Types of Businesses
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Before explaining types of business categories, first of all explain business. The word “Business” means the state of being busy. Generally, an organization (combination of resources) entity engaged for making profit. In other words all legal and economic activities undertaken towards achieving organizational objective of an enterprise referred to Business. Different authors define business in their own context; however, central idea is same:
- Every human activity which is engaged in for the sake of earning profit may be called business
- Business may be defined as human activities directed toward providing or acquiring wealth through buying and selling of goods
- An institution organized and operated to provide goods and services to the society, under the incentive of private gain is business
An organization is a group of individuals who come together to pursue a common set of goals and objectives. There are types of business categories: business and non-business. A business organization sells products and/or services for profit. A non-business organization, such as a charity or hospital, exists to meet various societal needs and does not have profit as a goal. All businesses, regardless of type, record, report, and, most importantly, use accounting information for making decisions.
Concluded that, the term business includes all human activities concerned with earning money or it is an activity in which produce or exchange goods and services for mutual gain or profit. The goods and services produced or purchased for personal use are not included in business. There are different types of Businesses, under different basis by different authors. Some forms under some basis are discussed below:
1. Business Classification by Operational Activity
This is first business classification for type of businesses. From operational activities point of view business can be classified into three main classes of activities. These activities are as follows:
1.1. Merchandising Activity
This type of business does not change the shape of the goods rather by adding their profit. Business received goods in finished form and sell to customers as it is.
1.2. Manufacturing Activities
The enterprises which are involved in manufacturing activities start their activities from purchase of raw material and put labor and factory overhead on the raw material and develop products. Produced products are looks entirely different from raw material. Hence we can say that in this type of business value addition is carries out.
1.3. Services Activities
The organizations involve in providing service like banking, education, insurance, management development and training are called services activities.
2. Business Classification by Sector
Basically there are two sector public and private. The public sector business organizations, for profit or non profit, are the ones controlled by the government. The firms owned by private entrepreneurs are private sector organizations.
>>> Practice related Multiple-Choice Questions Types of Businesses MCQs.
3. Business Classification by Legal Structure
In terms of the legal structure, firm can be categorized into the following four categories.
3.1. Sole Proprietorship
A business owned by one person and the owner may operate by own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business.
Stafford states, it is the simplest form of business organization, which is owned and controlled by one man.
Baker defined as; sole proprietorship is a business operated by one person to earn profit.
An individual may enter into business alone, either selling goods or providing a service. Such a person is described as a sole trader. The business may be started because the sole trader has a good idea which appears likely to make a profit, and has some cash to buy the equipment and other resources to start the business. If cash is not available, the sole trader may borrow from a bank to enable the business to start up.
Although this is the form in which many businesses have started, it is one which is difficult to expand because the sole trader will find it difficult to arrange additional finance for expansion. If the business is not successful and the sole trader is unable to meet obligations to pay money to others, then those persons may ask a court of law to authorize the sale of the personal possessions, and even the family home, of the sole trader. Being a sole trader can be a risky matter and the cost of bank borrowing may be at a relatively unfavorable rate of interest because the bank fears losing its money.
Sole proprietorship is the oldest form of business organization in which one man invests his capital himself. He is all in all in doing his business. He enjoys the whole of the profit or bearing a loss. For accounting purposes, the business is regarded as a separate economic entity, of which the sole trader is the owner who takes the risk of the bad times and the benefit of the good times.
One method by which the business of a sole trader may expand is to enter into partnership with one or more people. This may permit a pooling of skills to allow more efficient working, or may allow one person with ideas to work with another who has the money to provide the resources needed to turn the ideas into a profit. There is thus more potential for being successful. If the business is unsuccessful, then the consequences are similar to those for the sole trader. Persons to whom money is owed by the business may ask a court of law to authorize the sale of the personal property of the partners in order to meet the obligation.
- Partnership is the second stage in the evolution business organization.
- It means the association of two or more persons to carry on as co-owners.
- The persons who constitute this organization are individually termed as partners and collectively known as firm; and the name under which their business is conducted is called “The Firm Name”.
- In ordinary business, the number of partners should not exceed 20, but in case of banking business it must not exceed 10. This type of business organization is very popular.
- The law related to partnership is called Partnership Act.
According to Partnership Act, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
Partnership may be established as a matter of fact by two persons starting to work together with the intention of making a profit and sharing it between them. More often there is a legal agreement, called a partnership deed, which sets out the rights and duties of each partner and specifies how they will share the profits. There is also partnership law, which governs the basic relationships between partners and which they may use to resolve their disputes in a court of law if there is no partnership deed, or if the partnership deed has not covered some aspect of the partnership.
