Read about types of businesses, how to start one, and how to get a business loan
Reviewed by MARGARET JAMES
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What Is a Business?
The term business refers to an organization or enterprising entity engaged in commercial, What Is a Business industrial, or professional activities. The purpose of a business is to organize some sort of economic production of goods or services. Businesses can be for-profit entities or non-profit organizations fulfilling a charitable mission or furthering a social cause. Businesses range in scale and scope from sole proprietorships to large, international corporations.
The term business also refers to the efforts and activities undertaken by individuals to produce and sell goods and services for profit.
KEY TAKEAWAYS
A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities.
Businesses can be for-profit entities or non-profit organizations.
Business types range from limited liability companies to sole proprietorships, corporations, and partnerships.
Some businesses run as small operations in a single industry while others are large operations that spread across many industries around the world.
Apple and Walmart are two examples of well-known, successful businesses.
Alex Dos Diaz / Investopedia
Understanding a Business
The term business often refers to an entity that operates for commercial, industrial, or professional reasons. The concept begins with an idea and a name, and extensive market research may be required to determine how feasible it is to turn the idea into a business.1
Businesses often require business plans before operations begin. A business plan is a formal document that outlines the company’s goals and objectives and lists the strategies and plans to achieve these goals and objectives. Business plans are essential when you want to borrow capital to begin operations.1
Determining the legal structure of the business is an important factor to consider, since business owners may need to secure permits and licenses and follow registration requirements to begin legal operations.1 Corporations are considered to be juridical persons in many countries, meaning that the business can own property, take on debt, and be sued in court.2
A good name is often one of the most valuable assets of a business, so it’s important that business owners choose their name wisely.3
Most businesses operate to generate a profit, commonly called for-profit. However, some businesses that have a goal to advance a certain cause without profit are referred to as not-for-profit or nonprofit. These entities may operate as charities, arts, culture, educational, and recreational enterprises, political and advocacy groups, or social services organizations.4
Business activities often include the sale and purchase of goods and services. Business activity can take place anywhere, whether that’s in a physical storefront, online, or on the roadside. Anyone who conducts business activity with financial earnings must report this income to the Internal Revenue Service (IRS).5
A company often defines its business by the industry in which it operates. For example, the real estate business, advertising business, or mattress production business are examples of industries. Business is a term often used to indicate transactions regarding an underlying product or service. For example, ExxonMobil conducts its business by providing oil.
Types of Businesses
There are many ways to organize a business, and there are various legal and tax structures that correspond with each. Businesses are commonly classified and generally structured as:
Sole Proprietorship: As the name suggests, a sole proprietorship is owned and operated by a single person. There is no legal separation between the business and the owner, which means the tax and legal liabilities of the business are the responsibility of the owner.6
Partnership: A partnership is a business relationship between two or more people who together conduct business. Each partner contributes resources and money to the business and shares in the profits and losses of the business. The shared profits and losses are recorded on each partner’s tax return.7
Corporation: A corporation is a business in which a group of people acts as a single entity. Owners are commonly referred to as shareholders who exchange consideration for the corporation’s common stock. Incorporating a business releases owners of the financial liability of business obligations. A corporation comes with unfavorable taxation rules for the owners of the business.2
Limited Liability Company (LLC): This is a relatively new business structure and was first available in Wyoming in 1977 and in other states in the 1990s. A limited liability company combines the pass-through taxation benefits of a partnership with the limited liability benefits of a corporation.8
Business Sizes
Small Businesses
Small owner-operated companies are called small businesses. Commonly managed by one person or a small group of people with less than 100 employees, these companies include family restaurants, home-based companies, clothing, books, and publishing companies, and small manufacturers.9 As of 2021, 33.2 million small businesses in the United States with 61.7 million employees were operating.10
The Small Business Administration (SBA) uses the number of employees working at a company and its annual revenue to formally define a small business. For 229 industry sectors, from engineering and manufacturing to food service and real estate, the SBA sets sizing standards every five years.11
Businesses that meet the standards of the SBA can qualify for loans, grants, and “small business set-asides,” contracts where the federal government limits competition to help small businesses compete for and win federal contracts.12
Mid-Sized Enterprises
There is no definitive specification in the U.S. to define a mid-sized or medium-sized company. However, when large U.S. cities such as Philadelphia, Baltimore, and Boston evaluate the landscape of operating businesses, a medium-sized company is defined as one with 100 to 249 employees or $10 million to less than $1 billion in annual gross sales.1314
Large Businesses
Large businesses commonly have 250 or more employees and garner more than $1 billion in gross receipts.13 They may issue corporate stock to finance operations as a publicly-traded company.
