specialization of its workforce. Most small-to-medium-sized businesses implement a functional structure. Dividing the firm into departments consisting of marketing, sales, and operations is the act of using a bureaucratic organizational structure.

Divisional or Multidivisional Structure

The second type is common among large companies with many business units. Called the divisional or multidivisional (M-Form) structure, a company that uses this method structures its leadership team based on the products, projects, or subsidiaries they operate. A good example of this structure is Johnson & Johnson. With thousands of products and lines of business, the company structures itself so each business unit operates as its own company with its own president.

Divisions may also be designated geographically in addition to specialization. For instance, a global corporation may have a North American Division and a European Division.

Similar to divisional or functional structures, team-based organizations segregate into close-knit teams of employees that serve particular goals and functions, but where each team is a unit that contains both leaders and workers.

Flat (Flatarchy) Structure

Flatarchy, also known as a horizontal structure, is relatively newer, and is used among many startups. As the name alludes, it flattens the hierarchy and chain of command and gives its employees a lot of autonomy. Companies that use this type of structure have a high speed of implementation.

Matrix Structure

Firms can also have a matrix structure. It is also the most confusing and the least used. This structure matrixes employees across different superiors, divisions, or departments. An employee working for a matrixed company, for example, may have duties in both sales and customer service .

Circular Structure

Circular structures are hierarchical, but they are said to be circular as it places higher-level employees and managers at the center of the organization with concentric rings expanding outward, which contain lower-level employees and staff. This way of organizing is intended to encourage open communication and collaboration among the different ranks.

Network Structure

The network structure organizes contractors and third-party vendors to carry out certain key functions. It features a relatively small headquarters with geographically-dispersed satellite offices, along with key functions outsourced to other firms and consultants.

Putting an organizational structure in place can be very beneficial to a company. The structure not only defines a company's hierarchy but also allows the firm to lay out the pay structure for its employees. By putting the organizational structure in place, the firm can decide salary grades and ranges for each position.

The structure also makes operations more efficient and much more effective. By separating employees and functions into different departments, the company can perform different operations at once seamlessly.

In addition, a very clear organizational structure informs employees on how best to get their jobs done. For example, in a hierarchical organization, employees will have to work harder at buying favor or courting those with decision-making power. In a decentralized organization, employees must take on more initiative and bring creative problem solving to the table. This can also help set expectations for how employees can track their own growth within a company and emphasize a certain set of skills—as well as for potential employees to gauge if such a company would be a good fit with their own interests and work styles.

What Are Some Types of Organizational Structures?

The four types of organizational structures are functional, multi-divisional, flat, and matrix structures. Others include circular, team-based, and network structures.

What Are the Key Elements of an Organizational Structure?

Key elements of an organizational structure include how certain activities are directed in order to achieve the goals of an organization, such as rules, roles, responsibilities, and how information flows between levels within the company.

What Is an Organizational Structure Example?

An example of an organizational structure is a decentralized structure, which gives individuals and teams high degrees of autonomy without needing a core team to regularly approve business decisions. A good example of this decentralized structure is Johnson & Johnson. With thousands of products and lines of business, the company structures itself so each business unit operates as its own company with its own president.

What Is an Organizational Structure Chart?

Organizational structures are normally illustrated in some sort of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least amount of power are at the bottom.

What Is the Best Organizational Structure?

There is no one best organizational structure, as it depends on the nature of the company and the industry it operates in.

There are entire fields of study based on how to optimize and best structure organizations to be the most effective and productive. Senior leaders should consider a variety of factors before deciding which type of organization is best for their business , including the business goals, industry, and culture of the company.

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

13.1 Business Structures: Overview of Legal and Tax Considerations

Learning objectives.

By the end of this section, you will be able to:

• Understand why a business’s purpose is an important role in the initial business structure decision
• Identify major types of business structures (corporation, LLC, partnership, sole proprietorship, joint venture)
• Distinguish between for-profit and not-for-profit purposes and structures

The structure of a new business creates the legal, tax, and operational environment in which the business will function. In order to choose a business structure, entrepreneurs need to have a clear understanding of the type of business they seek to establish, the purpose of the business, the location of the business, and how the business plans on operating.

For example, a business that plans to qualify as a nonprofit—Section 501(c) of the Internal Revenue Code—will be treated differently from a business that aims to earn a profit and distribute the profits to its owners. Therefore, the first step in any entrepreneurial endeavor is to establish the nature and purpose of the business ( Figure 13.2 ).

One of the most important initial decisions an entrepreneur must make, from a legal perspective, is the legal organization of a business, called the business structure or entity selection . The choices are varied, with several basic entities, each with several variations, resulting in multiple permutations.

Many business ventures, regardless of humble beginnings, may have the potential to evolve into significantly larger business ventures. This is what makes the initial decisions so important. The founders should think through every step of business development, beyond the inception or formation, and consider the possible paths of the business. How an entrepreneur organizes the business, or which business structure they choose, will have a significant impact on both the entrepreneur and the business.

Business structure options include traditional choices such as corporations , partnerships , and sole proprietorships , and hybrid entities such as limited liability companies (LLCs) , limited liability partnerships (LLPs) , and joint ventures (JVs) . Each structure carries different requirements to set up, different requirements to fulfill (such as taxes and government filings), and varying ownership risks and protections. Entrepreneurs should consider these factors as well as the expected business growth in selecting a structure, while being aware that the structure can and should change as the business venture grows.

For example, if you think you want to share authority, responsibilities, and obligations with other people, your best choice would likely be a partnership, in which other people contribute money and help manage the business. Alternatively, if you prefer to manage the business yourself, a better choice for you might be a single-member LLC, assuming you can borrow money from a lender if needed. Conversely, if you think your idea is so popular that you may grow rapidly and want the ability to raise capital by selling interests in your business through equity or debt, then a corporation would be your best choice. You should obtain legal and tax advice about your structure.

Are You Ready?

Becoming an informed entrepreneur.

If you are an entrepreneur with an idea for a startup, ask yourself if you are ready to make important decisions. How much do you know about taxation, incorporation, or liability? If you don’t know at least some of the basics, you may have to depend on a lot of advice from accountants and attorneys, and that is very expensive. If you spend too much money on advice, you have too little left for something else such as advertising and marketing.

Establishing a Business Purpose

A clear understanding of the business purpose helps direct the entrepreneur toward the most appropriate business structure. The business purpose is the reason the entrepreneur forms the company and determines who benefits from it, whether it is the entrepreneur, customers, or some other entity. (The business purpose is different from a business mission or vision.) Drafting the expectations of the entrepreneur and how the business will operate, with a careful analysis of how the business will generate cash flows, realize profits, and to whom the business will owe its primary obligations, is the start of determining the appropriate business structure. A written business plan (see Business Model and Plan ) will help the entrepreneur develop the best legal structure in which the business is to operate because the legal structure of the business should be tied to the nature of the business.

Once the entrepreneur is clear on the nature and purpose of the business, consideration of the business structure follows. The first consideration is whether the entity is being created to produce a profit for its owners or shareholders, or whether it will be structured as a not-for-profit entity. A second factor is the state of incorporation, as state law defines each business’s creation, with different states permitting different types of entities and various legal protections. Additional considerations include how the structure facilitates bringing in new investors, allows the owners to transfer profits out of the business, and supports a potential subsequent sale of the entity. Taxation is also a crucial aspect of business success, and the business structure or entity directly affects how it is taxed.

Drafting a Business Purpose

Can you write an outline of a business purpose? Try this: Your university’s tutoring center is crowded, and those students who need extra help are struggling to find it. You have decided to start a new company to match those students with student tutors at your university. Who determines how much a tutor can charge? Is it a set price, a surge pricing model like Uber, or is it up to the tutor? How much of a profit do you make? In essence, you must determine the purpose of your business. Read this IRS article about shared-economy businesses to learn more.

For-Profit versus Not-for-Profit Businesses

Owners form businesses for one of two purposes: to make a profit or to further a social cause without taking a profit. In either case, there are multiple options in terms of how a business is structured. Each structure carries its own tax consequences determined by the owners’ financial requirements and how the owners want to distribute profits. The structure, in turn, determines the appropriate income tax return form to file.

Characteristics of For-Profit Businesses

A for-profit business is designed to create profits that are distributed to the owners. There are multiple entity structures used in for-profit business entities including corporations, LLCs, partnerships, and sole proprietorships. Many for-profit business owners seek some form of limited liability, and thus form a corporation or an LLC, each of which carries with it specific legal attributes. Additionally, for-profit business entities are subject to a variety of local, state, and federal taxes and filings. Liability and tax issues will be discussed later in this chapter.

For-profit businesses are commercial entities that generally earn revenue through the sales of products or services, whereas nonprofits are organized for social purposes. Nonprofits are allowed to provide assets or income to individuals only as fair compensation for their services. For-profit businesses can be either privately owned (such as an LLC) or publicly owned and traded (such as a corporation). Publicly held and traded corporations sell stock or interests , and must abide by special rules to protect shareholders , whereas privately owned businesses may be less regulated. Regulations may vary by state and by type of incorporation.

Characteristics of Not-for-Profit Organizations

A not-for-profit organization (NFPO) is usually dedicated to serve the public interest, further a particular social cause, or advocate for a common shared interest. They must follow particular regulations regarding eligibility, government lobbying, and tax-deductible contributions. In financial terms, a not-for-profit organization uses its surplus revenues to achieve its ultimate objective, rather than distributing its income to the organization’s shareholders, partners, or members. Common examples of not-for-profits include educational organizations such as schools, colleges, and universities; public charities such as the United Way ; religious organizations such as places of worship; foundations; trade organizations; and issue-advocacy groups. Other organizations also considered NFPOs include nongovernmental organizations, civil society organizations, foundations that provide funding for various activities, and private voluntary organizations. 2

Nonprofits are usually tax-exempt as categorized by the US Internal Revenue Service (IRS) , meaning they do not pay income tax on the money they receive for their organization. These types of organizations are created under state law (but also subject to federal and local laws) and are typically created for the common good.

To operate as a not-for-profit business, most states require that the entrepreneur create a corporation that has the specific purpose of acting in the public interest. This type of corporation does not have owners but has directors charged with running the organization for the public good, subject to bylaws. Some states only require a minimum of one director, whereas other states may require three or more directors. This is an important consideration for an entrepreneur because the nonprofit corporation will need the approval of all of the directors, and not just one person for its creation. Careful vetting of the directors is the best policy of any entrepreneur since directors have a duty to the corporation.

Because state laws vary, a not-for-profit corporation created for the common good in one state needs permission from another state to operate in that state. The permission is typically an approval from the other state’s secretary of state memorialized in the form of official documents or permits. When operating in different states, the entrepreneur needs to make sure that the business follows all laws, rules, and regulations for each state.

Another issue to consider is the creation of a not-for-profit business organization for a particular purpose. One example of a special-purpose organization is an alumni organization, usually incorporated as a 501(c)(3) nonprofit, which incorporates to raise money for a college or university for a specific reason, such as student scholarships. Alternatively, a booster club may incorporate to receive donations for a single function, such as the women’s soccer team. These organizations may need additional approvals prior to the creation or start of operations, depending upon state and local legal requirements. Each state typically has different requirements; depending on the federal tax regulation under which the entrepreneur is attempting to qualify, there may be additional federal regulations. This is why the entrepreneur needs to fully understand the purpose of the business they are starting and the legal operating environment before selecting the business structure. While NFPOs play an important role, most entrepreneurs form for-profit businesses; therefore, the remainder of this chapter will focus primarily on for-profit business entities.

Entrepreneur In Action

Determining the purpose of your business—profit versus non-profit, or a little of both.

The Approach Used by Gravity Payments’ Entrepreneur Dan Price

Sometimes, a business may be a for-profit company yet act in a way that some may think exhibits a not-for-profit philosophy. Most startups must address their business purpose. In other words, is the primary purpose of the business to enrich the owners or is it to spread the benefits of success to the workers? The history of Gravity Payments ( Figure 13.3 ) illustrates this issue.

In 2011, an employee earning $35,000 a year told his boss at Gravity Payments, a credit-card payment business, that his earnings were not sufficient for a decent life in expensive Seattle. The boss, Dan Price , who cofounded the company in 2004, was somewhat surprised, as he had always taken pride in treating employees well. Nevertheless, he decided his employee was right. For the next three years, Gravity gave every employee a 20 percent annual raise. Still, profit continued to outgrow wages, so Price announced that over the next three years, Gravity would phase in a minimum salary of $70,000 for all employees. He reduced his own salary from $1 million to $70,000 to demonstrate the point and help fund the company-wide salary increase. The following week, 5,000 people applied for jobs at Gravity, including a Yahoo executive who took a pay cut to transfer to a company she considered fun and meaningful to work for.

Price recognized that low starting salaries were antithetical to his values and to what he felt was a large part of his business purpose. A majority of the initial cost of his approach to employee salaries was absorbed by making less profit, yet revenue continues to grow at Gravity, along with the customer base and the workforce. Price believes that managers should measure purpose, impact, and service as much as profit.

• Do you think an entrepreneur can successfully operate a for-profit business while paying its workers substantially more than the competition?
• 2 International Center for Not-for-Profit Law (ICNL). “What Is the Difference between ‘Non-Profit’ and ‘Not-for-Profit’?” 2013. http://www.icnl.org/contact/faq/index.html#difference

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/entrepreneurship/pages/1-introduction

• Authors: Michael Laverty, Chris Littel
• Publisher/website: OpenStax
• Book title: Entrepreneurship
• Publication date: Jan 16, 2020
• Location: Houston, Texas
• Book URL: https://openstax.org/books/entrepreneurship/pages/1-introduction
• Section URL: https://openstax.org/books/entrepreneurship/pages/13-1-business-structures-overview-of-legal-and-tax-considerations

© Jan 4, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

Capital structure of SMEs: a systematic literature review and bibliometric analysis

• Published: 13 November 2019
• Volume 70 , pages 535–565, ( 2020 )

Cite this article

• Satish Kumar   ORCID: orcid.org/0000-0001-5200-1476 1 ,
• Riya Sureka 1 &
• Sisira Colombage 2  

5153 Accesses

83 Citations

Explore all metrics

Capital structure is the outcome of market conditions, financial decisions taken by the firm, and credit rationing of fund providers. Research on the capital structure of small and medium enterprises (SMEs) has gained momentum in recent years. The present study aims to identify key contributors, key areas, current dynamics, and suggests future research directions in the field of the capital structure of SMEs. This paper adopts a systematic literature review methodology along with bibliometric, network, and content analysis on a sample of 262 studies taken from the Web of Science database to examine the research activities that have taken place on this topic. Most influential papers are identified based on citations and PageRank, along with the most influential authors. The co-citation network is developed to see the intellectual structure of this research area. Applying bibliometric tools, four research clusters have been identified and content analysis performed on the papers identified in the clusters. It is found that the major research focus in this area is around theory testing—mainly, pecking order theory, trade-off theory, and agency theory. Determinants of capital structure, trade credit, corporate governance, and bankruptcy are also the prominent research topics in this field. Also, this study has identified the research gaps and has proposed five actionable research directions for the future.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price includes VAT (Russian Federation)

Instant access to the full article PDF.

