Businesses are established with the goal of generating profit. One of the first and most important decisions an aspiring business owner has to make is to decide what type of business it will choose and how it should be structured.
Generally, business comes in different types and forms of organization. Here they are:
Types of Business
1. Service Business
This type of business provides intangible products to its customers. Service businesses offer professional skills, advice, expertise and the like. It includes, but is not limited, to the following: banks, accounting and law firms, schools, hair and nail salons, repair shops, laundry shops, hospitals, hotels, restaurants, transportation, theaters and clinics.
2. Merchandising Business
A merchandising type of business buys products at a wholesale price without changing its form and sells it to its own customers. They make profit by selling products at a higher price than their purchase cost. Examples of this are markets, retail stores, grocery stores, convenience stores, department stores, bookstores, online shops, as well as distributors and resellers.
3. Manufacturing Business
Manufacturing businesses create their own products. Unlike the merchandising business, this type buys products and uses them as materials to create a new product. The finished goods are sold directly to customers, to merchandisers or to other manufacturing businesses. Some examples of products that are manufactured are electronics, cars, apparel, beverage and processed foods.
Types of Business Organizations
1. Sole proprietorship
The sole proprietorship is a business owned by only one person. Many businesses, even corporations, started out as sole proprietorships. It is the simplest form of business – the easiest and the least costly to start. Businesses of this type usually operate under the name of its owner, or a trade name created by the owner. However, the trade name does not create a legal entity different from the owner of a sole proprietorship business. The owner still signs contracts in his or her own name, and customers write in checks to the owner’s name.
To start a sole proprietorship, the owner only needs to register his or her name and secure licenses. The owner is solely responsible of the assets and liabilities of the business, and assumes all the risks and decision-making for it. The downside of it is that the owner faces unlimited liability, meaning, he or she is personally liable for all debts, so creditors can file lawsuits against the owner where they can go after his or her personal assets if the business cannot pay for it.
Usually starting out in oral agreements and handshakes, a partnership type of business is owned by two or more people who would contribute resources such as money, properties, skill or labor into the entity. Like sole proprietorships, the law does not distinguish between the owners and the business.
Partners share profits by themselves, as well as the risks, liabilities and decision-making – depending on the percentage of ownership agreed upon. This can be both an advantage and a disadvantage, so it is important to form a written contract or agreement, preferably with the help of an attorney. The partnership contract should set clear agreements regarding profit sharing, decision making, problem solving, as well as how much capital and time each will devote to the business. It must also contain terms on how future partners will be admitted to the business, or – if needed – what should be done to opt a partner out, or dissolve the partnership entirely.
There are three types of partnerships:
- General Partnership – In this type of partnership, all owners have unlimited liability and they all share management responsibilities. Partners divide profit or loss according to internal agreement.
- Limited Partnership – A limited partnership is run by one or two general partner/s plus limited partners. “Limited” means that these partners have limited liability, depending on the extent or amount of their investment, and have little or no input allowed regarding management decisions.
- Joint Venture – This business arrangement have two or more parties agreeing to contribute resources to accomplish a specific task. It is similar to a general partnership, but formed for a single project or for a specified period of time.
A corporation is a larger and more complex form of business. Unlike the sole proprietorship and partnership, corporations are a separate legal entity from its owners. The ownership is divided into shares of stocks, which in turn, are issued to individuals or other businesses – making them stockholders of a corporation.
The stockholders have limited liability and limited involvement in the operations on a corporation. This type of business has a board of directors elected from the stockholders, who manages or makes decisions for the business. It is easy to increase resources of the business by issuing stock.
Corporations are more formal than the types of business mentioned above. There are certain formalities that must be observed by the directors, owners and employees. They are also required to pass periodic filings and annual fees with the state.
Corporations are classified into how it is taxed:
- C corporations – These companies are subject to double taxation: one is at the corporate level based on the income of the business as a whole, and the other is at individual levels based on the profit of shareholders.
- Subchapter S corporations – Owners of this type of corporation can report their share of profits and losses in the company on their individual tax returns.
A cooperative is a form of business organization that is owned and operated for the benefit of meeting a collective need or to provide a service that will benefit all owners, also known as members, member-owners or user-owners. A cooperative usually have an elected board of directors or officers that run the business, while members can vote during decision making to control the direction of the cooperative. Members become part of a cooperative by buying shares.
5. Limited Liability Company (LLC)
The limited liability company is the newest form of business organization. It is often described as a hybrid business form because it has the limited liability protection of a corporation and the ease of administration and tax treatment of a partnership, wherein tax and income tax are distributed among the owning members. This type of company is more simple and flexible than a corporation.