Business Basics: Definition, Profit & Organization

Business Definition

• A business is an active process and part of human society
• Economic resources, like services and materials, come together in an organization for distribution
• The goal of business is to deliver goods, products or other outputs to consumers
• Significant business operations include accounting, selling, advertising, the delivery of goods and buying, assembling, and distributing resources

Profit

• Profit is the difference between the amount received and the amount spent on something that was purchased, produced or manufactured
• Business organizations should help promote the common good and protect the rights and interests of individuals

Types of Organizations

• There are three types of business organizations, including service, merchandising, and manufacturing businesses

Service Businesses

• Service businesses provide services to customers instead of products
• Computer repairs, wellness spas, laundry, tutoring, and delivery services are examples of service businesses

Merchandising Businesses

• Merchandising businesses sell customers the products they buy from other businesses
• Examples of merchandising businesses are grocery stores, sari-sari stores, supermarkets, bookstores, and department stores

Manufacturing Businesses

• Manufacturing businesses turn basic inputs into products that sell to consumers
• Shoe, wine, candle, cosmetics and baked goods manufacturing are examples of manufacturing businesses

Forms of Business Organizations

• Business organizations take the form of either sole proprietorships, partnerships, or corporations

Sole Proprietorship

• This is a one-person business
• The owner decides alone about finances and operations, and has full control
• Tax preparation is faster because you simply file an individual income tax return including business losses
• Personal and business income is considered the same and self-employment tax implications apply
• Start-up costs are lower
• Handling money is easier
• There are few government rules and regulations
• An owner can own their business as long as they want and can sell it when they want to move on
• Sole proprietorships can be passed down to an heir
• A sole proprietorship is personally liable for all enterprise debts and actions
• There is a lack of financial control because the structure is loose
• There could be difficulty with raising capital
• Bookkeeping businesses, financial planners, freelance writing, computer repair services and catering companies can be examples of sole proprietorships

Partnership

• A partnership is a business relationship between two or more people
• Individuals share profit and liabilities of a business venture
• Partners give feedback on how to use capital as well as critical strategic decisions from different perspectives
• Partnership businesses lack formality
• Partnerships may be created verbally or in writing, which makes them easier to start
• The burden can be shared for more support
• Each partner adds their own skills, connections, expertise and experience
• There is better decision-making as two heads are better than one
• Business deals can be kept confidential for more privacy
• Partners own and control the business
• More funds can be available for expansion, enhancing the borrowing capacity of the business
• Easy access to profits

Types of Partnerships

• There are four types of partnerships: general, limited, limited liability, and limited liability limited

General Partnership

• This is the most basic form of partnership
• It doesn't require forming a business entity with the state
• Partners usually sign a partnership agreement
• Ownership and profits split evenly, but different terms can be established in the partnership agreement

Limited Partnership

• These partnerships are formal business entities approved by the state
• They have a general partner who is fully responsible for the business
• There are limited partners who invest money but don't actively manage the business
• Limited partners are not responsible for its debts and liabilities and invest for financial returns

Limited Liability Partnership

• These partnerships operate like a general partnership but limit partner liability for one another's actions
• The partners still bear liability for the debts and legal liabilities of the business
• Partners aren't responsible for errors and omissions of their fellow partners
• LLPs are not allowed in every state, and are often limited to doctors, lawyers, and accountants

Limited Liability Limited Partnership

• This is a newer kind of partnership available in some states
• It operates like a limited partnership with at least one general partner who manages the business
• LLLPs limit the general partner's liability so all partners have liability protection

Partnership Disadvantages

• There is no independent legal status for the business
• The business has no separate legal personality, so the partners have personal liability for debts and losses
• A partnership business lacks the sense of prestige associated with corporations
• Raising money can be more difficult than in a corporation
• There is potential for differences and difficulties
• Decision-making can be slower due to required consulation among partners
• Profit must be shared among partners
• It may effect life-work balance because it might require a lot of time and energy
• Profits earned will be translated to income on the individual partners, so there theare subject income tax in the financial year in which they are made
• There are limits on business development like unlimited liability or a lack of commercial status and funding opportunities

Corporations

• A corporation is a legal entity separate and distinct from its owners
• It relies on corporate laws of the state for its existence
• Corporations can generate money for the company, and they can raise funds by selling shares of stocks.
• It files taxes separately from its owner.

Corporation Advantages

• The liability of the shareholders is limited to the amount of their investments
• A publicly held corporation can sell shares or issue bonds to raise substantial amounts
• Shareholders can sell shares easily in a corporation
• Ownership can pass through many generations since a corporation has no limit

Corporation Disadvantages

• The corporation pays taxes on its income, depending on its type, and the shareholders pay dividend taxes so income gets taxed twice
• The management team can operate without oversight from the owners