For accounting purposes the partnership is seen as a separate economic entity, owned by the partners. The owners may have the same intimate knowledge of the business as does the sole trader and may therefore feel that accounting information is not very important for them. On the other hand, each partner may wish to be sure that they are receiving a fair share of the partnership profits. There will also be other persons requesting accounting information, such as HM Revenue and Customs, banks who provide finance and individuals who may be invited to join the partnership so that it can expand even further.
3.3. Joint Stock Company
The main risk attached to either a sole trader or a partnership is that of losing personal property and possessions, including the family home, if the business fails. That risk would inhibit many persons from starting or expanding a business.
- Joint Stock Company is the third major form of business organization
- It is entirely different organizational from sole proprietorship & partnership
- There are two advantages of Joint Stock Company. First of all, it enjoys the advantage of increased capital. Secondly, the company offers the protection of limited liability to the investors and disadvantage is double taxation (Corporate + Income Tax)
- The law relating to Joint Stock Company has been laid in Companies Act
The most widely quoted definition of a company was given by an American judge, Justice Marshal in 1891, in which he defined a corporation as;
“an artificial being, invisible, intangible and existing only in law”
According to S.E. Thomas; “a company is an incorporated association of persons formed usually for the pursuit of some commercial purpose.”
For accounting purposes the company is an entity with an existence separate from the owners. In the very smallest companies the owners may not feel a great need for accounting information, but in medium- or large-sized companies, accounting information will be very important for the shareholders as it forms a report on how well the directors have run the company.
There are two types of companies which are discussing below.
3.3.1. Public Limited Company
- Company which is formed by a least ‘7’ members, and there no restrictions to maximum number of shareholders
- This company can invite public to subscribe its shares or debentures by issuance of prospectus
- The shares of a public company are freely transferable or subscribe
- The word ‘Limited’ is used at the end of the name of public company
3.3.2. Private Limited Company
- It is a company which is formed by at least ‘2’ members and maximum number of members which is fifty (50)
- A private company cannot invite public to subscribe to its shares or debentures by issue of prospectus
- The transfers if shares is generally restricted by the articles of association of a private company
- In case of a private company, the word ‘Private Limited’ must be used at the end of the name of a company.
In either type of company, the owners are called shareholders because they share the ownership and share the profits of the good times and the losses of the bad times (to the defined limit of liability). Once they have paid in full for their shares, the owners face no further risk of being asked to contribute to meeting any obligations of the business.
Hopefully, the business will prosper and the owners may be able to receive a share of that prosperity in the form of a cash dividend. A cash dividend returns to the owners, on a regular basis and in the form of cash, a part of the profit created by the business. If the company is very small, the owners may run the business themselves. If it is larger, then they may prefer to pay someone else to run the business. In either case, the persons running the business on a day-to-day basis are called the directors. Because limited liability is a great privilege for the owners, the company must meet regulations set out by Parliament in the form of a Companies Act.
Those combine limited liability advantage of a company with single tax advantages of a sole proprietor/ partnership
3.4.1. S-Type Corporation
- S-Type corporations are limited liability corporations without double taxation
- In a regular corporation, the company itself is taxed on business profits. In addition, the owners pay individual income tax on money that they draw from the corporation as salaries, bonuses, or dividends
- In contrast, in an S corporation, all business profits “pass through” to the owners, who report them on their personal tax returns (as in sole proprietorship or partnerships)
3.4.2. Limited Liability Partnership (LLP)
- Limited Liability Partnership (LLP) or limited partnership is also a form of partnership with allows limited liability to the owners.
- These organizations are similar in many ways to the partnership; however, LLPs offer more flexibility and benefits to the owners.
3.4.3. Personal Corporations (PC)
- Personal Corporations (PC) or Professional Corporations are generally formed by professionals to protect them against litigation. Professionals like doctors, lawyers etc. prefer to register their business as Professional Corporations.
4. Non-profit-making Organizations
Other organizations are formed with the intent of providing services, without intending to be profitable in the long term:
4.1. Clubs and Societies
These organizations exist to provide facilities and entertainments for their members. They are often sports and/or social clubs and most of their revenue is derived from the members who benefit from the club’s facilities. They may carry out some activities that are regarded as ‘trading’ activities, in which profits are made, but these are not seen as the main purpose of the organization.
These exist to provide services to particular groups, for example people with special needs and to protect the environment. Although they are regarded as non-profit-making, they too often carry out trading activities, such as running shops.
4.3. Local and central government
Government departments are financed by members of society (including limited companies). Their finances are used to provide the infrastructure in which we live, and to redistribute wealth to other members of society. You will not look at the accounts of government bodies in this Learning System.
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.