What is a business? | Definition and characteristics
Tips / 26.09.2022
We all know what a business is in its basic form. We hear the term constantly and engage with different types of enterprises daily. Yet, when it comes down to defining the meaning of business and its characteristics, many find it difficult to explain.
So, what is a business precisely, how is it structured, what types are out there and how can one start their own company?
Whether you are an aspiring entrepreneur, a businessman, someone who wants to ensure they have a full grasp of the topic, or simply curious about it, read on. You will find all there is to know about what a business is.
Table of Contents
What is a business?
An organization or enterprise that engages in commercial, industrial or professional activity is called a “business”. The aim of a business is to carry out some kind of economic activity of production of goods or services. When it comes to defining the business, the single factor that matters is that the establishment wants to make money from that which it engages in.
Enterprises can be legal entities that operate for profit or non-profit organizations that support a social cause or have a humanitarian purpose. From small sole proprietorships to large international corporations, businesses come in all shapes and sizes.
Characteristics of business
While businesses differ in many ways, they all have several common characteristics which help put them under the same umbrella. Here are the key ones:
- Economic motive
Business can be easily defined as an organised commercial activity, and as such, it revolves around the monetary motive. What is at its core is earning profit.
- Production or purchase of products
Businesses produce or purchase goods, which are then distributed to society. This can work both ways – buying raw materials and machinery to produce goods or buying an already finished product, adding value to it and reselling it to the end consumer.
- Selling of goods and services
The already produced goods are either sold to retailers, who distribute the product, or directly to customers. Services, the intangible form of goods, are also sold for profit, but generally directly from the provider.
- Profit earning
With businesses, in the end, it always comes down to earning a profit. Ultimately, it is what sustains the entity in the long run and keeps it running smoothly.
- Consumer satisfaction
The main activity of an enterprise is to produce and deliver goods and services to satisfy the demands of society. Thus, the end consumer, as the source of profit, always plays a pivotal role. That’s why customer satisfaction is so important.
- Continuous activity
Individual exchange of goods or services is not regarded as a business activity. Transactions have to occur on a regular basis for the activity to be considered commercial.
- Risk and uncertainties
Even if you have a well-planned strategy and a solid business plan, there is always the element of uncertainty and risk. The business world is dynamic and ever-changing, and some factors cannot be predicted.
- Legal and lawful
No matter the type, structure and size of the entity, a commercial organisation is considered as such only if it meets certain legal criteria and is authorised by the law.
Types of business
Businesses can vary on many different levels but are typically divided into four principal categories. Here are the most common types of business:
The first type of business refers to situations where the seller offers intangible goods, such as assistance, advice or labour, to customers and/or other businesses. Examples of this type include legal advice firms, consultancy agencies and providers of courier and transportation services. Here, the products for sale cannot be stored or separated from their providers, as is the case with products.
In manufacturing, the producer uses raw materials to create a product. This product is then sold to the customer, either directly or through a third party. Such businesses produce the goods themselves, rather than simply distribute them. Some examples of this type are automotive companies, wine producers, steel factories, shoemakers and tailors.
Also known as merchandising or a ‘buy and sell’ business, this type involves middlemen who purchase goods from producers. They then sell them at a retail price to the end consumers. Here the profit comes from the distribution of the product at the retail price, which is higher than the price it has been bought at. You can find a good example of it in the face of supermarkets, brick-and-mortar stores and duty-free shops.
As the name suggests, hybrid businesses are a combination of at least two other types. Restaurants are one example of this practice since they produce their own food but, at the same time, buy water, soft drinks, wine, etc. from other manufacturers. By doing so, they are both a manufacturer and a retailer. Furthermore, restaurants also serve customers’ orders and create an experience for them, which makes them a service business too.
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Forms of business ownership
What works for one company doesn’t necessarily mean that it will work for another. That’s why there are various company structures or so-called forms of business ownership. The structures’ difference lies in the number of owners, their share of ownership and their liability.