Rent this article via DeepDyve

Institutional subscriptions

Similar content being viewed by others

社会网络与商业信用: 基于 “结构洞” 位置的证据

Efficiency and Capital Structure in Portuguese SMEs

The Financial Structure of Small and Medium Firms and the Impact on the Cost of Capital

Acedo FJ, Barroso C, Casanueva C, Gala JL (2006) Co-authorship in management and organizational studies. J Manag Stud 43:957–983. https://doi.org/10.1111/j.1467-6486.2006.00625.x

Article   Google Scholar  

Ang JS (1992) On the theory of finance for privately held firms. J Entrep Finance 1:185–203

Google Scholar  

Azouzi MA, Jarboui A (2012) CEO emotional bias and capital structure choice, bayesian network method. Bus Excell Manag 2:47–70

Beck T, Demirgüç-Kunt A, Maksimovic V (2008) Financing patterns around the world: are small firms different? J Financ Econ 89:467–487. https://doi.org/10.1016/j.jfineco.2007.10.005

Berger AN, Udell GF (1998) The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. J Bank Finance 22:613–673. https://doi.org/10.1016/S0378-4266(98)00038-7

Blondel VD, Guillaume JL, Lambiotte R, Lefebvre E (2008) Fast unfolding of communities in large networks. J Stat Mech Theory Exp 10:P10008. https://doi.org/10.1088/1742-5468/2008/10/P10008

Brin S, Page L (1998) The anatomy of a large-scale hypertextual web search engine. Comput Netw ISDN Syst 30:107–117. https://doi.org/10.1016/S0169-7552(98)00110-X

Brounen D, De Jong A, Koedijk K (2004) Corporate finance in Europe: confronting theory with practice. Financ Manag 44:71–101

Castriotta M, Loi M, Marku E, Naitana L (2019) What’s in a name? Exploring the conceptual structure of emerging organizations. Scientometrics 118:407–437. https://doi.org/10.1007/s11192-018-2977-2

Chang RP, Rhee SG (1990) The impact of personal taxes on corporate dividend policy and capital structure decisions. Financ Manag 19:21–31. https://doi.org/10.2307/3665631

Cisneros L, Ibanescu M, Keen C, Lobato-Calleros O, Niebla-Zatarain J (2018) Bibliometric study of family business succession between 1939 and 2017: mapping and analyzing authors’ networks. Scientometrics 117:919–951. https://doi.org/10.1007/s11192-018-2889-1

Cloyd CB, Limberg ST, Robinson JR (1997) The impact of federal taxes on the use of debt by closely held corporations. Natl Tax J 50:261–277

Czarniewski S (2016) Small and medium-sized enterprises in the context of innovation and entrepreneurship in the economy. Pol J Manag Stud 3:30–39. https://doi.org/10.17512/pjms.2016.13.1.03

Daskalakis N, Eriotis N, Thanou E, Vasiliou D (2014) Capital structure and size: new evidence across the broad spectrum of SMEs. Manag Finance 40:1207–1222. https://doi.org/10.1108/MF-11-2013-0325

Demirgüç-Kunt A, Maksimovic V (1999) Institutions, financial markets, and firms’ choice of debt maturity. World Bank. https://doi.org/10.1596/1813-9450-1686

Diamond DW (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414. https://doi.org/10.2307/2297430

Ding Y, Cronin B (2011) Popular and/or prestigious? Measures of scholarly esteem. Inf Process Manag 47:80–96. https://doi.org/10.1016/j.ipm.2010.01.002

Ding Y, Chowdhury GG, Foo S (2001) Bibliometric cartography of information retrieval research by using co-work analysis. Inf Process Manage 37:817–842. https://doi.org/10.1016/S0306-4573(00)00051-0

Ding Y, Yan E, Frazho A, Caverlee J (2009) PageRank for ranking authors in co-citation networks. J Am Soc Inf Sci 60:2229–2243. https://doi.org/10.1002/asi.21171

Fahimnia B, Sarkis J, Davarzani H (2015) Green supply chain management: a review and bibliometric analysis. Int J Prod Econ 162:101–114. https://doi.org/10.1016/j.ijpe.2015.01.003

Fairchild RJ (2005) The effect of Managerial Overconfidence, asymmetric information, and moral hazard on capital structure decisions. http://dx.doi.org/10.2139/ssrn.711845

Fernández Z, Nieto MJ (2006) Impact of ownership on the international involvement of SMEs. J Int Bus Stud 37:340–351. https://doi.org/10.1057/palgrave.jibs.8400196

Ferris JS (1981) A transactions theory of trade credit use. Q J Econ 96:243–270. https://doi.org/10.2307/1882390

Gallo MÁ, Tàpies J, Cappuyns K (2004) Comparison of family and nonfamily business: financial logic and personal preferences. Family Bus Rev 17:303–318. https://doi.org/10.1111/j.1741-6248.2004.00020.x

Garfield E (2009) From the science of science to Scientometrics visualizing the history of science with HistCite software. J Informetr 3:173–179. https://doi.org/10.1016/j.joi.2009.03.009

Gmur M (2003) Co-citation analysis and the search for invisible colleges: a methodological evaluation. Scientometrics 57:27–57. https://doi.org/10.1023/A:1023619503005

Graham JR, Harvey CR (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243. https://doi.org/10.1016/S0304-405X(01)00044-7

Hasan I, Jackowicz K, Kowalewski O, Kozłowski Ł (2017) Do local banking market structures matter for SME financing and performance? New evidence from an emerging economy. J Bank Finance 79:142–158. https://doi.org/10.1016/j.jbankfin.2017.03.009

Heshmati A (2001) On the growth of micro and small firms: evidence from Sweden. Small Bus Econ 17:213–228. https://doi.org/10.1023/A:1011886128912

Hjørland B (2013) Citation analysis: a social and dynamic approach to knowledge organization. Inf Process Manag 49:1313–1325. https://doi.org/10.1016/j.ipm.2013.07.001

Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Kelly A, Morris H, Harvey C (2009) Modelling the outcome of the UK business and management studies RAE 2008 with reference to the ABS journal quality guide. Association of Business Schools

Kraus A, Litzenberger RH (1973) A state preference model of optimal financial leverage. J Finance 28:911–922. https://doi.org/10.1111/j.1540-6261.1973.tb01415.x

Leydesdorff L (2015) Bibliometrics/citation networks. In: Barnett GA (ed) Encyclopedia of social networks. SAGE Publications Inc, Thousand Oaks

Li C, Wu K, Wu J (2017) A bibliometric analysis of research on haze during 2000–2016. Environ Sci Pollut Res 24:24733–24742. https://doi.org/10.1007/s11356-017-0440-1

López-Gracia J, Sogorb-Mira F (2008) Testing trade-off and pecking order theories financing SMEs. Small Bus Econ 31:117–136. https://doi.org/10.1007/s11187-007-9088-4

Mac an Bhaird C, Lucey B (2014) Culture’s influences: an investigation of inter-country differences in capital structure. Borsa Istanb Rev 14:1–9. https://doi.org/10.1016/j.bir.2013.10.004

Martinez LB, Scherger V, Guercio MB (2019). SMEs capital structure: trade-off or pecking order theory: a systematic review. J Small Bus Enterp Dev 26:105–132. https://doi.org/10.1108/JSBED-12-2017-0387

Mc Namara A, Murro P, O’ Donohoe S (2017) Countries lending infrastructure and capital structur determination: the case of European SMEs. J Corp Finance 43:122–138. https://doi.org/10.1016/j.jcorpfin.2016.12.008

Michaelas N, Chittenden F, Poutziouris P (1999) Financial policy and capital structure choice in UK SMEs: empirical evidence from company panel data. Small Bus Econ 12:113–130. https://doi.org/10.1023/A:1008010724051

Michiels A, Molly V (2017) Financing decisions in family businesses: a review and suggestions for developing the field. Family Bus Rev 30:369–399. https://doi.org/10.1177/0894486517736958

Miller D, Le Breton-Miller I (2006) Family governance and firm performance: agency, stewardship, and capabilities. Family Bus Rev 19:73–87. https://doi.org/10.1111/j.1741-6248.2006.00063.x

Mingers J, Willmott H (2013) Taylorizing business school research: on the ‘one best way’ performative effects of journal ranking lists. Hum Relat 66:1051–1073. https://doi.org/10.1177/0018726712467048

Modigliani F, Miller MH (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48:261–297

Moritz A, Block JH, Heinz A (2016) Financing patterns of European SMEs—an empirical taxonomy. Venture Cap 18:115–148. https://doi.org/10.1080/13691066.2016.1145900

MSME (2018) Annual report 2017–2018. Government of India. https://msme.gov.in/relatedlinks/annual-report-ministry-micro-small-and-medium-enterprises . Accessed 17 May 2018

Myers SC (1977) Determinants of corporate borrowing. J Financ Econ 5:147–175. https://doi.org/10.1016/0304-405X(77)90015-0

Myers SC (1984) The capital structure puzzle. J Finance 39:574–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x

Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13:187–221. https://doi.org/10.1016/0304-405X(84)90023-0

Oliver BR (2005) The impact of management confidence on capital structure. Available at SSRN 791924. http://dx.doi.org/10.2139/ssrn.791924

Pacheco L, Tavares F (2015) Capital structure determinants of Portuguese footwear sector SMEs: empirical evidence using a panel data. Tékhne 13:145–157. https://doi.org/10.1016/j.tekhne.2016.04.002

Persson O, Danell R, Schneider JW (2009) How to use Bibexcel for various types of bibliometric analysis. Celebr Sch Commun Stud Festschrift Olle Persson 60th Birthd 5:9–24

Petersen MA, Rajan RG (1994) The benefits of lending relationships: evidence from small business data. J Finance 49:3–37. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x

Pritchard A (1969) Statistical bibliography or bibliometrics. J Doc 25:348–349

Rajan RG, Zingales L (1995) What do we know about capital structure? Some evidence from international data. J Finance 50:1421–1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x

Ramos Rodríguez AR, Ruíz Navarro J (2004) Changes in the intellectual structure of strategic management research: a bibliometric study of the Strategic Management Journal, 1980–2000. Strateg Manag J 25:981–1004. https://doi.org/10.1002/smj.397

Rice T, Strahan PE (2010) Does credit competition affect small-firm finance? J Finance 65:861–889. https://doi.org/10.1111/j.1540-6261.2010.01555.x

Romano CA, Tanewski GA, Smyrnios KX (2001) Capital structure decision making: a model for family business. J Bus Ventur 16:285–310. https://doi.org/10.1016/S0883-9026(99)00053-1

Ross SA (1977) The determination of financial structure: the incentive-signalling approach. Bell J Econ 8:23–40. https://doi.org/10.2307/3003485

Scherr FC, Hulburt HM (2001) The debt maturity structure of small firms. Financ Manag 30:85–111. https://doi.org/10.2307/3666392

Serrasqueiro Z, Nunes PM (2012) Is age a determinant of SMEs’ financing decisions? Empirical evidence using panel data models. Entrep Theory Pract 36:627–654. https://doi.org/10.1111/j.1540-6520.2010.00433.x

Serrasqueiro Z, Nunes PM (2014) Financing behaviour of Portuguese SMEs in hotel industry. Int J Hosp Manag 43:98–107. https://doi.org/10.1016/j.ijhm.2014.09.001

Shen Y, Shen M, Xu Z, Bai Y (2009) Bank size and small-and medium-sized enterprise (SME) lending: evidence from China. World Dev 37:800–811. https://doi.org/10.1016/j.worlddev.2008.07.014

Shleifer A, Vishny RW (1997) A survey of corporate governance. J Finance 52:737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x

Small H (1973) Co-citation in the scientific literature: a new measure of the relationship between two documents. J Am Soc Inf Sci 24:265–269. https://doi.org/10.1002/asi.4630240406

Small HG (2009) Critical thresholds for co-citation clusters and emergence of the giant component. J Informetr 3:332–340. https://doi.org/10.1016/j.joi.2009.05.001

Small H, Greenlee E (1980) Citation context analysis of a co-citation cluster: recombinant-DNA. Scientometrics 2:277–301. https://doi.org/10.1007/BF02016349

Sogorb-Mira F (2005) How SME uniqueness affects capital structure: evidence from a 1994–1998 Spanish data panel. Small Bus Econ 25:447–457. https://doi.org/10.1007/s11187-004-6486-8

Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71:393–410

Stohs MH, Mauer DC (1996) The determinants of corporate debt maturity structure. J Bus 69:279–312

Storey DJ (1994) The role of legal status in influencing bank financing and new firm growth. Appl Econ 26:129–136. https://doi.org/10.1080/00036849400000068

Strozzi F, Colicchia C, Creazza A et al (2017) Literature review on the “Smart Factory” concept using bibliometric tools. Int J Prod Res 55:6572–6591. https://doi.org/10.1080/00207543.2017.1326643

Svensson G (2010) SSCI and its impact factors: a “prisoner’s dilemma”? Eur J Mark 44:23–33. https://doi.org/10.1108/03090561011008583

Thorburn KS (2000) Bankruptcy auctions: costs, debt recovery, and firm survival. J Financ Econ 58:337–368. https://doi.org/10.1016/S0304-405X(00)00075-1

Titman S, Wessels R (1988) The determinants of capital structure choice. J Finance 43:1–19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x

Tranfield D, Denyer D, Smart P (2003) Towards a methodology for developing evidence informed management knowledge by means of systematic review. Br J Manag 14:207–222. https://doi.org/10.1111/1467-8551.00375

Tunger D, Eulerich M (2018) Bibliometric analysis of corporate governance research in German-speaking countries: applying bibliometrics to business research using a custom-made database. Scientometrics 117:2041–2059. https://doi.org/10.1007/s11192-018-2919-z

Tüselmann H, Sinkovics RR, Pishchulov G (2016) Revisiting the standing of international business journals in the competitive landscape. J World Bus 51:487–498. https://doi.org/10.1016/j.jwb.2016.01.006

Ueda M (2004) Banks versus venture capital: project evaluation, screening, and expropriation. J Finance 59:601–621. https://doi.org/10.1111/j.1540-6261.2004.00643.x

