Revision as of 15:40, 17 July 2023 by User (talk | contribs)

Business is an organization or economic system where goods and services are exchanged for one another or for money.[1]

Businesses can be classified and categorized along different dimensions. One way to classify businesses is by profit motive:

  • For-Profit Businesses: in simple terms, these exist to make money for their owners i.e. their income is more than expenses. In a more meaningful way, this type of business is created to return more money than invested by the owner(s). Most companies fall into this category. For example, IBM, Exxon, Google, Netflix, etc.
  • Not-for-Profit Businesses are entities that do not generate a profit for the owner(s) i.e. their owners do not generate more than they invest.

It is important to understand that for-profit business can and indeed do incur losses. However, the purpose of their creation is to make not lose money.

Elements of a Business

These are the key elements of a business:

  • Model
  • Function
    • Make
    • Buy
    • Sell
    • Service
    • Distribute
  • Strategy
  • Process
  • Organization
  • Income
  • Expense
  • Equity
  • Stock
  • Debt
  • Employee
  • Customer
  • Vendor
  • Owner
  • Manager

Generally, a business begins with a business concept (the idea) and a name. Depending on the nature of the business, extensive market research may be necessary to determine whether turning the idea into a business is feasible and if the business can deliver Business Value to consumers. The business name can be one of the most valuable assets of a firm; careful consideration should thus be given when choosing it. Businesses operating under fictitious names must be registered with the state. Many businesses organize themselves around some sort of hierarchy or bureaucracy, where positions in a company have established roles and responsibilities. The most common structures include sole proprietorships, partnerships, corporations, and limited liability companies, with sole proprietorships being the most prevalent.

  • A sole proprietorship, as its name suggests, is a business owned and operated by a single natural person. There is no legal separation between the business and the owner; the tax and legal liabilities of the business are thus that of the owner.
  • A partnership is a business relationship between two or more people who join to conduct business. Each partner contributes resources and money to the business and shares in the profits and losses of the business. The shared profits and losses are recorded on each partner's tax return.
  • A corporation is a business in which a group of people acts together as a single entity; most commonly, owners of a corporation are shareholders who exchange consideration for the corporation's common stock. Incorporating a business releases owners of financial liability of business obligations; however, a corporation has unfavorable taxation rules for the owners of the business.
  • For this reason, a relatively new (first available in Wyoming in 1977 and other states in the 1990s) business structure, a limited liability company (LLC), is available; this structure combines the pass-through taxation benefits of a partnership with the limited-liability benefits of a corporation.[2]

Types of Businesses[3]

There are many different types of businesses, but the three general types are:

  • Service Businesses
  • Manufacturing Businesses
  • Retail Businesses

In North America, businesses are classified both by industry (NAICS, a system used in Canada, the U.S., and Mexico) and size:

  • Small Business
  • Medium Business
  • Large Business

This classification is usually based on either the number of employees or the revenues of a business. The exact parameters differ so it may not be meaningful to put numbers against each for our purposes.

Businesses may also be classified by the type of Business Model they use.

Characteristics of Business[4]

Characteristics are the features that are necessary to classify the business.

  • Economic Activity: Business necessarily has to be an economic activity. But what exactly is an economic activity? Any activity that gives a monetary return is an economic activity. For example, if a friend or colleague gives you a ride to work and back every day, he is doing this act out of kindness. But if he starts a transportation service of picking up and dropping off by charging money then it’s an economic activity.
  • Production or Trading of Goods or Services for Sale: If a business plans on selling a product, it has to either manufacture that product or purchase it and add a profit margin to it and sell it further. Business is interested in every activity that is concerned with the production or purchase of goods for selling, this makes it one of the most important characteristics of a business. Services for sale include transportation, housekeeping, and security. Whereas, goods are mostly consumable items.
  • Sale or Exchange of Goods and Services: The third and crucial characteristic of business after production or procurement is to sell that product for the money. The way to sell a product or service is by launching it in the market or to offer it for sale. A sale or exchange must take place between the seller and the buyer.
  • Regularity in Dealings: Business is a repeatable economic activity that generates money. For example, if you sell your old bike and it generates money. Also, it’s an economic activity but are you doing this on a regular basis? No. As it has no regularity in it, it cannot be accepted as a business activity. Similarly, there is a dealer who deals in the purchase and sale of second-hand bikes. For him, it’s a business activity as there is a regularity in his dealing. A single transaction of purchase or sale cannot be classified as a business.
  • Profit Earning: The sole purpose of business is the maximization of profit. It steps into the market with the main objective of earning a profit. For the survival of a business in a market, generating profit is extremely necessary. If a business can’t produce profit, it is expected of it to go downhill financially. Therefore the businessman does all the possible tricks to maximize their profits by increasing the volume of sales or decreasing the costs
  • Risk Factor: It is well known “Higher the risks, higher the return”. The business attracts risk. While initiating business it is not guaranteed 100% that the business will be successful. There is an anticipation that there might be demand for its product or service in the market. But the market is always dwindling subject to risk. The business may even earn profit but the amount of profit earned may vary.
  • Uncertainty of Returns: Businessmen invest huge capital in their activities to sustain and extract profit from the business. As we discussed the risk above, it is very uncertain as to what amount the profit will be earned. Often there are situations where is no return on profit. There are always chances of losses in business activities.
  • Legal Activity: The business has to be legal and lawful. Business is an extremely important activity for a country but it is not above the law. Every economic activity has to be within the limits of the law. The country’s legislation puts clauses on the functioning of the business to control its activities.

