Many small business owners are often confused about what business is. Simply put, a business is simply defined as an entity or organized set of activities for a business that involves production, transportation, marketing, advertising, etc. Businesses may be either for- profit or non-profitable entities that conduct activities to meet a social purpose or further a religious agenda. The word “business” comes from the French verb bioconsse, meaning “to grow or develop.” In English, however, the definition of “business” typically involves using the word “profit” in addition to other factors such as technological, financial, and/or physical aspects.
A business organization, therefore, consists of those elements that combine to create the profit or reward associated with the activity or endeavor. All elements of a business must be considered together to determine the nature of the enterprise. The activities and assets of a business organization need to be assessed in relation to each other to determine the extent of each type of income or liability. This assessment is known as the income equation by many business law practitioners and managers.
One area that must be considered thoroughly in assessing the operational aspects of the businesses is the financial modeling or cost allocation. Under the standard accounting principles used in most businesses, the revenue is measured by sales volume or gross value of a product or service and measured over time. Income is similarly measured by the amount of income received by the business from all sources, including principal and interest paid to the creditors. Components of revenue and expense are generally reported in the statement of earnings. Both of these measurements, revenue and expense, are crucial to the overall viability and success of a business operation.
Another area of concern is whether the business should be treated as a sole proprietorship, a partnership, a corporation, or an LLC (limited liability company). There are three main types of business organization that should be considered. These main types are sole proprietorship, partnership, and corporation. There are specific formalities for each one depending on the jurisdiction.
A sole proprietorship is a unique form of business structure where there is no separate legal structure for the owners of the business. This means that the business can only exist legally by virtue of the legal ownership of the business. This type of ownership can be divided into two categories: corporations and limited liability companies (LLCs). A corporation is a separate legal entity from its shareholders, which allows them the same protection under the law as homeowners. Limited liability companies are also separate entities but are legally regarded as partnerships, forming a partnership with separate management and credit separate from the owners.
On the other hand, a corporation is a type of business structure that has a dual structure. It begins with the formation of a corporation and continues with the operation of that corporation through distribution of shares to its registered stockholders. Only its profit or income is distributed to its shareholders and not to the general public. The only way for any liability of the corporation to arise is if it carries on any business transactions or holds any share of the assets of the corporation. The company then becomes liable for all its activities unless it declares bankruptcy, which would wipe out its assets and leave its shareholders penniless.
Income from capital is often used to determine tax liability. Profits and losses from operations are also used in the calculation of taxes. Income from sources within the corporate business structure are not subjected to corporate taxation. Interest on loans, debts, and dividends is subject to taxation on a personal level if the taxpayer is treated as the creditor. Income from sources outside the business entity is not subject to corporate taxation.
A corporation is different from a partnership because unlike a partnership, there is no option to double up or sell shares to increase your liability. Because of this a corporation can only increase its profits by increasing the liability it has incurred. If a corporation is sued for personal damages because of negligence, the damages can never exceed the assets of the corporation and the personal assets of the plaintiff.