Uzzi B (1999) Embeddedness in the making of financial capital: how social relations and networks benefit firms seeking financing. Am Sociol Rev 64:481–505. https://doi.org/10.2307/2657252

Van der Wijst N, Thurik R (1993) Determinants of small firm debt ratios: an analysis of retail panel data. Small Bus Econ 5:55–65. https://doi.org/10.1007/BF01539318

Van Eck NJ, Waltman L (2009) How to normalize cooccurrence data? An analysis of some well known similarity measures. J Am Soc Inform Sci Technol 60:1635–1651. https://doi.org/10.1002/asi.21075

Van Eck NJ, Waltman L (2010) Software survey: VOSviewer, a computer program for bibliometric mapping. Scientometrics 84:523–538. https://doi.org/10.1007/s11192-009-0146-3

Vermoesen V, Deloof M, Laveren E (2013) Long-term debt maturity and financing constraints of SMEs during the global financial crisis. Small Bus Econ 41:433–448. https://doi.org/10.1007/s11187-012-9435-y

Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value? J Financ Econ 80:385–417. https://doi.org/10.1016/j.jfineco.2004.12.005

Vos E, Yeh AJY, Carter S, Tagg S (2007) The happy story of small business financing. J Bank Finance 31:2648–2672. https://doi.org/10.1016/j.jbankfin.2006.09.011

Voulgaris F, Asteriou D, Agiomirgianakis G (2004) Size and determinants of capital structure in the Greek manufacturing sector. Int Rev Appl Econ 18:247–262. https://doi.org/10.1080/0269217042000186714

Wald JK (1999) How firm characteristics affect capital structure: an international comparison. J Financ Res 22:161–187. https://doi.org/10.1111/jfir.1999.22.issue-2

Warner JB (1977) Bankruptcy costs: some evidence. J Finance 32:337–347. https://doi.org/10.2307/2326766

Watson R, Wilson N (2002) Small and medium size enterprise financing: a note on some of the empirical implications of a pecking order. J Bus Finance Account 29:557–578. https://doi.org/10.1111/1468-5957.00443

Westhead P, Storey DJ (1997) Financial constraints on the growth of high technology small firms in the United Kingdom. Appl Financ Econ 7:197–201. https://doi.org/10.1080/096031097333763

Whited TM (1992) Debt, liquidity constraints, and corporate investment: evidence from panel data. J Finance 47:1425–1460. https://doi.org/10.1111/j.1540-6261.1992.tb04664.x

Wiklund J, Shepherd D (2005) Entrepreneurial orientation and small business performance: a configurational approach. J Bus Ventur 20:71–91. https://doi.org/10.1016/j.jbusvent.2004.01.001

Williamson OE (1975) Markets and hierarchies. Free Press, New York, p 2630

Williamson OE (1988) Corporate finance and corporate governance. J Finance 43:567–591. https://doi.org/10.1111/j.1540-6261.1988.tb04592.x

Wilner BS (2000) The exploitation of relationships in financial distress: the case of trade credit. J Finance 55:153–178. https://doi.org/10.1111/0022-1082.00203

Winborg J, Landström H (2001) Financial bootstrapping in small businesses: examining small business managers’ resource acquisition behaviors. J Bus Ventur 16:235–254. https://doi.org/10.1016/S0883-9026(99)00055-5

Windmeijer F (2005) A finite sample correction for the variance of linear efficient two-step GMM estimators. J Econom 126:25–51. https://doi.org/10.1016/j.jeconom.2004.02.005

Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105:581–606. https://doi.org/10.1016/j.jfineco.2012.03.005

Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT Press, Cambridge

Wooldridge JM (2010) Econometric analysis of cross section and panel data. MIT press, Cambridge

Wright M, Robbie K (1998) Venture capital and private equity: a review and synthesis. J Bus Finance Account 25:521–570. https://doi.org/10.1111/1468-5957.00201

Wright M, Stigliani I (2013) Entrepreneurship and growth. Int Small Bus J 31:3–22. https://doi.org/10.1177/0266242612467359

Wu Z, Chua JH, Chrisman JJ (2007) Effects of family ownership and management on small business equity financing. J Bus Ventur 22:875–895. https://doi.org/10.1016/j.jbusvent.2006.07.002

Xiang D, Worthington AC, Higgs H (2015) Discouraged finance seekers: an analysis of Australian small and medium-sized enterprises. Int Small Bus J 33:689–707. https://doi.org/10.1177/0266242613516138

Xu X, Chen X, Jia F, Brown S, Gong Y, Xu Y (2018) Supply chain finance: a systematic literature review and bibliometric analysis. Int J Prod Econ 204:160–173. https://doi.org/10.1016/j.ijpe.2018.08.003

Yang CH, Huang CH (2005) R&D, size and firm growth in Taiwan‘s electronics industry. Small Bus Econ 25:477–487. https://doi.org/10.1007/s11187-004-6487-7

Yermack D (1996) Higher market valuation of companies with a small board of directors. J Financ Econ 40:185–211. https://doi.org/10.1016/0304-405X(95)00844-5

Yosha O (1995) Information disclosure costs and the choice of financing source. J Financ Intermed 4:3–20. https://doi.org/10.1006/jfin.1995.1001

Zahra SA (2003) International expansion of US manufacturing family businesses: the effect of ownership and involvement. J Bus Ventur 18:495–512. https://doi.org/10.1016/S0883-9026(03)00057-0

Zahra SA (2005) Entrepreneurial risk taking in family firms. Family Bus Rev 18:2340. https://doi.org/10.1111/j.1741-6248.2005.00028.x

Zahra SA, Ireland RD, Hitt MA (2000) International expansion by new venture firms: international diversity, mode of market entry, technological learning, and performance. Acad Manag J 43:925–950. https://doi.org/10.5465/1556420

Zingales L (2000) In search of new foundations. J Finance 55:1623–1653. https://doi.org/10.1111/0022-1082.00262

Zott C, Huy QN (2007) How entrepreneurs use symbolic management to acquire resources. Adm Sci Q 52:70–105. https://doi.org/10.2189/asqu.52.1.70

Zupic I, Čater T (2015) Bibliometric methods in management and organization. Organ Res Methods 18:429–447. https://doi.org/10.1177/1094428114562629

Zwiebel J (1996) Dynamic capital structure under managerial entrenchment. Am Econ Rev 86:1197–1215

Download references

Author information

Authors and affiliations.

Department of Management Studies, Malaviya National Institute of Technology, JLN Marg, Jaipur, Rajasthan, 302017, India

Satish Kumar & Riya Sureka

Federation Business School, Federation University Australia, Berwick Campus 100, Clyde Road, Berwick, VIC, 3806, Australia

Sisira Colombage

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Satish Kumar .

Additional information

Publisher's note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (DOCX 19 kb)

Rights and permissions.

Reprints and permissions

About this article

Kumar, S., Sureka, R. & Colombage, S. Capital structure of SMEs: a systematic literature review and bibliometric analysis. Manag Rev Q 70 , 535–565 (2020). https://doi.org/10.1007/s11301-019-00175-4

Download citation

Received : 03 July 2019

Accepted : 06 November 2019

Published : 13 November 2019

Issue Date : November 2020

DOI : https://doi.org/10.1007/s11301-019-00175-4

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Capital structure
• Systematic literature review
• Bibliometric analysis
• Network analysis
• Content analysis
• Co-citation

JEL Classfications

• Find a journal
• Publish with us
• Track your research

• Link to facebook
• Link to linkedin
• Link to twitter
• Link to youtube
• Writing Tips

How to Structure a Business Report

• 5-minute read
• 14th March 2019

The content of a business report will depend on what you are writing about. Even the writing style may depend on who you are writing for (although clear, concise and formal is usually best). However, there is a general structure that most business reports follow. In this post, then, we’ll look at how to structure a business report for maximum clarity and professionalism.

1. Title Page

Every business report should feature a title page . The title itself should clearly set out what the report is about. Typically, you should also include your name and the date of the report.

Most business reports begin with a summary of its key points. Try to include:

• A brief description of what the report is about
• How the report was completed (e.g., data collection methods)
• The main findings from the research
• Key conclusions and recommendations

A paragraph or two should suffice for this in shorter business reports. However, for longer or more complex reports, you may want to include a full executive summary .

3. Table of Contents

Short business reports may not need a table of contents, especially if they include a summary. But longer reports should set out the title of each section and the structure of the report. Make sure the headings here match those used in the main text. You may also want to number the sections.

4. Introduction

The introduction is the first part of the report proper. Use it to set out the brief you received when you were asked to compile the report. This will frame the rest of the report by providing:

• Background information (e.g., business history or market information)
• The purpose of the report (i.e., what you set out to achieve)
• Its scope (i.e., what the report will cover and what it will ignore)

These are known as the “terms of reference” for the business report.

5. Methods and Findings

If you are conducting original research, include a section about your methods. This may be as simple as setting out the sources you are using and why you chose them. But it could also include how you have collected and analyzed the data used to draw your conclusions.

After this, you will need to explain your findings. This section will present the results of your research clearly and concisely, making sure to cover all the main points set out in the brief.

Find this useful?

Subscribe to our newsletter and get writing tips from our editors straight to your inbox.

One tip here is to break the findings down into subsections, using headings to guide the reader through your data. Using charts and illustrations , meanwhile, can help get information across visually, but make sure to label them clearly so the reader knows how they relate to the text.

6. Conclusions and Recommendations

The last main section of your report will cover conclusions and recommendations. The conclusion section should summarize what you have learned from the report. If you have been asked to do so, you should also recommend potential courses of action based on your conclusions.

If you are not sure what to suggest here, think back to the objectives set out in your brief.

7. References

If you have used any third-party sources while writing your report, list them in a bibliography after the main report. This could include other business documents, academic articles, or even news reports. The key is to show what you have based your findings and conclusions upon.

8. Appendices (If Applicable)

Finally, you may have gathered extra documentation during your research, such as interview transcripts, marketing material, or financial data. Including this in the main report would make it too long and unfocused, but you can add it to an appendix (or multiple appendices) at the end of the document. It will then be available should your reader need it.

Summary: How to Structure a Business Report

If you are writing a business report, aim to structure it as follows:

• Title Page – Include a clear, informative title, your name, and the date.
• Summary – A brief summary of what the report is about, the data collection methods used, the findings of the report, and any recommendations you want to make.
• Table of Contents – For longer reports, include a table of contents.
• Introduction –Set out the brief you were given for the report.
• Methods and Findings – A description of any methods of data collection and analysis used while composing the report, as well as your findings.
• Conclusions and Recommendations – Any conclusions reached while writing the report, plus recommendations for what to do next (if required).
• References – Sources used in your report listed in a bibliography.
• Appendices – If you have supporting material (e.g., interview transcripts, raw data), add it to an appendix at the end of the document.

Don’t forget, too, that a business report should be clear, concise, and formal. And if you would like help making sure that your business writing is easy to read and error free, just let us know .

Share this article:

Post A New Comment

Got content that needs a quick turnaround? Let us polish your work. Explore our editorial business services.

9-minute read

How to Use Infographics to Boost Your Presentation

Is your content getting noticed? Capturing and maintaining an audience’s attention is a challenge when...

8-minute read

Why Interactive PDFs Are Better for Engagement

Are you looking to enhance engagement and captivate your audience through your professional documents? Interactive...

7-minute read

Seven Key Strategies for Voice Search Optimization

Voice search optimization is rapidly shaping the digital landscape, requiring content professionals to adapt their...

4-minute read

Five Creative Ways to Showcase Your Digital Portfolio

Are you a creative freelancer looking to make a lasting impression on potential clients or...

How to Ace Slack Messaging for Contractors and Freelancers

Effective professional communication is an important skill for contractors and freelancers navigating remote work environments....

3-minute read

How to Insert a Text Box in a Google Doc

Google Docs is a powerful collaborative tool, and mastering its features can significantly enhance your...

Make sure your writing is the best it can be with our expert English proofreading and editing.

Shrinking the Term Structure

We propose a new framework to explain the factor structure in the full cross section of Treasury bond returns. Our method unifies non-parametric curve estimation with cross-sectional factor modeling. We identify smoothness as a fundamental principle of the term structure of returns. Our approach implies investable factors, which correspond to the optimal spanning basis functions in decreasing order of smoothness. Our factors explain the slope and curvature shapes frequently encountered in PCA. In a comprehensive empirical study, we show that the first four factors explain the time-series variation and risk premia of the term structure of excess returns. Cash flows are covariances as the exposure of bonds to factors is fully explained by cash flow information. We identify a state-dependent complexity premium. The fourth factor, which captures complex shapes of the term structure premium, substantially reduces pricing errors and pays off during recessions.

We thank Robert Anderson, Michael Bauer, Xiaohong Chen, Richard Crump, Darrell Duffie, Kay Giesecke, Lisa Goldberg, Nikolay Gospodinov, Tze Lai, Martin Lettau, Aaron Sidford, Irina Zviadadze (discussant), and seminar and conference participants at Stanford, UC Berkeley, University of Cincinnati, Korean Advanced Institute of Science & Technology, Korean Business School, Balyasny Asset Management, the Annual Meeting of the European Finance Association and the Conference on Computational and Financial Econometrics for helpful comments. We thank Rose Wang for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

MARC RIS BibTeΧ

Download Citation Data

• data appendix
• U.S. Treasury Discount Bond Database

More from NBER

In addition to working papers , the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter , the NBER Digest , the Bulletin on Retirement and Disability , the Bulletin on Health , and the Bulletin on Entrepreneurship  — as well as online conference reports , video lectures , and interviews .

• U.S. Locations
• UMGC Europe
• Learn Online
• Find Answers
• 855-655-8682
• Current Students

Online Guide to Writing and Research

The research process, explore more of umgc.

• Online Guide to Writing

Structuring the Research Paper

Formal research structure.

These are the primary purposes for formal research:

enter the discourse, or conversation, of other writers and scholars in your field

learn how others in your field use primary and secondary resources

find and understand raw data and information

For the formal academic research assignment, consider an organizational pattern typically used for primary academic research.  The pattern includes the following: introduction, methods, results, discussion, and conclusions/recommendations.

Usually, research papers flow from the general to the specific and back to the general in their organization. The introduction uses a general-to-specific movement in its organization, establishing the thesis and setting the context for the conversation. The methods and results sections are more detailed and specific, providing support for the generalizations made in the introduction. The discussion section moves toward an increasingly more general discussion of the subject, leading to the conclusions and recommendations, which then generalize the conversation again.

Sections of a Formal Structure

The introduction section.

Many students will find that writing a structured  introduction  gets them started and gives them the focus needed to significantly improve their entire paper. 