Classification of Business Activities[5]

Industry: Industry implies the economic activities that are associated with the conversion of resources into goods that are ready for use. This involves the production, processing, and mining of goods. The industry is further divided into three broad categories; primary industry, secondary industry, and tertiary industry. Commerce: In simple terms, commerce refers to the buying and selling of goods for value, and includes all those activities which facilitate the transaction. Further, commerce encompasses two types of activities, trade, and auxiliaries to trade. Over the past few years, the entire concept of business has undergone a drastic change, i.e. it has been turned from producer-oriented activity to consumer-oriented activity. Previously, the approach is ‘to sell what is produced, but now the approach is ‘to produce what is demanded.

Organization and Regulation[6]

Most legal jurisdictions specify the forms of ownership that a business can take, creating a body of commercial law for each type. The major factors affecting how a business is organized are usually:

  • The size and scope of the business firm and its structure, management, and ownership, broadly analyzed in the theory of the firm: Generally, a smaller business is more flexible, while larger businesses, or those with wider ownership or more formal structures, will usually tend to be organized as corporations or (less often) partnerships. In addition, a business that wishes to raise money on a stock market or to be owned by a wide range of people will often be required to adopt a specific legal form to do so.
  • The sector and country: Private profit-making businesses are different from government-owned bodies. In some countries, certain businesses are legally obliged to be organized in certain ways.
  • Tax advantages: Different structures are treated differently in tax law and may have advantages for this reason.
  • Disclosure and compliance requirements: Different business structures may be required to make less or more information public (or report it to relevant authorities) and may be bound to comply with different rules and regulations.

Many businesses are operated through a separate entity such as a corporation or a partnership (either formed with or without limited liability). Most legal jurisdictions allow people to organize such an entity by filing certain charter documents with the relevant Secretary of State or equivalent and complying with certain other ongoing obligations. The relationships and legal rights of shareholders, limited partners, or members are governed partly by the charter documents and partly by the law of the jurisdiction where the entity is organized. Generally speaking, shareholders in a corporation, limited partners in a limited partnership, and members in a limited liability company are shielded from personal liability for the debts and obligations of the entity, which is legally treated as a separate "person". This means that unless there is misconduct, the owner's own possessions are strongly protected by law if the business does not succeed.

Where two or more individuals own a business together but have failed to organize a more specialized form of vehicle, they will be treated as a general partnership. The terms of a partnership are partly governed by a partnership agreement if one is created, and partly by the law of the jurisdiction where the partnership is located. No paperwork or filing is necessary to create a partnership, and without an agreement, the relationships and legal rights of the partners will be entirely governed by the law of the jurisdiction where the partnership is located. A single person who owns and runs a business is commonly known as a sole proprietor, whether that person owns it directly or through a formally organized entity. Depending on the business needs, an adviser can decide what kind is proprietorship will be most suitable. A few relevant factors to consider in deciding how to operate a business include:

  • General partners in a partnership (other than a limited liability partnership), plus anyone who personally owns and operates a business without creating a separate legal entity, are personally liable for the debts and obligations of the business.
  • Generally, corporations are required to pay tax just like "real" people. In some tax systems, this can give rise to so-called double taxation, because first the corporation pays tax on the profit, and then when the corporation distributes its profits to its owners, individuals have to include dividends in their income when they complete their personal tax returns, at which point a second layer of income tax is imposed.
  • In most countries, there are laws that treat small corporations differently from large ones. They may be exempt from certain legal filing requirements or labor laws, have simplified procedures in specialized areas, and have simplified, advantageous, or slightly different tax treatment.
  • "Going public" through a process known as an initial public offering (IPO) means that part of the business will be owned by members of the public. This requires the organization as a distinct entity, to disclose information to the public, and adhere to a tighter set of laws and procedures. Most public entities are corporations that have sold shares, but increasingly there are also public LLCs that sell units (sometimes also called shares), and other more exotic entities as well, such as, for example, real estate investment trusts in the US, and unit trusts in the UK. A general partnership cannot "go public".

Business and Information Technology

In the 21st century, no business can operate using information technology. IT pervades all facets of business from making the product to marketing it and serving the customer, IT is critical to business success. Therefore, it is important to create a strategy that outlines how a company will use technology to achieve its business goals and objectives. It defines the technology-related investments, initiatives, and resources that a company will pursue in order to create value and drive growth.

See Also