- For other uses, see business (disambiguation) or The Business
In economics, a business is a legally-recognized organizational entity existing
within an economically free country designed to sell goods and/or services to
consumers, usually in an effort to generate profit.
In predominantly capitalist economies, where most businesses are privately owned,
businesses are typically formed to earn profit and grow the personal wealth of their owners. The owners and operators of a business have as one of their main objectives the
receipt or generation of a financial return in exchange for their work and their acceptance of risk. Notable exceptions to this
rule include cooperative businesses and government
institutions. This model of business functioning is contrasted with socialistic systems, which
involve either government, public, or worker ownership of most sizable businesses.
The etymology of "business" relates to the state of being busy either as an individual or
society, doing commercially viable and profitable work. The term "business" has at least three
usages, depending on the scope — the singular usage (above) to mean a particular company or
corporation, the generalized usage to refer to a particular market sector, such as "the record business," or the broadest meaning to include all activity by the
community of suppliers of goods and services. However, the exact definition of business, like much else in the philosophy of business, is a matter of debate.
Business Studies, the study of the management of
individuals organizing to maintain collective productivity toward accomplishing particular
creative and productive goals (usually to generate profit), is taught as an
academic subject in many schools.
Basic forms of ownership
Although forms of business ownership vary by country and local government, there are several generic forms of business
ownership:
- Sole proprietorship: A sole proprietorship is a business owned by one
person. The owner may operate on their own or may employ others. The owner of the business has total and unlimited personal
liability of the debts incurred by the business.
- Cooperative: Often referred to as a "Co-Op business" or "Co-Op", a cooperative is
a for-profit, limited liability entity that differs from corporations in that it has members, as
opposed to shareholders, who share decision-making authority. Cooperatives typically fall into three types: consumer cooperatives, producer cooperatives[citation needed] and worker cooperatives.
Cooperatives are fundamental to the ideology of economic democracy.
Classifications
There are many types of businesses, and, as a result, businesses can be classified in many ways. One of the most common
focuses on the primary profit-generating activities of a business:
- Manufacturers produce products, from
raw materials or component parts, which they then sell at a profit. Companies that make
physical goods, such as cars or pipes, are considered
manufacturers.
- Service businesses offer intangible goods or services and typically
generate a profit by charging for labor or other services provided to government, other businesses or consumers. Organizations ranging from house decorators to consulting firms to restaurants and even to
entertainers are types of service businesses.
- Retailers and Distributors act as
middle-men in getting goods produced by manufacturers to the intended consumer, generating a profit as a result of providing
sales or distribution services. Most consumer-oriented stores and catalogue companies are distributors or retailers. See
also: Franchising
- Agriculture and mining businesses are concerned with the
production of raw material, such as plants or minerals.
- Financial businesses include banks and other companies that generate profit through
investment and management of capital.
- Information businesses generate profits primarily from the resale of intellectual property and include movie studios,
publishers and packaged software companies.
- Utilities produce public services, such as heat, electricity, or sewage treatment,
and are usually government chartered.
- Real estate businesses generate profit from the selling, renting, and development of
properties, homes, and buildings.
- Transportation businesses deliver goods and individuals from location to location,
generating a profit on the transportation costs
There are many other divisions and subdivisions of businesses. The authoritative list of business types for North America
(although it is widely used around the world) is generally considered to be the North American Industry
Classification System, or NAICS. The equivalent European Union list is the NACE.
Organization
Most businesses must accomplish similar functions regardless of size, legal structure or industry. These functions are often
organized into departments. Common departments include (but are not limited to):
- Accounting
- Typically responsible for financial reporting, financial controls and the
raising of the capital necessary to run the business.
- Human Resources
- Typically responsible for hiring, firing, payroll, benefits, etc.
- Marketing and sales
- responsible for selling the business' goods or services to the customer and for managing the relationships with the customer
-
- Marketing
- Typically responsible for promoting interest in, and generating demand for, the business' products or services, and
positioning them within the market
- Sales
- finding likely purchasers and obtaining their agreement (known as a contract) to buy the
business' products or services
- Operations
- makes the product or delivers the service
-
- Production
- produces the raw materials into the delivered goods, if they require processing
- Customer service
- supports customers who need help with the goods or services
- Procurement
- responsible for acquiring the goods and services necessary for the business. Sometimes organized as:
-
- Strategic sourcing
- determines the business' needs and plans for acquiring the necessary raw materials and services for the business
- Purchasing
- processes the purchase orders and related transactions
- Research and Development
- tests to create new products and to determine their viability (e.g. pilot plants)
- Information Technology
- manages the business' computer and data assets
- Communications/Public Relations
- responsible for communicating to the outside world
- Administration
- provides administrative support to the other departments (such as typing, filing, etc.)