- Sole Proprietorship: These businesses are owned and operated by a single individual. This makes the process of setting up and registering easier. Here, however, the owner has unlimited responsibility and they answer for all company-related tax and legal liabilities. This is a double-edged sword because, if the entity proves unable to pay the creditors, they will go after the owner’s personal assets.
- Partnership: Here the organisation is run by two or more people and all partners have shares in the funding, profits and losses. There are two kinds of partnerships – general and limited. The former is similar to sole proprietorship, as all owners have unlimited liability. In the latter form, however, one or more of the owners have limited liability.
- Limited Liability Partnership (LLP): This type is very similar to a partnership with one key difference. The partner’s liability is limited to the amount of funds they invest in the business. The LLP needs to be registered at Companies House and additionally with HMRC. Annual accounts also have to be ready and filed. An LLP requires two or more members in order to exist and a member can be both an individual or a company. The responsiblities of each member are set out in the LLP agreement. All members in the partnership must submit a personal Self Assessment Tax Return each year, additionally pay income tax on their share of the profits from the partnership and also pay National Insurance to HMRC.
- Limited Company: This type characterises a privately managed business. It is owned by shareholders and ran by its directors. A limited company is a business with its own legal rights and obligations as it’s classified as a separate legal entity. The company itself is responsible for everything it does and the finances are separate to the personal affairs of the owners of the business. After the business pays corporation tax, all generated profits are retained by the company. Once this is done and only then, the profits can be distributed accordingly to the shareholders in the form of dividends. Limited companies can be limited by shares or by guarantee. Furthermore, they have mandatory annual reporting and filing requirements with Companies House and HMRC.
This offers benefits such as:
– If you are the controlling shareholder you have the freedom to decide on remuneration packages;
– The business has the possibility to retain profits;
– You can protect your brand;
– You can choose to claim back expenses on the business, if you need to.
Sizes of business
Businesses come in all sizes. Some can be as small as having up to 10 employees and others can grow into large corporations with many different departments and levels of authority. Below we will look at the three most common divisions of business sizes.
- Small enterprises: Usually managed by one person or a small group of people, small businesses generally consist of fewer than 50 employees. Such companies are usually family-owned or home-based firms.
- Mid-sized enterprises: While there are no specifically designated guidelines to define a company as mid-sized, generally, organisations with a staff of 50 to 250 employees and a turnover of between £25 million and £500 million per year are regarded as middle-sized businesses (MSBs).
- Large enterprises: These are the organisations that exceed the number of employees and turnover of MSBs. This means that any company consisting of more than 250 employees is commonly referred to as a large business. Large enterprises account for 40% of the UK’s employment.
How to start a business
Starting a business involves lots of planning and market research. Before you even file for registration and officially set up your company, you need to make sure you are prepared for what is to come.
While many factors in the business world can be unpredictable, building a strong strategy and setting your mind on what you want to achieve and, most importantly, how you can achieve it, will help you come up with a plan that will work best for you.
To give you peace of mind, below we’ve put together the most important steps of starting a business from scratch so that you know where to begin.
- Conduct market research to gather information on the current demands, trends and competitors’ practices.
- Come up with a name that’s unique, easy to remember and reflects your company’s identity.
- Decide on the business structure that will work best for you and your company.
- Plan your finances, and if you don’t currently have all the required capital, explore ways to fund your project.
- Create a business plan to show your strategy, goals and financial objectives to potential investors.
- Register your company with the law and apply for the required licences and permits based on your industry and location.
- Open a business account to help you handle all your daily finances.
Businesses provide goods and services desired by society in exchange for profit. They range in size, from small and medium-sized to large, as well as in type and structure. Yet, they all share the same characteristics that help define them as business entities.
The main thing that unites them all is the monetary motive. Every enterprise is driven by the need for profit and the customer, whether an individual client or a firm, always plays a key role.
If you want to start your own company from scratch, you need to be prepared for lots of planning and research. Determining the most suitable strategy for your enterprise is only possible if you are familiar with all business aspects. This means knowing and understanding the various forms of business ownership, the different types and sizes of enterprises, as well as the registration and taxation regulations that come with each of them.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.