Introductions usually have three parts:

presentation of the problem statement, the topic, or the research inquiry

purpose and focus of your paper

summary or overview of the writer’s position or arguments

In the first part of the introduction—the presentation of the problem or the research inquiry—state the problem or express it so that the question is implied. Then, sketch the background on the problem and review the literature on it to give your readers a context that shows them how your research inquiry fits into the conversation currently ongoing in your subject area. 

In the second part of the introduction, state your purpose and focus. Here, you may even present your actual thesis. Sometimes your purpose statement can take the place of the thesis by letting your reader know your intentions. 

The third part of the introduction, the summary or overview of the paper, briefly leads readers through the discussion, forecasting the main ideas and giving readers a blueprint for the paper. 

The following example provides a blueprint for a well-organized introduction.

Example of an Introduction

Entrepreneurial Marketing: The Critical Difference

In an article in the Harvard Business Review, John A. Welsh and Jerry F. White remind us that “a small business is not a little big business.” An entrepreneur is not a multinational conglomerate but a profit-seeking individual. To survive, he must have a different outlook and must apply different principles to his endeavors than does the president of a large or even medium-sized corporation. Not only does the scale of small and big businesses differ, but small businesses also suffer from what the Harvard Business Review article calls “resource poverty.” This is a problem and opportunity that requires an entirely different approach to marketing. Where large ad budgets are not necessary or feasible, where expensive ad production squanders limited capital, where every marketing dollar must do the work of two dollars, if not five dollars or even ten, where a person’s company, capital, and material well-being are all on the line—that is, where guerrilla marketing can save the day and secure the bottom line (Levinson, 1984, p. 9).

By reviewing the introductions to research articles in the discipline in which you are writing your research paper, you can get an idea of what is considered the norm for that discipline. Study several of these before you begin your paper so that you know what may be expected. If you are unsure of the kind of introduction your paper needs, ask your professor for more information.  The introduction is normally written in present tense.

THE METHODS SECTION

The methods section of your research paper should describe in detail what methodology and special materials if any, you used to think through or perform your research. You should include any materials you used or designed for yourself, such as questionnaires or interview questions, to generate data or information for your research paper. You want to include any methodologies that are specific to your particular field of study, such as lab procedures for a lab experiment or data-gathering instruments for field research. The methods section is usually written in the past tense.

THE RESULTS SECTION

How you present the results of your research depends on what kind of research you did, your subject matter, and your readers’ expectations. 

Quantitative information —data that can be measured—can be presented systematically and economically in tables, charts, and graphs. Quantitative information includes quantities and comparisons of sets of data. 

Qualitative information , which includes brief descriptions, explanations, or instructions, can also be presented in prose tables. This kind of descriptive or explanatory information, however, is often presented in essay-like prose or even lists.

There are specific conventions for creating tables, charts, and graphs and organizing the information they contain. In general, you should use them only when you are sure they will enlighten your readers rather than confuse them. In the accompanying explanation and discussion, always refer to the graphic by number and explain specifically what you are referring to; you can also provide a caption for the graphic. The rule of thumb for presenting a graphic is first to introduce it by name, show it, and then interpret it. The results section is usually written in the past tense.

THE DISCUSSION SECTION

Your discussion section should generalize what you have learned from your research. One way to generalize is to explain the consequences or meaning of your results and then make your points that support and refer back to the statements you made in your introduction. Your discussion should be organized so that it relates directly to your thesis. You want to avoid introducing new ideas here or discussing tangential issues not directly related to the exploration and discovery of your thesis. The discussion section, along with the introduction, is usually written in the present tense.

THE CONCLUSIONS AND RECOMMENDATIONS SECTION

Your conclusion ties your research to your thesis, binding together all the main ideas in your thinking and writing. By presenting the logical outcome of your research and thinking, your conclusion answers your research inquiry for your reader. Your conclusions should relate directly to the ideas presented in your introduction section and should not present any new ideas.

You may be asked to present your recommendations separately in your research assignment. If so, you will want to add some elements to your conclusion section. For example, you may be asked to recommend a course of action, make a prediction, propose a solution to a problem, offer a judgment, or speculate on the implications and consequences of your ideas. The conclusions and recommendations section is usually written in the present tense.

Key Takeaways

• For the formal academic research assignment, consider an organizational pattern typically used for primary academic research. 
•  The pattern includes the following: introduction, methods, results, discussion, and conclusions/recommendations.

Mailing Address: 3501 University Blvd. East, Adelphi, MD 20783 This work is licensed under a  Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License . © 2022 UMGC. All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Table of Contents: Online Guide to Writing

Chapter 1: College Writing

How Does College Writing Differ from Workplace Writing?

What Is College Writing?

Why So Much Emphasis on Writing?

Chapter 2: The Writing Process

Doing Exploratory Research

Getting from Notes to Your Draft

Introduction

Prewriting - Techniques to Get Started - Mining Your Intuition

Prewriting: Targeting Your Audience

Prewriting: Techniques to Get Started

Prewriting: Understanding Your Assignment

Rewriting: Being Your Own Critic

Rewriting: Creating a Revision Strategy

Rewriting: Getting Feedback

Rewriting: The Final Draft

Techniques to Get Started - Outlining

Techniques to Get Started - Using Systematic Techniques

Thesis Statement and Controlling Idea

Writing: Getting from Notes to Your Draft - Freewriting

Writing: Getting from Notes to Your Draft - Summarizing Your Ideas

Writing: Outlining What You Will Write

Chapter 3: Thinking Strategies

A Word About Style, Voice, and Tone

A Word About Style, Voice, and Tone: Style Through Vocabulary and Diction

Critical Strategies and Writing

Critical Strategies and Writing: Analysis

Critical Strategies and Writing: Evaluation

Critical Strategies and Writing: Persuasion

Critical Strategies and Writing: Synthesis

Developing a Paper Using Strategies

Kinds of Assignments You Will Write

Patterns for Presenting Information

Patterns for Presenting Information: Critiques

Patterns for Presenting Information: Discussing Raw Data

Patterns for Presenting Information: General-to-Specific Pattern

Patterns for Presenting Information: Problem-Cause-Solution Pattern

Patterns for Presenting Information: Specific-to-General Pattern

Patterns for Presenting Information: Summaries and Abstracts

Supporting with Research and Examples

Writing Essay Examinations

Writing Essay Examinations: Make Your Answer Relevant and Complete

Writing Essay Examinations: Organize Thinking Before Writing

Writing Essay Examinations: Read and Understand the Question

Chapter 4: The Research Process

Planning and Writing a Research Paper

Planning and Writing a Research Paper: Ask a Research Question

Planning and Writing a Research Paper: Cite Sources

Planning and Writing a Research Paper: Collect Evidence

Planning and Writing a Research Paper: Decide Your Point of View, or Role, for Your Research

Planning and Writing a Research Paper: Draw Conclusions

Planning and Writing a Research Paper: Find a Topic and Get an Overview

Planning and Writing a Research Paper: Manage Your Resources

Planning and Writing a Research Paper: Outline

Planning and Writing a Research Paper: Survey the Literature

Planning and Writing a Research Paper: Work Your Sources into Your Research Writing

Research Resources: Where Are Research Resources Found? - Human Resources

Research Resources: What Are Research Resources?

Research Resources: Where Are Research Resources Found?

Research Resources: Where Are Research Resources Found? - Electronic Resources

Research Resources: Where Are Research Resources Found? - Print Resources

Structuring the Research Paper: Formal Research Structure

Structuring the Research Paper: Informal Research Structure

The Nature of Research

The Research Assignment: How Should Research Sources Be Evaluated?

The Research Assignment: When Is Research Needed?

The Research Assignment: Why Perform Research?

Chapter 5: Academic Integrity

Academic Integrity

Giving Credit to Sources

Giving Credit to Sources: Copyright Laws

Giving Credit to Sources: Documentation

Giving Credit to Sources: Style Guides

Integrating Sources

Practicing Academic Integrity

Practicing Academic Integrity: Keeping Accurate Records

Practicing Academic Integrity: Managing Source Material

Practicing Academic Integrity: Managing Source Material - Paraphrasing Your Source

Practicing Academic Integrity: Managing Source Material - Quoting Your Source

Practicing Academic Integrity: Managing Source Material - Summarizing Your Sources

Types of Documentation

Types of Documentation: Bibliographies and Source Lists

Types of Documentation: Citing World Wide Web Sources

Types of Documentation: In-Text or Parenthetical Citations

Types of Documentation: In-Text or Parenthetical Citations - APA Style

Types of Documentation: In-Text or Parenthetical Citations - CSE/CBE Style

Types of Documentation: In-Text or Parenthetical Citations - Chicago Style

Types of Documentation: In-Text or Parenthetical Citations - MLA Style

Types of Documentation: Note Citations

Chapter 6: Using Library Resources

Finding Library Resources

Chapter 7: Assessing Your Writing

How Is Writing Graded?

How Is Writing Graded?: A General Assessment Tool

The Draft Stage

The Draft Stage: The First Draft

The Draft Stage: The Revision Process and the Final Draft

The Draft Stage: Using Feedback

The Research Stage

Using Assessment to Improve Your Writing

Chapter 8: Other Frequently Assigned Papers

Reviews and Reaction Papers: Article and Book Reviews

Reviews and Reaction Papers: Reaction Papers

Writing Arguments

Writing Arguments: Adapting the Argument Structure

Writing Arguments: Purposes of Argument

Writing Arguments: References to Consult for Writing Arguments

Writing Arguments: Steps to Writing an Argument - Anticipate Active Opposition

Writing Arguments: Steps to Writing an Argument - Determine Your Organization

Writing Arguments: Steps to Writing an Argument - Develop Your Argument

Writing Arguments: Steps to Writing an Argument - Introduce Your Argument

Writing Arguments: Steps to Writing an Argument - State Your Thesis or Proposition

Writing Arguments: Steps to Writing an Argument - Write Your Conclusion

Writing Arguments: Types of Argument

Appendix A: Books to Help Improve Your Writing

Dictionaries

General Style Manuals

Researching on the Internet

Special Style Manuals

Writing Handbooks

Appendix B: Collaborative Writing and Peer Reviewing

Collaborative Writing: Assignments to Accompany the Group Project

Collaborative Writing: Informal Progress Report

Collaborative Writing: Issues to Resolve

Collaborative Writing: Methodology

Collaborative Writing: Peer Evaluation

Collaborative Writing: Tasks of Collaborative Writing Group Members

Collaborative Writing: Writing Plan

General Introduction

Peer Reviewing

Appendix C: Developing an Improvement Plan

Working with Your Instructor’s Comments and Grades

Appendix D: Writing Plan and Project Schedule

Devising a Writing Project Plan and Schedule

Reviewing Your Plan with Others

By using our website you agree to our use of cookies. Learn more about how we use cookies by reading our  Privacy Policy .

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

• View all journals
• My Account Login
• Explore content
• About the journal
• Publish with us
• Sign up for alerts
• Open access
• Published: 17 October 2023

The impact of founder personalities on startup success

• Paul X. McCarthy 1 , 2 ,
• Xian Gong 3 ,
• Fabian Braesemann 4 , 5 ,
• Fabian Stephany 4 , 5 ,
• Marian-Andrei Rizoiu 3 &
• Margaret L. Kern 6  

Scientific Reports volume  13 , Article number:  17200 ( 2023 ) Cite this article

59k Accesses

2 Citations

305 Altmetric

Metrics details

• Human behaviour
• Information technology

An Author Correction to this article was published on 07 May 2024

This article has been updated

Startup companies solve many of today’s most challenging problems, such as the decarbonisation of the economy or the development of novel life-saving vaccines. Startups are a vital source of innovation, yet the most innovative are also the least likely to survive. The probability of success of startups has been shown to relate to several firm-level factors such as industry, location and the economy of the day. Still, attention has increasingly considered internal factors relating to the firm’s founding team, including their previous experiences and failures, their centrality in a global network of other founders and investors, as well as the team’s size. The effects of founders’ personalities on the success of new ventures are, however, mainly unknown. Here, we show that founder personality traits are a significant feature of a firm’s ultimate success. We draw upon detailed data about the success of a large-scale global sample of startups (n = 21,187). We find that the Big Five personality traits of startup founders across 30 dimensions significantly differ from that of the population at large. Key personality facets that distinguish successful entrepreneurs include a preference for variety, novelty and starting new things (openness to adventure), like being the centre of attention (lower levels of modesty) and being exuberant (higher activity levels). We do not find one ’Founder-type’ personality; instead, six different personality types appear. Our results also demonstrate the benefits of larger, personality-diverse teams in startups, which show an increased likelihood of success. The findings emphasise the role of the diversity of personality types as a novel dimension of team diversity that influences performance and success.

Similar content being viewed by others

Predicting success in the worldwide start-up network

The personality traits of self-made and inherited millionaires

The nexus of top executives’ attributes, firm strategies, and outcomes: Large firms versus SMEs

Introduction.

The success of startups is vital to economic growth and renewal, with a small number of young, high-growth firms creating a disproportionately large share of all new jobs 1 , 2 . Startups create jobs and drive economic growth, and they are also an essential vehicle for solving some of society’s most pressing challenges.

As a poignant example, six centuries ago, the German city of Mainz was abuzz as the birthplace of the world’s first moveable-type press created by Johannes Gutenberg. However, in the early part of this century, it faced several economic challenges, including rising unemployment and a significant and growing municipal debt. Then in 2008, two Turkish immigrants formed the company BioNTech in Mainz with another university research colleague. Together they pioneered new mRNA-based technologies. In 2020, BioNTech partnered with US pharmaceutical giant Pfizer to create one of only a handful of vaccines worldwide for Covid-19, saving an estimated six million lives 3 . The economic benefit to Europe and, in particular, the German city where the vaccine was developed has been significant, with windfall tax receipts to the government clearing Mainz’s €1.3bn debt and enabling tax rates to be reduced, attracting other businesses to the region as well as inspiring a whole new generation of startups 4 .

While stories such as the success of BioNTech are often retold and remembered, their success is the exception rather than the rule. The overwhelming majority of startups ultimately fail. One study of 775 startups in Canada that successfully attracted external investment found only 35% were still operating seven years later 5 .

But what determines the success of these ‘lucky few’? When assessing the success factors of startups, especially in the early-stage unproven phase, venture capitalists and other investors offer valuable insights. Three different schools of thought characterise their perspectives: first, supply-side or product investors : those who prioritise investing in firms they consider to have novel and superior products and services, investing in companies with intellectual property such as patents and trademarks. Secondly, demand-side or market-based investors : those who prioritise investing in areas of highest market interest, such as in hot areas of technology like quantum computing or recurrent or emerging large-scale social and economic challenges such as the decarbonisation of the economy. Thirdly, talent investors : those who prioritise the foundation team above the startup’s initial products or what industry or problem it is looking to address.