- Internal Audit
- an independent control function typically accountable to the Board of Directors for reporting on the proper functioning of
the other departments
Management is sometimes listed as a "department" but typically refers to the top level of
leadership within the business regardless of their functional role.
Management
The study of the efficient and effective operation of a business is called
management. The main branches of management are financial
management, marketing management, human
resource management, strategic management, production management, service management,
information technology management, and business intelligence.
Government regulation
Most legal jurisdictions specify the forms of ownership that a business can take,
creating a body of commercial law for each type.
Organizing a vehicle
The major factors affecting how a business is organized are usually:
- The size and scope of the business, and its anticipated management and ownership. Generally a smaller business is more
flexible, while larger businesses, or those with wider ownership or more formal structures, will usually tend to be organized as
partnerships or (more commonly) corporations. In addition a business which wishes to raise money on a stock market or to be owned by a wide range of people will often be required to adopt a specific legal form
to do so.
- The sector and country. Private profit making businesses are different from government owned bodies. In some countries,
certain businesses are legally obliged to be organized certain ways.
- Limited liability. Corporations, limited liability partnerships, and other
specific types of business organizations protect their owners from business failure by doing business under a separate legal
entity with certain legal protections. In contrast, unincorporated businesses or persons working on their own are usually not so
protected.
- Tax advantages. Different structures are treated differently in tax law, and may have advantages for this reason.
- Disclosure and compliance requirements. Different business structures may be required to make more or less information public
(or reported to relevant authorities), and may be bound to comply with different rules and regulations.
Many businesses are operated through a separate entity such as a corporation, limited partnership or limited liability
company. Most legal jurisdictions allow people to organize such an entity by filing certain charter documents with the relevant
Secretary of State or equivalent and complying with certain other ongoing obligations. The relationships and legal rights of
shareholders, limited partners, or members are governed partly by the charter documents and
partly by the law of the jurisdiction where the entity is organized. Generally speaking, shareholders in a corporation, limited
partners in a limited partnership, and members in a limited liability company are shielded from personal
liability for the debts and obligations of the entity, which is legally treated as a separate "person." This means that
unless there is misconduct, the owner's own possessions are strongly protected in law, if the business does not succeed.
Where two or more individuals own a business together but have failed to organize a more specialized form of vehicle, they
will be treated as a general partnership. The terms of a partnership are partly governed by a partnership agreement if one is
created, and partly by the law of the jurisdiction where the partnership is located. No paperwork or filing is necessary to
create a partnership, and without an agreement, the relationships and legal rights of the partners will be entirely governed by
the law of the jurisdiction where the partnership is located.
A single person who owns and runs a business is commonly known as a sole proprietor, whether he or she owns it directly
or through a formally organized entity.
A few relevant factors to consider in deciding how to operate a business include:
- General partners in a partnership (other than a limited liability partnership), plus anyone who personally owns and operates
a business without creating a separate legal entity, are personally liable for the debts and obligations of the business.
- Generally, corporations are required to pay tax just like "real" people. In some tax systems, this can give rise to so-called
double taxation, because first the corporation pays tax on the profit, and then when the
corporation distributes its profits to its owners, individuals have to include dividends in their income when they complete their
personal tax returns, at which point a second layer of income tax is imposed.
- In most countries, there are laws which treat small corporations differently than large ones. They may be exempt from certain
legal filing requirements or labor laws, have simplified procedures in specialized areas, and have simplified, advantageous, or
slightly different tax treatment.
- In order to "go public" (sometimes called IPO) -- which basically means to
allow a part of the business to be owned by a wider range of investors or the public in general -- you must organize a separate
entity, which is usually required to comply with a tighter set of laws and procedures. Most public entities are corporations that
have sold shares, but increasingly there are also public LLCs that sell units (sometimes also called shares), and other more
exotic entities as well (for example, REITs in the USA, Unit Trusts in the UK). However, you cannot take a general partnership "public."
