A business is defined simply as an entity or organization that engages in professional, commercial, or financial activities for profit. A business may also be defined as the unorganized efforts and actions of people to make and sell products and services to earn a profit. A business may also be organized and operated by a board of directors, generally with a president, a vice president, and a general manager.
The object of conducting business activities is to earn a profit by selling or transferring goods, services, information or ideas to others, and to achieve the objects of the business organization. The objects may be gainful or non-gainful. Profits and losses are calculated by reference to the price or value of the property, the actual amount expended in performing the business activities, and the actual amount received in selling the property, service or idea. All profits are reported under the appropriate category.
A sole proprietorship is a form of business organization in which there is no interference by any outside body. There is no possibility for double taxation at source, and there is no minimum liquid capital. Under a sole proprietorship, the profits are usually exempt from federal income taxation. In certain situations, the sole proprietor may be the only holder of a particular share of the stock, so that his profits would be limited to the value of such share.
A limited liability company, also known as an LLC, is similar to a sole proprietorship. It is a structure in which one person owns and operates the LLC, while many businesses are owned and operated by entities or partnerships. In a limited liability company, the owners participate in the profits of the business, but there is no liability if those owners were negligent. Many businesses that have limited liability companies are able to offer long-term financing because they do not face the double taxation at source like many businesses do.
A partnership is another structure that allows business owners to share in the profits of the venture. Partnerships can be limited or they can include one partner and one or more partners. Many partnerships have a board of directors that makes decisions to maximize the profits of the partnership and its members.
A corporation is a legal entity, which has both advantages and disadvantages. It allows the business owners to have limited liability. It can take the place of a sole proprietorship when one or more partners are unwilling or unable to continue to make profits on their own. The company is able to purchase goods or services on credit, using the profits from the business to pay off business debts. Capitalization of the company is limited to the amount of capital it can raise and cannot exceed the value of the shares on the shareholders’ equity basis.
An S Corporation is a type of corporation that has few restrictions on capitalization. It is also called a small business corporation and has the advantages of limited liability. Unlike a partnership, the company is not required to distribute its profits to its owners. There are very few requirements that must be met to be recognized as an S Corporation, such as paying taxes.
Although many businesses choose to form one of these two forms of business organization, there are still others that are able to function without one. A sole proprietorship may only earn a profit when all of the partners are in business and making no money off of the business. A partnership will only make a profit when each partner takes a part of the profits from the business. These types of businesses are typically known as Service Businesses, such as restaurants.