What is Business?

What is a business in relation to learning accounting?

Summary

  • What is Business?
  • Types of Business
    • Service Provider
    • Merchandising
    • Manufacturing
  • Business Structure
    • Sole Proprietorship
    • Partnership
    • Corporation
    • S Corporation
    • Limited Liability Company (LLC)

What is Business?

The IFRS Foundation defined Business as follows:

“An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.”

In simpler words, a business is an organization that provides goods or services, or both, intending to make a profit. Although some view profit-making as abuse, the economy also receives benefits from businesses such as having easy access to services and products.

Types of Business

Business entities are classified into three main types according to their nature of activities. It can be a service business, a merchandising business, or a manufacturing business.

1. Service Provider

A service business is a type of business where a company provides services or entertainment to customers without transferring tangible products while a merchandising and manufacturing business are companies that transfer goods to customers. A business is not just about the product, it can also run by providing services such as talent studios that provide entertainment to viewers and money safekeeping and security services by banks.

2. Merchandising

A business that transfers goods to customers is either a merchandising or manufacturing entity. The difference between merchandising and manufacturing is that a Merchandising business provides goods to customers bought from suppliers with little or no process applied, meaning goods are sold in the same state as when it was purchased.

3. Manufacturing

Meanwhile, Manufacturing business is a business that processes raw materials into finished products that are eventually sold to customers.

Business Structure

The business structure or legal structure of business differs from country to country. For instance, in the US it falls under 5 types:

  • Sole Proprietorship
  • Partnership
  • Corporation
  • S Corporation
  • Limited Liability Company (LLC)

Why is it important to choose the right business structure? Each structure actually has its pros and cons. This highly affects your taxes and the amount of liability. In order to choose the right structure, you must know your business very well. Also, choosing the right business structure must be included in your strategy.

Please take note that these 5 types of business structures may not be the case in your country.

1. Sole Proprietorship

Generally, the easiest and simplest to form. This type usually is recommended for beginner entrepreneurs who intend to work alone and solo the profit.

Pros

  • Easy to form
  • You solo the profit
  • Minimal legal requirements to comply for
  • You can decide alone for your business
  • You usually need a small capital to form one

Cons

  • Harder funding – you usually start with your own funds (you can’t easily obtain a large amount of loan from banks with this kind of structure)
  • Since it’s harder to fund this type of structure, it also generally yields the lowest amount of profit
  • Your personal properties are not protected. For instance, your business went bankrupt, your unpaid creditors may file a suit against your personal properties (e.g. your car, or house, or lot may be attached and executed by the court in payment to your creditor)

2. Partnership

If you want to form a business together with your friends or family members, this type may work out for you.

Pros

  • Easy to form just like sole-proprietorship
  • Generally lower taxes than a corporation. However, some countries tax partnerships as if they are corporations.
  • If you are a limited partner in a limited partnership, your personal properties are protected.
  • Generally higher profit compared to a sole proprietorship
  • Higher chance of acquiring funds compared to a sole proprietorship
  • Minimal legal requirements compared to corporations

Cons

  • A partnership is easily dissolved – the death, insanity, or civil interdiction of a partner usually will automatically result in the dissolution of a partnership
  • Company is usually managed by many persons and may result in conflicts in decision-making
  • There are two kinds of partnerships: 1.) General Partnership – composed of general partners; and 2.) Limited Partnership – composed of at least 1 general partner and the remaining are limited partners. General partners’ personal properties are not protected.

3. Corporation

It is usually referred to as C Corporation. If you want to establish a really big business requiring high funding, a corporation is a structure for you.

Pros

  • Generally, generates the largest profit
  • Easier to acquire large funds
  • Has a right of succession – meaning the death of a stockholder will not dissolve the corporation
  • Usually has a more organized decision-making body
  • Protection of personal properties – any stockholder’s personal property is protected under a corporate structure

Cons

  • Heavy taxation – generally double taxation is imposed
  • Tons of legal requirements
  • Heavily regulated by-laws
  • Large capital requirement

4. S Corporation

This a type of corporation. It is actually similar aspects from a C Corporation except for the following pros and cons:

Pros

  • S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates
  • May use the cash method of accounting as opposed to GAAP’s accrual method.

Cons

  • Limited to 100 shareholders only
  • All shareholders must be US citizens (since this post is based on US business laws and tax laws)

5. Limited Liability Company (LLC)

This type of business structure is like a combination of a partnership and a corporation. It may also sound like an S corporation but there are differences which are mentioned in the pros and cons:

Pros

  • Not limited to any number of members

Cons

  • Limited to certain types of business (e.g. most states generally do not allow banks and insurance companies to form LLC)

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