A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. Business organizations come in different types and in different forms of ownership.
The three major types of businesses (as to product offered) are:
A service type business provides intangible products (products with no physical form). Service type firms offer skills, labor, expertise, and other similar work in return for professional or talent fees.
Examples of service businesses are:
This type of business buys products at wholesale price and sells the same at retail price. They are known as "buy and sell" or "reseller" businesses. They make profit by selling their goods at prices higher than their purchase costs.
A merchandising business buys a product and sells it without changing its form. Examples include all distribution and retail stores such as: department store, grocery, hardware, clothes and accessories shop, consumer electronics, home furniture, appliance stores, drug stores, etc.
Unlike a merchandising business, a manufacturing business buys products with the intention of using them as raw materials to make a new product. Thus, there is transformation of the products purchased.
A manufacturing business combines raw materials, labor, and overhead costs in its production process. The goods produced are then be sold to customers. Examples include:
Many companies engage in more than one type of business, typically segregated through different departments or divisions.
Take for example a tech company that produces phones (manufacturing), sells them through their distribution centers (merchandising), and provides repairs and maintenance (service). A restaurant combines ingredients in making a meal (manufacturing), sells a cold bottle of beer (merchandising), and provides a dining venue (service).
These are the basic forms of business ownership:
A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them. The sole proprietorship form is usually adopted by small business entities.
Advantages of sole proprietorship:
Disadvantages of sole proprietorship:
A partnership is owned by two or more persons who contribute capital to conduct business. The partners divide the profits of the business among themselves based on agreed terms.
In general partnerships, all partners are have unlimited liability. In limited partnership (or Limited Liability Partnership, LLC), at least one partner is a limited partner. The creditors cannot go after personal assets of limited partners.
Advantages of partnership:
Disadvantages of partnership:
A corporation is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock.
The owners, known as stockholders, enjoy limited liability but have limited involvement in the company's operations. The board of directors elected from the stockholders, controls the activities and direction of the corporation.
Advantages of corporation:
Disadvantages of corporation:
In addition to these basic forms of business ownership, these are some other types of organizations that are common today:
A cooperative is a business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group are called members. Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are: utility cooperatives (water and electricity), cooperative banking, credit unions, and housing cooperatives.
Limited liability companies (LLCs) in the USA, are hybrid forms of business that have characteristics of both a corporation and a partnership or sole proprietorship. An LLC is easier to establish. It is not incorporated; hence, it is not considered a corporation. However, the owner/s enjoy limited liability like in a corporation.
An LLC may choose to be taxed like a sole proprietorship or partnership (flow-through taxation, where the company is not taxed and income is only taxed in the owners' tax returns) or like a corporation. By default, an LLC is taxed through flow-through taxation.
An "S Corporation" is not really a type or form of business entity, rather it is a tax classification in the US. This classification allows income to pass-through to the owners like in a partnership. In effect, the business is not taxed; instead, taxes are charged in the tax returns of the owners. In contrast, a "C Corporation" is a business that is taxed separately from its owners.
Main types of businesses:• Service - intangible products
Basic forms of business organizations:• Sole proprietorship - owned and controlled by only one person
Other forms that also exist are: LLCs and cooperatives.