Commercial law
Most commercial transactions are governed by a very detailed and well-established body of rules that have evolved over a very
long period of time, it being the case that governing trade and commerce was a strong driving force in the creation of law and
courts in Western civilization.
As for other laws that regulate or impact businesses, in many countries it is all but impossible to chronicle them all in a
single reference source. There are laws governing treatment of labor and generally relations with employees, safety and
protection issues (OSHA or Health and Safety),
anti-discrimination laws (age, gender, disabilities, race, and in some jurisdictions, sexual orientation), minimum wage laws,
union laws, workers compensation laws, and annual vacation or working hours time.
In some specialized businesses, there may also be licenses required, either due to special laws that govern entry into certain
trades, occupations or professions, which may require special education, or by local governments who just want your money.
Professions that require special licenses run the gamut from law and medicine to flying airplanes to selling liquor to radio
broadcasting to selling investment securities to selling used cars to roofing. Local jurisdictions may also require special
licenses and taxes just to operate a business without regard to the type of business involved.
Some businesses are subject to ongoing special regulation. These industries include, for example, public utilities, investment
securities, banking, insurance, broadcasting, aviation, and health care providers. Environmental regulations are also very
complex and can impact many kinds of businesses in unexpected ways.
Capital
When businesses need to raise money (called 'capital'), more laws come into play.
A highly complex set of laws and regulations govern the offer and sale of investment securities (the means of raising money) in most Western countries. These regulations can require
disclosure of a lot of specific financial and other information about the business and give buyers certain remedies. Because
"securities" is a very broad term, most investment transactions will be potentially subject to these laws, unless a special
exemption is available.
Capital may be raised through private means, by public offer (IPO) on a stock
exchange, or in many other ways. Major stock exchanges include the New York
Stock Exchange and Nasdaq (USA), the London Stock
Exchange (UK), the Tokyo Stock Exchange (Japan), and so on. Most countries
with capital markets have at least one.
Business that have gone "public" are subject to extremely detailed and complicated regulation about their internal governance
(such as how executive officers' compensation is determined) and when and how information is disclosed to the public and their
shareholders. In the United States, these regulations are primarily implemented and enforced by the United States Securities and
Exchange Commission (SEC). Other Western nations have comparable regulatory bodies.
As noted at the beginning, it is impossible to enumerate all of the types of laws and regulations that impact on business
today. In fact, these laws have become so numerous and complex, that no business lawyer can learn them all, forcing increasing
specialization among corporate attorneys. It is not unheard of for teams of 5 to 10 attorneys to be required to handle certain
kinds of corporate transactions, due to the sprawling nature of modern regulation. Commercial law spans general corporate law,
employment and labor law, healthcare law, securities law, M&A law (who specialize in acquisitions), tax law, ERISA law (ERISA
in the United States governs employee benefit plans), food and drug regulatory law, intellectual property law (specializing in
copyrights, patents, trademarks and such), telecommunications law, and more.
In Thailand, for example, it is necessary to register a particular amount of capital for each employee, and pay a fee
to the government for the amount of capital registered. There is no legal requirement to prove that this capital actually exists,
the only requirement is to pay the fee. This is a typical example of a corrupt government using its power to create laws in order
to steal money. Overall, processes like this are detrimental to the development and GDP of a country, but often exist in "feudal"
developing countries.
Intellectual property
Businesses often have important "intellectual property" that needs protection
from competitors in order for the company to stay profitable. This could require patents or copyrights or preservation of trade
secrets. Most businesses have names, logos and similar branding techniques that could benefit from trademarking. Patents and
copyrights in the United States are largely governed by federal law, while trade secrets and trademarking are mostly a matter of
state law. Because of the nature of intellectual property, a business needs protection in every jurisdiction in which they are
concerned about competitors. Many countries are signatories to international treaties concerning
intellectual property, and thus companies registered in these countries are subject to national laws bound by these treaties.
Exit plans
Businesses can be bought and sold. Business owners often refer to their plan of disposing of the business as an "exit plan."
Common exit plans include IPOs, MBOs
and mergers with other businesses.
See also
- Main lists: List of basic business topics and List of business topics
This encyclopedia includes over 1600 business and economics articles, so not all appear listed here. This lists some of the
main branches of business. For more specific topics, look at the various sublists.
External links
General
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