Investors who adopt the third perspective and prioritise talent often recognise that a good team can overcome many challenges in the lead-up to product-market fit. And while the initial products of a startup may or may not work a successful and well-functioning team has the potential to pivot to new markets and new products, even if the initial ones prove untenable. Not surprisingly, an industry ‘autopsy’ into 101 tech startup failures found 23% were due to not having the right team—the number three cause of failure ahead of running out of cash or not having a product that meets the market need 6 .

Accordingly, early entrepreneurship research was focused on the personality of founders, but the focus shifted away in the mid-1980s onwards towards more environmental factors such as venture capital financing 7 , 8 , 9 , networks 10 , location 11 and due to a range of issues and challenges identified with the early entrepreneurship personality research 12 , 13 . At the turn of the 21st century, some scholars began exploring ways to combine context and personality and reconcile entrepreneurs’ individual traits with features of their environment. In her influential work ’The Sociology of Entrepreneurship’, Patricia H. Thornton 14 discusses two perspectives on entrepreneurship: the supply-side perspective (personality theory) and the demand-side perspective (environmental approach). The supply-side perspective focuses on the individual traits of entrepreneurs. In contrast, the demand-side perspective focuses on the context in which entrepreneurship occurs, with factors such as finance, industry and geography each playing their part. In the past two decades, there has been a revival of interest and research that explores how entrepreneurs’ personality relates to the success of their ventures. This new and growing body of research includes several reviews and meta-studies, which show that personality traits play an important role in both career success and entrepreneurship 15 , 16 , 17 , 18 , 19 , that there is heterogeneity in definitions and samples used in research on entrepreneurship 16 , 18 , and that founder personality plays an important role in overall startup outcomes 17 , 19 .

Motivated by the pivotal role of the personality of founders on startup success outlined in these recent contributions, we investigate two main research questions:

Which personality features characterise founders?

Do their personalities, particularly the diversity of personality types in founder teams, play a role in startup success?

We aim to understand whether certain founder personalities and their combinations relate to startup success, defined as whether their company has been acquired, acquired another company or listed on a public stock exchange. For the quantitative analysis, we draw on a previously published methodology 20 , which matches people to their ‘ideal’ jobs based on social media-inferred personality traits.

We find that personality traits matter for startup success. In addition to firm-level factors of location, industry and company age, we show that founders’ specific Big Five personality traits, such as adventurousness and openness, are significantly more widespread among successful startups. As we find that companies with multi-founder teams are more likely to succeed, we cluster founders in six different and distinct personality groups to underline the relevance of the complementarity in personality traits among founder teams. Startups with diverse and specific combinations of founder types (e. g., an adventurous ‘Leader’, a conscientious ‘Accomplisher’, and an extroverted ‘Developer’) have significantly higher odds of success.

We organise the rest of this paper as follows. In the Section " Results ", we introduce the data used and the methods applied to relate founders’ psychological traits with their startups’ success. We introduce the natural language processing method to derive individual and team personality characteristics and the clustering technique to identify personality groups. Then, we present the result for multi-variate regression analysis that allows us to relate firm success with external and personality features. Subsequently, the Section " Discussion " mentions limitations and opportunities for future research in this domain. In the Section " Methods ", we describe the data, the variables in use, and the clustering in greater detail. Robustness checks and additional analyses can be found in the Supplementary Information.

Our analysis relies on two datasets. We infer individual personality facets via a previously published methodology 20 from Twitter user profiles. Here, we restrict our analysis to founders with a Crunchbase profile. Crunchbase is the world’s largest directory on startups. It provides information about more than one million companies, primarily focused on funding and investors. A company’s public Crunchbase profile can be considered a digital business card of an early-stage venture. As such, the founding teams tend to provide information about themselves, including their educational background or a link to their Twitter account.

We infer the personality profiles of the founding teams of early-stage ventures from their publicly available Twitter profiles, using the methodology described by Kern et al. 20 . Then, we correlate this information to data from Crunchbase to determine whether particular combinations of personality traits correspond to the success of early-stage ventures. The final dataset used in the success prediction model contains n = 21,187 startup companies (for more details on the data see the Methods section and SI section  A.5 ).

Revisions of Crunchbase as a data source for investigations on a firm and industry level confirm the platform to be a useful and valuable source of data for startups research, as comparisons with other sources at micro-level, e.g., VentureXpert or PwC, also suggest that the platform’s coverage is very comprehensive, especially for start-ups located in the United States 21 . Moreover, aggregate statistics on funding rounds by country and year are quite similar to those produced with other established sources, going to validate the use of Crunchbase as a reliable source in terms of coverage of funded ventures. For instance, Crunchbase covers about the same number of investment rounds in the analogous sectors as collected by the National Venture Capital Association 22 . However, we acknowledge that the data source might suffer from registration latency (a certain delay between the foundation of the company and its actual registration on Crunchbase) and success bias in company status (the likeliness that failed companies decide to delete their profile from the database).

The definition of startup success

The success of startups is uncertain, dependent on many factors and can be measured in various ways. Due to the likelihood of failure in startups, some large-scale studies have looked at which features predict startup survival rates 23 , and others focus on fundraising from external investors at various stages 24 . Success for startups can be measured in multiple ways, such as the amount of external investment attracted, the number of new products shipped or the annual growth in revenue. But sometimes external investments are misguided, revenue growth can be short-lived, and new products may fail to find traction.

Success in a startup is typically staged and can appear in different forms and times. For example, a startup may be seen to be successful when it finds a clear solution to a widely recognised problem, such as developing a successful vaccine. On the other hand, it could be achieving some measure of commercial success, such as rapidly accelerating sales or becoming profitable or at least cash positive. Or it could be reaching an exit for foundation investors via a trade sale, acquisition or listing of its shares for sale on a public stock exchange via an Initial Public Offering (IPO).

For our study, we focused on the startup’s extrinsic success rather than the founders’ intrinsic success per se, as its more visible, objective and measurable. A frequently considered measure of success is the attraction of external investment by venture capitalists 25 . However, this is not in and of itself a good measure of clear, incontrovertible success, particularly for early-stage ventures. This is because it reflects investors’ expectations of a startup’s success potential rather than actual business success. Similarly, we considered other measures like revenue growth 26 , liquidity events 27 , 28 , 29 , profitability 30 and social impact 31 , all of which have benefits as they capture incremental success, but each also comes with operational measurement challenges.

Therefore, we apply the success definition initially introduced by Bonaventura et al. 32 , namely that a startup is acquired, acquires another company or has an initial public offering (IPO). We consider any of these major capital liquidation events as a clear threshold signal that the company has matured from an early-stage venture to becoming or is on its way to becoming a mature company with clear and often significant business growth prospects. Together these three major liquidity events capture the primary forms of exit for external investors (an acquisition or trade sale and an IPO). For companies with a longer autonomous growth runway, acquiring another company marks a similar milestone of scale, maturity and capability.

Using multifactor analysis and a binary classification prediction model of startup success, we looked at many variables together and their relative influence on the probability of the success of startups. We looked at seven categories of factors through three lenses of firm-level factors: (1) location, (2) industry, (3) age of the startup; founder-level factors: (4) number of founders, (5) gender of founders, (6) personality characteristics of founders and; lastly team-level factors: (7) founder-team personality combinations. The model performance and relative impacts on the probability of startup success of each of these categories of founders are illustrated in more detail in section  A.6 of the Supplementary Information (in particular Extended Data Fig.  19 and Extended Data Fig.  20 ). In total, we considered over three hundred variables (n = 323) and their relative significant associations with success.

The personality of founders

Besides product-market, industry, and firm-level factors (see SI section  A.1 ), research suggests that the personalities of founders play a crucial role in startup success 19 . Therefore, we examine the personality characteristics of individual startup founders and teams of founders in relationship to their firm’s success by applying the success definition used by Bonaventura et al. 32 .

Employing established methods 33 , 34 , 35 , we inferred the personality traits across 30 dimensions (Big Five facets) of a large global sample of startup founders. The startup founders cohort was created from a subset of founders from the global startup industry directory Crunchbase, who are also active on the social media platform Twitter.

To measure the personality of the founders, we used the Big Five, a popular model of personality which includes five core traits: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Emotional stability. Each of these traits can be further broken down into thirty distinct facets. Studies have found that the Big Five predict meaningful life outcomes, such as physical and mental health, longevity, social relationships, health-related behaviours, antisocial behaviour, and social contribution, at levels on par with intelligence and socioeconomic status 36 Using machine learning to infer personality traits by analysing the use of language and activity on social media has been shown to be more accurate than predictions of coworkers, friends and family and similar in accuracy to the judgement of spouses 37 . Further, as other research has shown, we assume that personality traits remain stable in adulthood even through significant life events 38 , 39 , 40 . Personality traits have been shown to emerge continuously from those already evident in adolescence 41 and are not significantly influenced by external life events such as becoming divorced or unemployed 42 . This suggests that the direction of any measurable effect goes from founder personalities to startup success and not vice versa.

As a first investigation to what extent personality traits might relate to entrepreneurship, we use the personality characteristics of individuals to predict whether they were an entrepreneur or an employee. We trained and tested a machine-learning random forest classifier to distinguish and classify entrepreneurs from employees and vice-versa using inferred personality vectors alone. As a result, we found we could correctly predict entrepreneurs with 77% accuracy and employees with 88% accuracy (Fig.  1 A). Thus, based on personality information alone, we correctly predict all unseen new samples with 82.5% accuracy (See SI section  A.2 for more details on this analysis, the classification modelling and prediction accuracy).

We explored in greater detail which personality features are most prominent among entrepreneurs. We found that the subdomain or facet of Adventurousness within the Big Five Domain of Openness was significant and had the largest effect size. The facet of Modesty within the Big Five Domain of Agreeableness and Activity Level within the Big Five Domain of Extraversion was the subsequent most considerable effect (Fig.  1 B). Adventurousness in the Big Five framework is defined as the preference for variety, novelty and starting new things—which are consistent with the role of a startup founder whose role, especially in the early life of the company, is to explore things that do not scale easily 43 and is about developing and testing new products, services and business models with the market.

Once we derived and tested the Big Five personality features for each entrepreneur in our data set, we examined whether there is evidence indicating that startup founders naturally cluster according to their personality features using a Hopkins test (see Extended Data Figure  6 ). We discovered clear clustering tendencies in the data compared with other renowned reference data sets known to have clusters. Then, once we established the founder data clusters, we used agglomerative hierarchical clustering. This ‘bottom-up’ clustering technique initially treats each observation as an individual cluster. Then it merges them to create a hierarchy of possible cluster schemes with differing numbers of groups (See Extended Data Fig.  7 ). And lastly, we identified the optimum number of clusters based on the outcome of four different clustering performance measurements: Davies-Bouldin Index, Silhouette coefficients, Calinski-Harabas Index and Dunn Index (see Extended Data Figure  8 ). We find that the optimum number of clusters of startup founders based on their personality features is six (labelled #0 through to #5), as shown in Fig.  1 C.

To better understand the context of different founder types, we positioned each of the six types of founders within an occupation-personality matrix established from previous research 44 . This research showed that ‘each job has its own personality’ using a substantial sample of employees across various jobs. Utilising the methodology employed in this study, we assigned labels to the cluster names #0 to #5, which correspond to the identified occupation tribes that best describe the personality facets represented by the clusters (see Extended Data Fig.  9 for an overview of these tribes, as identified by McCarthy et al. 44 ).

Utilising this approach, we identify three ’purebred’ clusters: #0, #2 and #5, whose members are dominated by a single tribe (larger than 60% of all individuals in each cluster are characterised by one tribe). Thus, these clusters represent and share personality attributes of these previously identified occupation-personality tribes 44 , which have the following known distinctive personality attributes (see also Table  1 ):

Accomplishers (#0) —Organised & outgoing. confident, down-to-earth, content, accommodating, mild-tempered & self-assured.

Leaders (#2) —Adventurous, persistent, dispassionate, assertive, self-controlled, calm under pressure, philosophical, excitement-seeking & confident.

Fighters (#5) —Spontaneous and impulsive, tough, sceptical, and uncompromising.

We labelled these clusters with the tribe names, acknowledging that labels are somewhat arbitrary, based on our best interpretation of the data (See SI section  A.3 for more details).

For the remaining three clusters #1, #3 and #4, we can see they are ‘hybrids’, meaning that the founders within them come from a mix of different tribes, with no one tribe representing more than 50% of the members of that cluster. However, the tribes with the largest share were noted as #1 Experts/Engineers, #3 Fighters, and #4 Operators.

To label these three hybrid clusters, we examined the closest occupations to the median personality features of each cluster. We selected a name that reflected the common themes of these occupations, namely:

Experts/Engineers (#1) as the closest roles included Materials Engineers and Chemical Engineers. This is consistent with this cluster’s personality footprint, which is highest in openness in the facets of imagination and intellect.

Developers (#3) as the closest roles include Application Developers and related technology roles such as Business Systems Analysts and Product Managers.

Operators (#4) as the closest roles include service, maintenance and operations functions, including Bicycle Mechanic, Mechanic and Service Manager. This is also consistent with one of the key personality traits of high conscientiousness in the facet of orderliness and high agreeableness in the facet of humility for founders in this cluster.

Founder-Level Factors of Startup Success. ( A ), Successful entrepreneurs differ from successful employees. They can be accurately distinguished using a classifier with personality information alone. ( B ), Successful entrepreneurs have different Big Five facet distributions, especially on adventurousness, modesty and activity level. ( C ), Founders come in six different types: Fighters, Operators, Accomplishers, Leaders, Engineers and Developers (FOALED) ( D ), Each founder Personality-Type has its distinct facet.

Together, these six different types of startup founders (Fig.  1 C) represent a framework we call the FOALED model of founder types—an acronym of Fighters, Operators, Accomplishers, Leaders, Engineers and D evelopers.

Each founder’s personality type has its distinct facet footprint (for more details, see Extended Data Figure  10 in SI section  A.3 ). Also, we observe a central core of correlated features that are high for all types of entrepreneurs, including intellect, adventurousness and activity level (Fig.  1 D).To test the robustness of the clustering of the personality facets, we compare the mean scores of the individual facets per cluster with a 20-fold resampling of the data and find that the clusters are, overall, largely robust against resampling (see Extended Data Figure  11 in SI section  A.3 for more details).

We also find that the clusters accord with the distribution of founders’ roles in their startups. For example, Accomplishers are often Chief Executive Officers, Chief Financial Officers, or Chief Operating Officers, while Fighters tend to be Chief Technical Officers, Chief Product Officers, or Chief Commercial Officers (see Extended Data Fig.  12 in SI section  A.4 for more details).

