Business is any economic activity that includes the purchase or sale of
goods or services with the basic objective of earning profit and
satisfying the individuals’ needs of the society.
Types of Businesses:
#1 Sole Proprietorship
A sole proprietorship is an unincorporated company that is owned by
one individual only. While it is the simplest of the types of businesses, it
also offers the least amount of financial and legal protection for the
owner. Unlike partnerships or corporations, sole proprietorships do not
create a separate legal identity for the business. Essentially, the owner
of the business shares the same identity as the company. Therefore,
the owner is fully liable for any and all liabilities incurred by the
company.
An entrepreneur may choose this option if they want to retain full
control of the company. Additionally, it is a relatively easy and
inexpensive process to establish a sole proprietorship. There are also
tax benefits, as income is considered the owner’s personal income and
therefore only taxed once. Finally, there are relatively few regulation
requirements for sole proprietorships.
#2 Partnership
As the name states, a partnership is a business owned by two or more
people, known as partners. Like sole proprietorships, partnerships are
able to take advantage of flow-through taxation. This means that the
income is treated as the owners’ incomes so it is only taxed once.
Owners in partnerships are responsible for the liabilities of the firm.
However, there are some nuances to this. There are different types of
partnerships: general partnerships, limited partnerships, and limited
liability partnerships
General partnerships: This is the easiest type of partnership to form,
with few upkeep costs. Every partner is considered as participating in
the operations of the business, and there is unlimited liability for every
partner. This means that every partner’s personal asset can be used to
repay the liabilities of the partnership. This also means that each
partner is responsible for every other partner’s actions.
For example, John and Dave are in a general partnership. If John is sued
for malpractice, Dave’s personal assets may also be claimed against in
the lawsuit.
Limited Partnerships: This type of partnership has at least one
general partner. This general partner takes on unlimited liability for the
partnership and manages the operations of the company. Additionally,
there are also limited partners in limited partnerships. Limited partners
only take on as much liability as their financial stake in the business.
However, as limited partners, they are not involved in management
decisions and do not have any direct control over the company.
Limited Liability Partnerships (LLP): LLPs are similar to general
partnerships, where multiple partners are each responsible for the
operations of the business. However, partners in LLPs are not
personally responsible for the actions of other partners or the debts of
the business. Unfortunately, not all businesses can be LLPs. This type of
business is often restricted to certain professions, such as lawyers or
accountants.
In general, as compared to other types of businesses, partnerships
offer more flexibility but also have greater exposure to risk.
#3 Limited Liability Company (LLC)
Limited liability companies (LLCs) are one of the most flexible types of
businesses. LLCs combine aspects of both partnerships and
corporations. They retain the tax benefits of sole proprietorships and
the limited liability of corporations. LLCs are able to choose between
different tax treatments. As long as the LLC chooses not to be treated
as a C corporation, it retains its flow-through taxation status.
Additionally, LLCs benefit from limited liability status. In LLCs, the
company exists as its own legal entity. This protects the owners of the
LLCs from being personally liable for the operations and debts of the
business.
#4 Corporation
Corporations are a separate legal entity created by shareholders.
Incorporating a business protects owners from being personally liable
for the company’s debts or legal disputes. A corporation is more
complicated to create, as compared to the other three types of
businesses. Articles of incorporation must be drafted, which include
information such as the number of shares to be issued, the name and
location of the business, and the purpose of the business.
In sole proprietorships and partnerships, if one of the owners passes
away or declares bankruptcy, the company is dissolved. Corporations
exist as a legally separate entity. Therefore, they are protected from
this situation and will continue to exist even if the owner of the
business passes away.
There are three main types of corporations:
C Corporation: This is the most common form of incorporation. The
corporation is taxed as a business entity and owners receive profits
that are then also taxed individually.
S Corporation: This is similar to a C corporation but may only consist of
up to 100 shareholders. S corporations are pass-through entities like
partnerships, so profits are not taxed twice.
Non-Profit Corporation: Often used by charitable organizations, non-
profit corporations are tax exempt. All forms of incoming cash flow
must be utilized to spend on the organization’s operations or future
plans.
Examples of Types of Businesses
Many businesses begin as sole proprietorships, as this type of business
is great for many new, small businesses. As they grow and expand,
many businesses tend to convert to corporations. eBay is a very
famous example of a sole proprietorship that eventually converted into
a corporation.
Hewlett- Packard (HP) is an example of an incredibly successful and
famous partnership. Like eBay, as they grew, they eventually
incorporated in 1947. However, the company began as a business
partnership between two friends.
Chrysler is one of the largest automobile manufacturers in the United
States. Since its inception, Chrysler has maintained its status as a
limited liability corporation (LLC).
Finally, among the most famous of companies is Apple. Like most large
companies that are listed on stock exchanges, Apple, otherwise known
as Apple Inc., was incorporated soon after the company began its
operations. To this day, Apple remains one of the largest companies in
the world. It has continued to exist despite one of its co-founders, Steve
Jobs, passing away.
The Categories of Each Factor
Factors of production can also fall into three different categories. These are
primary, secondary and tertiary factors. These categories are based on the
order of how the factors are used to produce goods or services.
1: Primary Factors
The primary factors of production are land, labour, entrepreneurship, and
capital. These were discussed in detail above.
2: Secondary Factors
The secondary factors of production are suppliers of the primary factors. They
provide the resources that are used to produce goods or services. These can
include suppliers of land, labour or human capital, capital, and entrepreneurship.
3: Tertiary Factors
The tertiary factors of production are those that provide services to the primary
and secondary factors. They include things like transportation,
communication, financial institutions, and government agencies.
