Types and Structures of Business

Types and Structures of Business:

Business come in a variety of shapes and sizes and there are three major types of businesses.

1.       Service Business:

Service type firm offers professional skills, expertise, consultancy, and other similar products. Example of service business are Schools, Banks, Broking Firms, Accounting firms, Law firms, Printing Services, Beauty Salons, Repair shops, etc.

2.       Merchandising Business:

This type of business buys products at wholesale price and sells the same at retail price. They are known as buy and Sell business or trading business. They make profit by selling the products at prices higher than their purchase costs. For example, distributors, re-sellers, grocery stores, clothe stores, toy stores, etc.

3.       Manufacturing Business:

It’s a business that uses components, parts or raw materials to make finished product. Manufactured goods are than sold to customers. Examples of manufacturing business are washing detergent and soaps, plastic products, utensils, cars, bikes, biscuits and cookies, etc.

There are Hybrid businesses as well. For example, A restaurant combines ingredients in making a meal (manufacturing), Sells a cold bottle of wine (merchandising) and fills customer order (service).  In this case, restaurants will be classified as service type as they provide dining service which is their major business interest.

If you're thinking of starting a business, you’ll need to look at the advantages and disadvantages of each different business structure and work out which structure best suits your needs.

The most common types of business structures are:

1.       Sole Proprietor:

A Sole proprietorship is a business owned by one individual. It is easy to set up and is the least costly among all the structures of businesses. The owner is not obligated to confer with anyone when it comes to deciding the location of the business, who to hire, what to sell, etc. Another advantage to an owner of a sole proprietorship is that you are the recipient of all profits generated by the business. The owner is not legally bound to share the profits with anyone else. You trade under your own name, with no separation of assets and liabilities. Proprietor will be liable for any debts that business occurs. The Sole proprietor is responsible for everything the business does.  

2. Partnership:

A partnership is a business owned by two or more people who contribute resources into the entity. The Partners shares the profits or losses of the business among themselves as per partnership agreement. One major advantage of a partnership is funding. Each owner can help with financing, start-up costs, or ongoing business expenses. Another advantage is shared knowledge and experience. However, conflict of opinions can hamper the growth of business.

3. Company:

A company is a separate legal entity, unlike sole proprietor or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued. The company’s owners (the shareholders) can limit their personal liability and are generally not liable for company debts. A company is a complex business structure, with higher set-up and administrative costs because of additional reporting requirements.

4. Limited Liability:

Limited Liability is a hybrid structure of business that has characteristics of both a company and a partnership. Limited liability is a type of liability that does not exceed the amount invested in entity. The limited liability feature is the biggest advantage as it allows the members to limit their personal liability if something goes wrong with the business. The main difference between an LLC and a company is that LLCs aren’t taxed as its own business entity. Instead, all profits and losses are moved from the business to the LLC members, who then, instead of having to report business finances on a company return, can report profits and losses on a personal income tax return.

5. Nonprofit Organization:

A nonprofit organization is pretty self-explanatory, in that it’s a business organization that’s intended to promote educational or charitable purposes. The “non-profit” aspect comes into play in that any money earned by the company must be kept by the organization to pay for its expense, programs, etc. Keep in mind that there are several types of nonprofits available, many of which can receive “tax exempt” status. This process requires filing paperwork, including an application, with the government for them to recognize you as a nonprofit organization. Depending on the parameters of your new business, they’ll be able to tell you which categories you best fall under.

6. Cooperative:

A cooperative is the business organisation fully owned and operated for the benefit of the members of the organization that use its services. In other words, whatever is earned by the cooperative is then shelled out among the members themselves, and isn’t required to be paid out to any external stakeholders, etc. Unlike other types of businesses, which have shareholders, cooperatives sell shares to cooperative “members,” who then have a say in the operations and direction of the cooperative itself. The main difference in the process of becoming a cooperative, as opposed to the other types of businesses listed, is that your organization must create bylaws, have a membership application and have a board of directors with a charter member meeting.

Before deciding which business structure to use, it’s important you seek advice from a professional business adviser, a lawyer or an accountant.

Good luck J