The ensemble theory of success

While founders’ individual personality traits, such as Adventurousness or Openness, show to be related to their firms’ success, we also hypothesise that the combination, or ensemble, of personality characteristics of a founding team impacts the chances of success. The logic behind this reasoning is complementarity, which is proposed by contemporary research on the functional roles of founder teams. Examples of these clear functional roles have evolved in established industries such as film and television, construction, and advertising 45 . When we subsequently explored the combinations of personality types among founders and their relationship to the probability of startup success, adjusted for a range of other factors in a multi-factorial analysis, we found significantly increased chances of success for mixed foundation teams:

Initially, we find that firms with multiple founders are more likely to succeed, as illustrated in Fig.  2 A, which shows firms with three or more founders are more than twice as likely to succeed than solo-founded startups. This finding is consistent with investors’ advice to founders and previous studies 46 . We also noted that some personality types of founders increase the probability of success more than others, as shown in SI section  A.6 (Extended Data Figures  16 and 17 ). Also, we note that gender differences play out in the distribution of personality facets: successful female founders and successful male founders show facet scores that are more similar to each other than are non-successful female founders to non-successful male founders (see Extended Data Figure  18 ).

The Ensemble Theory of Team-Level Factors of Startup Success. ( A ) Having a larger founder team elevates the chances of success. This can be due to multiple reasons, e.g., a more extensive network or knowledge base but also personality diversity. ( B ) We show that joint personality combinations of founders are significantly related to higher chances of success. This is because it takes more than one founder to cover all beneficial personality traits that ‘breed’ success. ( C ) In our multifactor model, we show that firms with diverse and specific combinations of types of founders have significantly higher odds of success.

Access to more extensive networks and capital could explain the benefits of having more founders. Still, as we find here, it also offers a greater diversity of combined personalities, naturally providing a broader range of maximum traits. So, for example, one founder may be more open and adventurous, and another could be highly agreeable and trustworthy, thus, potentially complementing each other’s particular strengths associated with startup success.

The benefits of larger and more personality-diverse foundation teams can be seen in the apparent differences between successful and unsuccessful firms based on their combined Big Five personality team footprints, as illustrated in Fig.  2 B. Here, maximum values for each Big Five trait of a startup’s co-founders are mapped; stratified by successful and non-successful companies. Founder teams of successful startups tend to score higher on Openness, Conscientiousness, Extraversion, and Agreeableness.

When examining the combinations of founders with different personality types, we find that some ensembles of personalities were significantly correlated with greater chances of startup success—while controlling for other variables in the model—as shown in Fig.  2 C (for more details on the modelling, the predictive performance and the coefficient estimates of the final model, see Extended Data Figures  19 , 20 , and 21 in SI section  A.6 ).

Three combinations of trio-founder companies were more than twice as likely to succeed than other combinations, namely teams with (1) a Leader and two Developers , (2) an Operator and two Developers , and (3) an Expert/Engineer , Leader and Developer . To illustrate the potential mechanisms on how personality traits might influence the success of startups, we provide some examples of well-known, successful startup founders and their characteristic personality traits in Extended Data Figure  22 .

Startups are one of the key mechanisms for brilliant ideas to become solutions to some of the world’s most challenging economic and social problems. Examples include the Google search algorithm, disability technology startup Fingerwork’s touchscreen technology that became the basis of the Apple iPhone, or the Biontech mRNA technology that powered Pfizer’s COVID-19 vaccine.

We have shown that founders’ personalities and the combination of personalities in the founding team of a startup have a material and significant impact on its likelihood of success. We have also shown that successful startup founders’ personality traits are significantly different from those of successful employees—so much so that a simple predictor can be trained to distinguish between employees and entrepreneurs with more than 80% accuracy using personality trait data alone.

Just as occupation-personality maps derived from data can provide career guidance tools, so too can data on successful entrepreneurs’ personality traits help people decide whether becoming a founder may be a good choice for them.

We have learnt through this research that there is not one type of ideal ’entrepreneurial’ personality but six different types. Many successful startups have multiple co-founders with a combination of these different personality types.

To a large extent, founding a startup is a team sport; therefore, diversity and complementarity of personalities matter in the foundation team. It has an outsized impact on the company’s likelihood of success. While all startups are high risk, the risk becomes lower with more founders, particularly if they have distinct personality traits.

Our work demonstrates the benefits of personality diversity among the founding team of startups. Greater awareness of this novel form of diversity may help create more resilient startups capable of more significant innovation and impact.

The data-driven research approach presented here comes with certain methodological limitations. The principal data sources of this study—Crunchbase and Twitter—are extensive and comprehensive, but there are characterised by some known and likely sample biases.

Crunchbase is the principal public chronicle of venture capital funding. So, there is some likely sample bias toward: (1) Startup companies that are funded externally: self-funded or bootstrapped companies are less likely to be represented in Crunchbase; (2) technology companies, as that is Crunchbase’s roots; (3) multi-founder companies; (4) male founders: while the representation of female founders is now double that of the mid-2000s, women still represent less than 25% of the sample; (5) companies that succeed: companies that fail, especially those that fail early, are likely to be less represented in the data.

Samples were also limited to those founders who are active on Twitter, which adds additional selection biases. For example, Twitter users typically are younger, more educated and have a higher median income 47 . Another limitation of our approach is the potentially biased presentation of a person’s digital identity on social media, which is the basis for identifying personality traits. For example, recent research suggests that the language and emotional tone used by entrepreneurs in social media can be affected by events such as business failure 48 , which might complicate the personality trait inference.

In addition to sampling biases within the data, there are also significant historical biases in startup culture. For many aspects of the entrepreneurship ecosystem, women, for example, are at a disadvantage 49 . Male-founded companies have historically dominated most startup ecosystems worldwide, representing the majority of founders and the overwhelming majority of venture capital investors. As a result, startups with women have historically attracted significantly fewer funds 50 , in part due to the male bias among venture investors, although this is now changing, albeit slowly 51 .

The research presented here provides quantitative evidence for the relevance of personality types and the diversity of personalities in startups. At the same time, it brings up other questions on how personality traits are related to other factors associated with success, such as:

Will the recent growing focus on promoting and investing in female founders change the nature, composition and dynamics of startups and their personalities leading to a more diverse personality landscape in startups?

Will the growth of startups outside of the United States change what success looks like to investors and hence the role of different personality traits and their association to diverse success metrics?

Many of today’s most renowned entrepreneurs are either Baby Boomers (such as Gates, Branson, Bloomberg) or Generation Xers (such as Benioff, Cannon-Brookes, Musk). However, as we can see, personality is both a predictor and driver of success in entrepreneurship. Will generation-wide differences in personality and outlook affect startups and their success?

Moreover, the findings shown here have natural extensions and applications beyond startups, such as for new projects within large established companies. While not technically startups, many large enterprises and industries such as construction, engineering and the film industry rely on forming new project-based, cross-functional teams that are often new ventures and share many characteristics of startups.

There is also potential for extending this research in other settings in government, NGOs, and within the research community. In scientific research, for example, team diversity in terms of age, ethnicity and gender has been shown to be predictive of impact, and personality diversity may be another critical dimension 52 .

Another extension of the study could investigate the development of the language used by startup founders on social media over time. Such an extension could investigate whether the language (and inferred psychological characteristics) change as the entrepreneurs’ ventures go through major business events such as foundation, funding, or exit.

Overall, this study demonstrates, first, that startup founders have significantly different personalities than employees. Secondly, besides firm-level factors, which are known to influence firm success, we show that a range of founder-level factors, notably the character traits of its founders, significantly impact a startup’s likelihood of success. Lastly, we looked at team-level factors. We discovered in a multifactor analysis that personality-diverse teams have the most considerable impact on the probability of a startup’s success, underlining the importance of personality diversity as a relevant factor of team performance and success.

Data sources

Entrepreneurs dataset.

Data about the founders of startups were collected from Crunchbase (Table  2 ), an open reference platform for business information about private and public companies, primarily early-stage startups. It is one of the largest and most comprehensive data sets of its kind and has been used in over 100 peer-reviewed research articles about economic and managerial research.

Crunchbase contains data on over two million companies - mainly startup companies and the companies who partner with them, acquire them and invest in them, as well as profiles on well over one million individuals active in the entrepreneurial ecosystem worldwide from over 200 countries and spans. Crunchbase started in the technology startup space, and it now covers all sectors, specifically focusing on entrepreneurship, investment and high-growth companies.

While Crunchbase contains data on over one million individuals in the entrepreneurial ecosystem, some are not entrepreneurs or startup founders but play other roles, such as investors, lawyers or executives at companies that acquire startups. To create a subset of only entrepreneurs, we selected a subset of 32,732 who self-identify as founders and co-founders (by job title) and who are also publicly active on the social media platform Twitter. We also removed those who also are venture capitalists to distinguish between investors and founders.

We selected founders active on Twitter to be able to use natural language processing to infer their Big Five personality features using an open-vocabulary approach shown to be accurate in the previous research by analysing users’ unstructured text, such as Twitter posts in our case. For this project, as with previous research 20 , we employed a commercial service, IBM Watson Personality Insight, to infer personality facets. This service provides raw scores and percentile scores of Big Five Domains (Openness, Conscientiousness, Extraversion, Agreeableness and Emotional Stability) and the corresponding 30 subdomains or facets. In addition, the public content of Twitter posts was collected, and there are 32,732 profiles that each had enough Twitter posts (more than 150 words) to get relatively accurate personality scores (less than 12.7% Average Mean Absolute Error).

The entrepreneurs’ dataset is analysed in combination with other data about the companies they founded to explore questions about the nature and patterns of personality traits of entrepreneurs and the relationships between these patterns and company success.

For the multifactor analysis, we further filtered the data in several preparatory steps for the success prediction modelling (for more details, see SI section  A.5 ). In particular, we removed data points with missing values (Extended Data Fig.  13 ) and kept only companies in the data that were founded from 1990 onward to ensure consistency with previous research 32 (see Extended Data Fig.  14 ). After cleaning, filtering and pre-processing the data, we ended up with data from 25,214 founders who founded 21,187 startup companies to be used in the multifactor analysis. Of those, 3442 startups in the data were successful, 2362 in the first seven years after they were founded (see Extended Data Figure  15 for more details).

Entrepreneurs and employees dataset

To investigate whether startup founders show personality traits that are similar or different from the population at large (i. e. the entrepreneurs vs employees sub-analysis shown in Fig.  1 A and B), we filtered the entrepreneurs’ data further: we reduced the sample to those founders of companies, which attracted more than US$100k in investment to create a reference set of successful entrepreneurs (n \(=\) 4400).

To create a control group of employees who are not also entrepreneurs or very unlikely to be of have been entrepreneurs, we leveraged the fact that while some occupational titles like CEO, CTO and Public Speaker are commonly shared by founders and co-founders, some others such as Cashier , Zoologist and Detective very rarely co-occur seem to be founders or co-founders. To illustrate, many company founders also adopt regular occupation titles such as CEO or CTO. Many founders will be Founder and CEO or Co-founder and CTO. While founders are often CEOs or CTOs, the reverse is not necessarily true, as many CEOs are professional executives that were not involved in the establishment or ownership of the firm.

Using data from LinkedIn, we created an Entrepreneurial Occupation Index (EOI) based on the ratio of entrepreneurs for each of the 624 occupations used in a previous study of occupation-personality fit 44 . It was calculated based on the percentage of all people working in the occupation from LinkedIn compared to those who shared the title Founder or Co-founder (See SI section  A.2 for more details). A reference set of employees (n=6685) was then selected across the 112 different occupations with the lowest propensity for entrepreneurship (less than 0.5% EOI) from a large corpus of Twitter users with known occupations, which is also drawn from the previous occupational-personality fit study 44 .

These two data sets were used to test whether it may be possible to distinguish successful entrepreneurs from successful employees based on the different patterns of personality traits alone.

Hierarchical clustering

We applied several clustering techniques and tests to the personality vectors of the entrepreneurs’ data set to determine if there are natural clusters and, if so, how many are the optimum number.

Firstly, to determine if there is a natural typology to founder personalities, we applied the Hopkins statistic—a statistical test we used to answer whether the entrepreneurs’ dataset contains inherent clusters. It measures the clustering tendency based on the ratio of the sum of distances of real points within a sample of the entrepreneurs’ dataset to their nearest neighbours and the sum of distances of randomly selected artificial points from a simulated uniform distribution to their nearest neighbours in the real entrepreneurs’ dataset. The ratio measures the difference between the entrepreneurs’ data distribution and the simulated uniform distribution, which tests the randomness of the data. The range of Hopkins statistics is from 0 to 1. The scores are close to 0, 0.5 and 1, respectively, indicating whether the dataset is uniformly distributed, randomly distributed or highly clustered.

To cluster the founders by personality facets, we used Agglomerative Hierarchical Clustering (AHC)—a bottom-up approach that treats an individual data point as a singleton cluster and then iteratively merges pairs of clusters until all data points are included in the single big collection. Ward’s linkage method is used to choose the pair of groups for minimising the increase in the within-cluster variance after combining. AHC was widely applied to clustering analysis since a tree hierarchy output is more informative and interpretable than K-means. Dendrograms were used to visualise the hierarchy to provide the perspective of the optimal number of clusters. The heights of the dendrogram represent the distance between groups, with lower heights representing more similar groups of observations. A horizontal line through the dendrogram was drawn to distinguish the number of significantly different clusters with higher heights. However, as it is not possible to determine the optimum number of clusters from the dendrogram, we applied other clustering performance metrics to analyse the optimal number of groups.

A range of Clustering performance metrics were used to help determine the optimal number of clusters in the dataset after an apparent clustering tendency was confirmed. The following metrics were implemented to evaluate the differences between within-cluster and between-cluster distances comprehensively: Dunn Index, Calinski-Harabasz Index, Davies-Bouldin Index and Silhouette Index. The Dunn Index measures the ratio of the minimum inter-cluster separation and the maximum intra-cluster diameter. At the same time, the Calinski-Harabasz Index improves the measurement of the Dunn Index by calculating the ratio of the average sum of squared dispersion of inter-cluster and intra-cluster. The Davies-Bouldin Index simplifies the process by treating each cluster individually. It compares the sum of the average distance among intra-cluster data points to the cluster centre of two separate groups with the distance between their centre points. Finally, the Silhouette Index is the overall average of the silhouette coefficients for each sample. The coefficient measures the similarity of the data point to its cluster compared with the other groups. Higher scores of the Dunn, Calinski-Harabasz and Silhouette Index and a lower score of the Davies-Bouldin Index indicate better clustering configuration.

Classification modelling

Classification algorithms.