Large enterprises may be based in one country with international operations. They are often organized by departments, such as human resources, finance, marketing, sales, and research and development.
Unlike small and mid-sized enterprises, owned by a person or group of people, large organizations often separate their tax burden from their owners, who usually do not manage their companies but instead, an elected board of directors enacts most business decisions.9
Examples of Well-Known Businesses
Apple
Apple (AAPL) is known for its innovative products, including its personal computers, smart devices, and music and video streaming services. Founded in 1977 by Steve Jobs and Steve Wozniak, Apple became the first publicly-traded company whose value hit $1 trillion.15
CNBC. “Apple Hangs Onto Its Historic $1 Trillion Market Cap.”
The company’s stock ended the trading day at about $172 on May 23, 2023. Its market cap was almost $2.7 billion.
The company employs more than two million people, including 80,000 individuals who work as direct Apple employees. The remaining jobs include suppliers, manufacturers, and others who are supported through the Apple store.16 The company reported net sales of $394.33 billion for the 12 months ending Sept. 24, 2022.17
Apple’s key to success lies in its family of products and its ability to innovate. The company focuses on design and quality—two key elements that were a key part of Jobs’ corporate vision. The products that Apple creates and markets can be used under the same operating system, which allows consumers to sync them together, thus lowering corporate costs. Apple’s ability to create, develop, and market new products and services also put it ahead of its competition.18
Walmart
Walmart (WMT) is one of the world’s largest retailers and operates as a multinational corporation. The company was founded in 1962 by Sam Walton in Arkansas.19 It has more than 10,500 locations in more than 20 different countries and employs over 2.1 million people.2019
The company went public in 1970 and trades on the New York Stock Exchange (NYSE). Walmart stock traded above $148 with a market cap of $399.79 billion on May 23, 2023. The company earned $611.3 billion in revenue for the full year of 2022, which is an increase of 6.7% from the previous fiscal year.21
Walmart’s success can be attributed to several factors, including its brand name, pricing, diversification (especially with the addition of its online marketplace), efficient supply chain management, and its financial strength.20
How Do You Start a Business?
There are several steps you need to hurdle to start a business. This includes conducting market research, developing a business plan, seeking capital or other forms of funding, choosing a location and business structure, picking the right name, submitting registration paperwork, obtaining tax documents (employer and taxpayer IDs), and pulling permits and licenses. It’s also a good idea to set up a bank account with a financial institution to facilitate your everyday banking needs.1
How Do You Launch an Online Business?
Starting an online business involves some of the same steps as a traditional business, with a few exceptions.
You still need to do your market research and develop a business plan before anything else. Once that’s done, choose a name and structure for your business, then file any paperwork to register your organization.
Rather than finding a physical location, choose a platform and design your website. Before launching your business, you should find a way to build up your target market, whether that’s through traditional marketing means or more creative ways like social media.1
How Do You Come Up With a Business Name?
Your business name should fit the type of organization you plan to run and it should be catchy—something that people will gravitate toward and remember, not to mention associate with you as well as the products and services you plan to sell. Originality is key. And most importantly, it should be a name that isn’t already in use by someone else. Go online and do a business name search to see if it’s available or already registered.3
How Do You Write a Business Plan?
Business plans are essential to running your business and can help you secure the funding you need to start your operations. You can choose between a traditional or lean plan.
A traditional business plan has a lot of details, including a summary of the company, how it plans to succeed, market information, management, products and services, marketing, and sales projections.
Lean formats are concise with very useful information such as partnership details, outlines of the business activities and customer relationships, cost structures, and revenue streams.
Templates are available online or you can design your own business plan.22
How Do You Get a Business Loan?
Necessary funding for a business often comes via a loan. A traditional lender or a government-backed loan, such as those offered through the Small Business Administration are two options. Prospective lenders want to see business details, especially for new start-ups. Make sure you have your business plan ready, including outlines of costs and revenue streams, and ensure you have a good credit score. You may need to put down some collateral to secure the loan if you’re approved.23
The Bottom Line
Businesses are the backbone of an economy. They provide products and services that can be purchased by individuals and other companies.
Businesses range in size from small to large and operate in many different industries. Business structures also vary from sole partnerships to major corporations that provide shareholder equity to their owners.
When starting a business, do your research and develop a business plan. This allows you to raise the money you need to start your operation.
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