To obtain a comprehensive and robust conclusion in the analysis predicting whether a given set of personality traits corresponds to an entrepreneur or an employee, we explored the following classifiers: Naïve Bayes, Elastic Net regularisation, Support Vector Machine, Random Forest, Gradient Boosting and Stacked Ensemble. The Naïve Bayes classifier is a probabilistic algorithm based on Bayes’ theorem with assumptions of independent features and equiprobable classes. Compared with other more complex classifiers, it saves computing time for large datasets and performs better if the assumptions hold. However, in the real world, those assumptions are generally violated. Elastic Net regularisation combines the penalties of Lasso and Ridge to regularise the Logistic classifier. It eliminates the limitation of multicollinearity in the Lasso method and improves the limitation of feature selection in the Ridge method. Even though Elastic Net is as simple as the Naïve Bayes classifier, it is more time-consuming. The Support Vector Machine (SVM) aims to find the ideal line or hyperplane to separate successful entrepreneurs and employees in this study. The dividing line can be non-linear based on a non-linear kernel, such as the Radial Basis Function Kernel. Therefore, it performs well on high-dimensional data while the ’right’ kernel selection needs to be tuned. Random Forest (RF) and Gradient Boosting Trees (GBT) are ensembles of decision trees. All trees are trained independently and simultaneously in RF, while a new tree is trained each time and corrected by previously trained trees in GBT. RF is a more robust and straightforward model since it does not have many hyperparameters to tune. GBT optimises the objective function and learns a more accurate model since there is a successive learning and correction process. Stacked Ensemble combines all existing classifiers through a Logistic Regression. Better than bagging with only variance reduction and boosting with only bias reduction, the ensemble leverages the benefit of model diversity with both lower variance and bias. All the above classification algorithms distinguish successful entrepreneurs and employees based on the personality matrix.

Evaluation metrics

A range of evaluation metrics comprehensively explains the performance of a classification prediction. The most straightforward metric is accuracy, which measures the overall portion of correct predictions. It will mislead the performance of an imbalanced dataset. The F1 score is better than accuracy by combining precision and recall and considering the False Negatives and False Positives. Specificity measures the proportion of detecting the true negative rate that correctly identifies employees, while Positive Predictive Value (PPV) calculates the probability of accurately predicting successful entrepreneurs. Area Under the Receiver Operating Characteristic Curve (AUROC) determines the capability of the algorithm to distinguish between successful entrepreneurs and employees. A higher value means the classifier performs better on separating the classes.

Feature importance

To further understand and interpret the classifier, it is critical to identify variables with significant predictive power on the target. Feature importance of tree-based models measures Gini importance scores for all predictors, which evaluate the overall impact of the model after cutting off the specific feature. The measurements consider all interactions among features. However, it does not provide insights into the directions of impacts since the importance only indicates the ability to distinguish different classes.

Statistical analysis

T-test, Cohen’s D and two-sample Kolmogorov-Smirnov test are introduced to explore how the mean values and distributions of personality facets between entrepreneurs and employees differ. The T-test is applied to determine whether the mean of personality facets of two group samples are significantly different from one another or not. The facets with significant differences detected by the hypothesis testing are critical to separate the two groups. Cohen’s d is to measure the effect size of the results of the previous t-test, which is the ratio of the mean difference to the pooled standard deviation. A larger Cohen’s d score indicates that the mean difference is greater than the variability of the whole sample. Moreover, it is interesting to check whether the two groups’ personality facets’ probability distributions are from the same distribution through the two-sample Kolmogorov-Smirnov test. There is no assumption about the distributions, but the test is sensitive to deviations near the centre rather than the tail.

Privacy and ethics

The focus of this research is to provide high-level insights about groups of startups, founders and types of founder teams rather than on specific individuals or companies. While we used unit record data from the publicly available data of company profiles from Crunchbase , we removed all identifiers from the underlying data on individual companies and founders and generated aggregate results, which formed the basis for our analysis and conclusions.

Data availability

A dataset which includes only aggregated statistics about the success of startups and the factors that influence is released as part of this research. Underlying data for all figures and the code to reproduce them are available on GitHub: https://github.com/Braesemann/FounderPersonalities . Please contact Fabian Braesemann ( [email protected] ) in case you have any further questions.

Change history

07 may 2024.

A Correction to this paper has been published: https://doi.org/10.1038/s41598-024-61082-7

Henrekson, M. & Johansson, D. Gazelles as job creators: A survey and interpretation of the evidence. Small Bus. Econ. 35 , 227–244 (2010).

Article   Google Scholar  

Davila, A., Foster, G., He, X. & Shimizu, C. The rise and fall of startups: Creation and destruction of revenue and jobs by young companies. Aust. J. Manag. 40 , 6–35 (2015).

Which vaccine saved the most lives in 2021?: Covid-19. The Economist (Online) (2022). noteName - AstraZeneca; Pfizer Inc; BioNTech SE; Copyright - Copyright The Economist Newspaper NA, Inc. Jul 14, 2022; Last updated - 2022-11-29.

Oltermann, P. Pfizer/biontech tax windfall brings mainz an early christmas present (2021). noteName - Pfizer Inc; BioNTech SE; Copyright - Copyright Guardian News & Media Limited Dec 27, 2021; Last updated - 2021-12-28.

Grant, K. A., Croteau, M. & Aziz, O. The survival rate of startups funded by angel investors. I-INC WHITE PAPER SER.: MAR 2019 , 1–21 (2019).

Google Scholar  

Top 20 reasons start-ups fail - cb insights version (2019). noteCopyright - Copyright Newstex Oct 21, 2019; Last updated - 2022-10-25.

Hochberg, Y. V., Ljungqvist, A. & Lu, Y. Whom you know matters: Venture capital networks and investment performance. J. Financ. 62 , 251–301 (2007).

Fracassi, C., Garmaise, M. J., Kogan, S. & Natividad, G. Business microloans for us subprime borrowers. J. Financ. Quantitative Ana. 51 , 55–83 (2016).

Davila, A., Foster, G. & Gupta, M. Venture capital financing and the growth of startup firms. J. Bus. Ventur. 18 , 689–708 (2003).

Nann, S. et al. Comparing the structure of virtual entrepreneur networks with business effectiveness. Proc. Soc. Behav. Sci. 2 , 6483–6496 (2010).

Guzman, J. & Stern, S. Where is silicon valley?. Science 347 , 606–609 (2015).

Article   ADS   CAS   PubMed   Google Scholar  

Aldrich, H. E. & Wiedenmayer, G. From traits to rates: An ecological perspective on organizational foundings. 61–97 (2019).

Gartner, W. B. Who is an entrepreneur? is the wrong question. Am. J. Small Bus. 12 , 11–32 (1988).

Thornton, P. H. The sociology of entrepreneurship. Ann. Rev. Sociol. 25 , 19–46 (1999).

Eikelboom, M. E., Gelderman, C. & Semeijn, J. Sustainable innovation in public procurement: The decisive role of the individual. J. Public Procure. 18 , 190–201 (2018).

Kerr, S. P. et al. Personality traits of entrepreneurs: A review of recent literature. Found. Trends Entrep. 14 , 279–356 (2018).

Hamilton, B. H., Papageorge, N. W. & Pande, N. The right stuff? Personality and entrepreneurship. Quant. Econ. 10 , 643–691 (2019).

Salmony, F. U. & Kanbach, D. K. Personality trait differences across types of entrepreneurs: A systematic literature review. RMS 16 , 713–749 (2022).

Freiberg, B. & Matz, S. C. Founder personality and entrepreneurial outcomes: A large-scale field study of technology startups. Proc. Natl. Acad. Sci. 120 , e2215829120 (2023).

Article   CAS   PubMed   PubMed Central   Google Scholar  

Kern, M. L., McCarthy, P. X., Chakrabarty, D. & Rizoiu, M.-A. Social media-predicted personality traits and values can help match people to their ideal jobs. Proc. Natl. Acad. Sci. 116 , 26459–26464 (2019).

Article   ADS   CAS   PubMed   PubMed Central   Google Scholar  

Dalle, J.-M., Den Besten, M. & Menon, C. Using crunchbase for economic and managerial research. (2017).

Block, J. & Sandner, P. What is the effect of the financial crisis on venture capital financing? Empirical evidence from us internet start-ups. Ventur. Cap. 11 , 295–309 (2009).

Antretter, T., Blohm, I. & Grichnik, D. Predicting startup survival from digital traces: Towards a procedure for early stage investors (2018).

Dworak, D. Analysis of founder background as a predictor for start-up success in achieving successive fundraising rounds. (2022).

Hsu, D. H. Venture capitalists and cooperative start-up commercialization strategy. Manage. Sci. 52 , 204–219 (2006).

Blank, S. Why the lean start-up changes everything (2018).

Kaplan, S. N. & Lerner, J. It ain’t broke: The past, present, and future of venture capital. J. Appl. Corp. Financ. 22 , 36–47 (2010).

Hallen, B. L. & Eisenhardt, K. M. Catalyzing strategies and efficient tie formation: How entrepreneurial firms obtain investment ties. Acad. Manag. J. 55 , 35–70 (2012).

Gompers, P. A. & Lerner, J. The Venture Capital Cycle (MIT Press, 2004).

Shane, S. & Venkataraman, S. The promise of entrepreneurship as a field of research. Acad. Manag. Rev. 25 , 217–226 (2000).

Zahra, S. A. & Wright, M. Understanding the social role of entrepreneurship. J. Manage. Stud. 53 , 610–629 (2016).

Bonaventura, M. et al. Predicting success in the worldwide start-up network. Sci. Rep. 10 , 1–6 (2020).

Schwartz, H. A. et al. Personality, gender, and age in the language of social media: The open-vocabulary approach. PLoS ONE 8 , e73791 (2013).

Plank, B. & Hovy, D. Personality traits on twitter-or-how to get 1,500 personality tests in a week. In Proceedings of the 6th workshop on computational approaches to subjectivity, sentiment and social media analysis , pp 92–98 (2015).

Arnoux, P.-H. et al. 25 tweets to know you: A new model to predict personality with social media. In booktitleEleventh international AAAI conference on web and social media (2017).

Roberts, B. W., Kuncel, N. R., Shiner, R., Caspi, A. & Goldberg, L. R. The power of personality: The comparative validity of personality traits, socioeconomic status, and cognitive ability for predicting important life outcomes. Perspect. Psychol. Sci. 2 , 313–345 (2007).

Article   PubMed   PubMed Central   Google Scholar  

Youyou, W., Kosinski, M. & Stillwell, D. Computer-based personality judgments are more accurate than those made by humans. Proc. Natl. Acad. Sci. 112 , 1036–1040 (2015).

Soldz, S. & Vaillant, G. E. The big five personality traits and the life course: A 45-year longitudinal study. J. Res. Pers. 33 , 208–232 (1999).

Damian, R. I., Spengler, M., Sutu, A. & Roberts, B. W. Sixteen going on sixty-six: A longitudinal study of personality stability and change across 50 years. J. Pers. Soc. Psychol. 117 , 674 (2019).

Article   PubMed   Google Scholar  

Rantanen, J., Metsäpelto, R.-L., Feldt, T., Pulkkinen, L. & Kokko, K. Long-term stability in the big five personality traits in adulthood. Scand. J. Psychol. 48 , 511–518 (2007).

Roberts, B. W., Caspi, A. & Moffitt, T. E. The kids are alright: Growth and stability in personality development from adolescence to adulthood. J. Pers. Soc. Psychol. 81 , 670 (2001).

Article   CAS   PubMed   Google Scholar  

Cobb-Clark, D. A. & Schurer, S. The stability of big-five personality traits. Econ. Lett. 115 , 11–15 (2012).

Graham, P. Do Things that Don’t Scale (Paul Graham, 2013).

McCarthy, P. X., Kern, M. L., Gong, X., Parker, M. & Rizoiu, M.-A. Occupation-personality fit is associated with higher employee engagement and happiness. (2022).

Pratt, A. C. Advertising and creativity, a governance approach: A case study of creative agencies in London. Environ. Plan A 38 , 1883–1899 (2006).

Klotz, A. C., Hmieleski, K. M., Bradley, B. H. & Busenitz, L. W. New venture teams: A review of the literature and roadmap for future research. J. Manag. 40 , 226–255 (2014).

Duggan, M., Ellison, N. B., Lampe, C., Lenhart, A. & Madden, M. Demographics of key social networking platforms. Pew Res. Center 9 (2015).

Fisch, C. & Block, J. H. How does entrepreneurial failure change an entrepreneur’s digital identity? Evidence from twitter data. J. Bus. Ventur. 36 , 106015 (2021).

Brush, C., Edelman, L. F., Manolova, T. & Welter, F. A gendered look at entrepreneurship ecosystems. Small Bus. Econ. 53 , 393–408 (2019).

Kanze, D., Huang, L., Conley, M. A. & Higgins, E. T. We ask men to win and women not to lose: Closing the gender gap in startup funding. Acad. Manag. J. 61 , 586–614 (2018).

Fan, J. S. Startup biases. UC Davis Law Review (2022).

AlShebli, B. K., Rahwan, T. & Woon, W. L. The preeminence of ethnic diversity in scientific collaboration. Nat. Commun. 9 , 1–10 (2018).

Article   CAS   Google Scholar  

Żbikowski, K. & Antosiuk, P. A machine learning, bias-free approach for predicting business success using crunchbase data. Inf. Process. Manag. 58 , 102555 (2021).

Corea, F., Bertinetti, G. & Cervellati, E. M. Hacking the venture industry: An early-stage startups investment framework for data-driven investors. Mach. Learn. Appl. 5 , 100062 (2021).

Chapman, G. & Hottenrott, H. Founder personality and start-up subsidies. Founder Personality and Start-up Subsidies (2021).

Antoncic, B., Bratkovicregar, T., Singh, G. & DeNoble, A. F. The big five personality-entrepreneurship relationship: Evidence from slovenia. J. Small Bus. Manage. 53 , 819–841 (2015).

Download references

Acknowledgements

We thank Gary Brewer from BuiltWith ; Leni Mayo from Influx , Rachel Slattery from TeamSlatts and Daniel Petre from AirTree Ventures for their ongoing generosity and insights about startups, founders and venture investments. We also thank Tim Li from Crunchbase for advice and liaison regarding data on startups and Richard Slatter for advice and referrals in Twitter .

Author information

Authors and affiliations.

The Data Science Institute, University of Technology Sydney, Sydney, NSW, Australia

Paul X. McCarthy

School of Computer Science and Engineering, UNSW Sydney, Sydney, NSW, Australia

Faculty of Engineering and Information Technology, University of Technology Sydney, Sydney, Australia

Xian Gong & Marian-Andrei Rizoiu

Oxford Internet Institute, University of Oxford, Oxford, UK

Fabian Braesemann & Fabian Stephany

DWG Datenwissenschaftliche Gesellschaft Berlin, Berlin, Germany

Melbourne Graduate School of Education, The University of Melbourne, Parkville, VIC, Australia

Margaret L. Kern

You can also search for this author in PubMed   Google Scholar

Contributions

All authors designed research; All authors analysed data and undertook investigation; F.B. and F.S. led multi-factor analysis; P.M., X.G. and M.A.R. led the founder/employee prediction; M.L.K. led personality insights; X.G. collected and tabulated the data; X.G., F.B., and F.S. created figures; X.G. created final art, and all authors wrote the paper.

Corresponding author

Correspondence to Fabian Braesemann .

Ethics declarations

Competing interests.

The authors declare no competing interests.

Additional information

Publisher's note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

The original online version of this Article was revised: The Data Availability section in the original version of this Article was incomplete, the link to the GitHub repository was omitted. Full information regarding the corrections made can be found in the correction for this Article.

Supplementary Information

Supplementary information., rights and permissions.

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ .

Reprints and permissions

About this article

Cite this article.

McCarthy, P.X., Gong, X., Braesemann, F. et al. The impact of founder personalities on startup success. Sci Rep 13 , 17200 (2023). https://doi.org/10.1038/s41598-023-41980-y

Download citation

Received : 15 February 2023

Accepted : 04 September 2023

Published : 17 October 2023

DOI : https://doi.org/10.1038/s41598-023-41980-y

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

By submitting a comment you agree to abide by our Terms and Community Guidelines . If you find something abusive or that does not comply with our terms or guidelines please flag it as inappropriate.

Quick links

• Explore articles by subject
• Guide to authors
• Editorial policies

Sign up for the Nature Briefing: AI and Robotics newsletter — what matters in AI and robotics research, free to your inbox weekly.

How to Start a Profitable Research And Development Business [11 Steps]

By Nick Cotter Updated Feb 02, 2024

Business Steps:

1. perform market analysis., 2. draft a research and development business plan., 3. develop a research and development brand., 4. formalize your business registration., 5. acquire necessary licenses and permits for research and development., 6. open a business bank account and secure funding as needed., 7. set pricing for research and development services., 8. acquire research and development equipment and supplies., 9. obtain business insurance for research and development, if required., 10. begin marketing your research and development services., 11. expand your research and development business..

Launching a research and development business begins with a thorough understanding of the market landscape. A comprehensive market analysis will help you identify your potential customers, competitors, and overall industry trends. Here are key points to consider when performing your market analysis:

• Define your target market: Understand who your potential customers are, what needs they have, and how your R&D business can meet those needs.
• Analyze competition: Research existing companies in your niche, their product offerings, market share, strengths, and weaknesses.
• Assess market trends: Look into current and future trends that may affect your industry, including technological advancements, regulatory changes, and funding availability.
• Identify market gaps: Spot opportunities for innovation by finding areas where customer needs are not being met by current products or services.
• Understand regulatory environment: Investigate the legal and compliance requirements relevant to your industry and how they might impact your business operations.
• Collect and analyze data: Use surveys, interviews, and secondary research reports to gather quantitative and qualitative data that will inform your business strategy.

Are Research And Development businesses profitable?

Yes, research and development businesses can be profitable. Depending on the type of research and products developed, these businesses can generate revenue from sales, licensing fees, and other forms of income. Additionally, research and development businesses can benefit from government grants and tax incentives.

Creating a research and development business plan is a pivotal step in transforming innovative ideas into marketable products or services. This plan serves as a roadmap for your R&D activities, ensuring they are aligned with your business goals and objectives. Consider the following key points when drafting your plan:

• Define your business vision, mission, and objectives to guide all R&D efforts.
• Identify the target market or sector for your R&D outcomes and analyze market needs and trends.
• Detail the specific technologies, products, or processes that will be the focus of your R&D.
• Establish a clear timeline for research phases, development milestones, and market entry.
• Outline the team expertise and resources required, including any partnerships or collaborations.
• Prepare a budget that encompasses staffing, equipment, materials, and other R&D expenses.
• Address intellectual property management, ensuring protection of innovations and compliance with regulations.
• Develop risk management strategies to mitigate potential challenges and obstacles.
• Include a financial plan with projections on R&D investment returns and funding strategies.

How does a Research And Development business make money?

Research and Development businesses make money by providing unique services to their target audiences. For example, a Research and Development business that focuses on antique business images might target antique business owners, antique collectors, or other professionals with an interest in antique business images. This business might offer services such as custom antique business image design, restoration, or digitization. These services would be provided to the target audience in exchange for a fee, generating revenue for the Research and Development business.

Developing a strong research and development (R&D) brand is a critical step in establishing your business within the competitive landscape. It reflects your company's vision, expertise, and the innovative value you offer. Here's how you can create a compelling R&D brand:

• Define Your Vision: Articulate a clear and forward-thinking vision statement that aligns with your R&D goals and resonates with your target audience.
• Identify Your Unique Selling Proposition (USP): Determine what sets your R&D business apart from competitors and emphasize that uniqueness in your branding.
• Create a Memorable Name and Logo: Choose a brand name and design a logo that is distinctive, relevant, and reflects the essence of your R&D work.
• Establish Brand Values: Select core values that represent your brand's ethics and approach to research, which will help build trust and credibility.
• Consistent Messaging: Ensure all communications, from marketing materials to research publications, consistently convey your brand's voice and message.
• Engage with Your Community: Actively participate in industry events, forums, and social media to increase visibility and establish your brand as a thought leader.
• Protect Intellectual Property: Safeguard your brand by registering trademarks and patents to prevent imitation and reinforce your market position.

How to come up with a name for your Research And Development business?

When coming up with a name for your Research And Development business, it is important to keep in mind what the company does and what it stands for. Brainstorming is a great way to come up with creative ideas. Additionally, doing some research on existing Research And Development businesses can be helpful to get inspiration. Lastly, try to make a name that is memorable, creative, and reflects the mission of your business.

Formalizing your business registration is a pivotal step in legitimizing your research and development business. This process varies by location, but certain universal steps must be taken to ensure your business operates within the legal framework. Follow these guidelines to register your business properly:

• Choose a business structure (e.g., sole proprietorship, partnership, LLC, corporation) that aligns with your needs for liability protection, taxation, and business scale.
• Register your business name with the appropriate government body, ensuring it's unique and meets all naming requirements for your jurisdiction.
• Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) if you're in the US, or the equivalent in your country, which is necessary for tax purposes.
• Register for state and local taxes, as required, to ensure you're set up to pay sales, use, income, and employment taxes as necessary.
• Acquire all necessary permits and licenses specific to the research and development industry, which may include local, state, or federal approvals depending on the nature of your work.
• File for intellectual property protection if your business involves unique inventions, proprietary technology, or trade secrets.

Resources to help get you started:

Explore key resources designed for research and development entrepreneurs, providing access to the latest market trends, operational best practices, and strategies for business expansion:

• Harvard Business Review: Offers articles and case studies on innovation and R&D management strategies. Visit site .
• MIT Sloan Management Review: Provides insights on leading through innovation and the effective use of R&D resources. Visit site .
• R&D World: Features news, trends, and analysis for R&D leaders, including annual reports on global R&D funding forecasts. Visit site .
• Springer Nature’s Journal of Research-Technology Management: Scholarly articles focused on the intersection of research, technology, and management practices. Visit site .
• CB Insights Research: Publishes tech market intelligence reports that cover various sectors, including predictive insights on emerging tech sectors relevant for R&D. Visit site .

Starting a research and development business may require specific permits, especially if your R&D involves hazardous materials, biomedical research, or other regulated areas. Ensure compliance with all relevant regulations. Key requirements include:

• Business License: Secure a general business license from your local municipality.
• Specialized Permits: Depending on your field, you may need permits from environmental, health, or industry-specific regulatory agencies.

Securing your business's financial foundation is a crucial step in the establishment of your research and development company. Opening a business bank account is essential for managing your finances and transactions professionally. If your project requires additional capital, exploring funding options becomes equally important. Here's how to proceed:

• Research banks that offer business accounts with benefits suitable to your R&D business needs, such as low fees, high transaction limits, and robust online banking services.
• Prepare the necessary documentation, which typically includes your business formation papers, EIN (Employer Identification Number), and personal identification.
• Compare the terms and conditions of different banks, including any business loans or lines of credit they may offer.
• For funding, consider government grants specifically for R&D, venture capital from investors interested in innovation, or business loans if you have a solid business plan with financial projections.
• Network with other entrepreneurs and attend industry events to discover potential angel investors or partners willing to contribute funding.
• Explore crowdfunding platforms if your R&D project has a strong appeal to the general public or offers innovative consumer products.

Setting the right pricing for research and development services is crucial to ensure your business is competitive and profitable. It involves considering various factors like cost, market demand, perceived value, and the nature of the innovation. Here's a guide to help you establish a pricing strategy:

• Cost-Plus Pricing: Calculate the total costs of providing your service, including direct and indirect expenses, and add a markup percentage for profit.
• Value-Based Pricing: Determine the price based on the perceived or estimated value your service will bring to the customer, rather than just the cost of the service itself.
• Competitive Analysis: Research what competitors are charging for similar services and position your pricing in a way that reflects your unique value proposition.
• Flexible Pricing Models: Offer different pricing structures, such as hourly rates, project-based fees, or retainer models, to cater to various client needs and project scopes.
• Dynamic Pricing: Adjust prices based on demand, with the flexibility to offer discounts or premium charges depending on the market conditions and client relationships.
• Transparency: Clearly communicate what is included in the price and any potential additional costs to foster trust and avoid misunderstandings with clients.

What does it cost to start a Research And Development business?

Initiating a research and development business can involve substantial financial commitment, the scale of which is significantly influenced by factors such as geographical location, market dynamics, and operational expenses, among others. Nonetheless, our extensive research and hands-on experience have revealed an estimated starting cost of approximately $1169000 for launching such a research and developmentbusiness. Please note, not all of these costs may be necessary to start up your research and development business.

Starting a research and development business involves meticulous planning, particularly when it comes to acquiring the right equipment and supplies. These are essential tools that will enable your team to innovate, experiment, and develop new products or technologies. Below, you'll find a step-by-step guide to help you make informed decisions about the equipment and supplies you need.

• Assess Your Needs: Begin with a thorough assessment of the specific equipment and supplies your research and development activities will require. Consider the nature of your projects and the scale of your operations.
• Source Suppliers: Research and identify reputable suppliers who specialize in high-quality research and development equipment. Look for vendors that offer competitive pricing, good customer service, and reliable support.
• Compare Prices and Quality: Obtain quotes from multiple suppliers to compare prices. However, ensure you also consider the quality and longevity of the equipment.
• Consider Second-Hand Equipment: For cost savings, consider purchasing certified pre-owned or gently used equipment from trusted sources.
• Plan for Future Needs: Invest in scalable equipment that can grow with your business, avoiding the need for frequent upgrades.
• Secure Financing: Explore financing options if the upfront cost of equipment is prohibitive, such as leasing or payment plans.
• Review Warranties and Service Agreements: Ensure that the equipment comes with a solid warranty and check if the supplier provides service agreements for maintenance and repairs.
• Purchase Consumables in Bulk: Save on recurring costs by buying consumable supplies in bulk, but be wary of shelf life and storage requirements.
• Stay Updated on New Technologies: Keep abreast of the latest advancements in equipment and tools that could benefit your R&D processes and consider investing in them.

List of Software, Tools and Supplies Needed to Start a Research And Development Business:

• Software development tools
• Internet access
• Research materials and resources
• Office supplies and stationery
• Laboratory equipment
• Analytical tools
• Laboratory supplies
• Prototyping materials
• Marketing materials

Protecting your research and development business with appropriate insurance is a critical step in safeguarding your assets, intellectual property, and the overall health of your enterprise. It's crucial to assess the risks specific to your field and acquire insurance that addresses those potential vulnerabilities. Below are key considerations to guide you in obtaining the right business insurance:

• Evaluate Risks: Consider the types of risks your business might face, such as property damage, liability issues, or data breaches. This will help determine the necessary coverage.
• Consult with Professionals: Speak with an insurance broker who specializes in business insurance. They can provide tailored advice and help you understand the specific policies that suit your R&D business.
• Consider Intellectual Property Insurance: Given the nature of R&D, protecting your intellectual property (IP) is crucial. IP insurance can help cover legal costs in case of infringement disputes.
• General Liability Insurance: This is a foundational insurance that covers bodily injury, property damage, and advertising injury claims against your business.
• Product Liability Insurance: If your R&D involves creating prototypes or products, this insurance can protect against claims related to product defects.
• Review Regularly: As your business evolves, so will your insurance needs. Make it a practice to review and adjust your insurance policies annually or when significant changes occur.

Successfully launching your research and development services requires a strategic marketing approach. By effectively promoting your unique capabilities and expertise, you can attract clients who are seeking innovative solutions to complex problems. Here are several steps to consider when beginning to market your R&D services:

• Identify Your Target Market: Clearly define who will benefit most from your services, whether it's startups, large corporations, or specific industries.
• Develop a Strong Brand: Create a memorable brand identity, including a professional logo and a compelling tagline that conveys the essence of your R&D services.
• Build a Professional Website: Launch an informative website that showcases your expertise, services, and past projects to establish credibility.
• Utilize Content Marketing: Share your knowledge through blogs, white papers, and case studies to demonstrate thought leadership in your field.
• Network and Collaborate: Attend industry conferences and networking events to build relationships and collaborate with potential clients and partners.
• Leverage Social Media: Use platforms like LinkedIn and Twitter to connect with your audience and share insights and updates about your R&D work.
• Consider Paid Advertising: Invest in targeted ads on search engines and social media to reach potential clients actively searching for R&D services.

Once your research and development business is established, expanding your operations can help in tapping into new markets and opportunities. A thoughtful approach to scaling up will ensure sustainability and innovation continue to thrive. Here are key strategies to consider:

• Explore partnerships with universities and industry leaders to gain access to a wider range of expertise and cutting-edge technology.
• Diversify your R&D portfolio by investing in new areas that align with emerging trends and customer demands.
• Apply for additional funding through grants, venture capital or partnerships to finance your expansion efforts.
• Enhance your facilities and equipment to support increased capacity and more sophisticated research projects.
• Attract top talent by offering competitive salaries, professional development opportunities, and a collaborative work environment.
• Invest in intellectual property protection to safeguard your innovations and establish a competitive edge in the market.
• Use data analytics to assess market needs and direct your R&D efforts more effectively.
• Expand your geographical reach through global collaborations or setting up satellite research labs in strategic locations.