1. 1
   What is accounting?
2. 2
   Purpose of accounting
3. 3
   Users of financial statements
4. 4
   Types / branches of accounting
5. 5
   Areas of practice
6. 6
   Types and forms of business
7. 7
   Summary
8. 8
   Quiz

Types and forms of business

A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services. Business organizations come in different types and in different forms of ownership.

3 Types of Business

The three major types of businesses (as to product offered) are:

1. Service Business

A service type business provides intangible products (products with no physical form). Service type firms offer skills, labor, expertise, and other similar work in return for professional or talent fees.

Examples of service businesses are:

• Business services, such as accounting, advisory, taxation, advertising, engineering, legal, research agencies, computer programming, etc.
• Personal services, such as laundry, beauty salon, photography
• Automotive repairs, car rental, car wash, parking spaces
• Fitness facilities, amusement parks, bowling centers, golf courses, theatres
• Hospitals and clinics, schools, museums, banks
• Hotel and lodging, and more.

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" or "reseller" businesses. They make profit by selling their goods at prices higher than their purchase costs.

A merchandising business buys a product and sells it without changing its form. Examples include all distribution and retail stores such as: department store, grocery, hardware, clothes and accessories shop, consumer electronics, home furniture, appliance stores, drug stores, etc.

3. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the intention of using them as raw materials to make a new product. Thus, there is transformation of the products purchased.

A manufacturing business combines raw materials, labor, and overhead costs in its production process. The goods produced are then be sold to customers. Examples include:

• Food processing, such as producing canned meat, frozen goods, dairy products, bottled drinks, also bakeries and oil mills
• Fabric mills and textile production from cotton, wool, polyester; and also clothing factories that use textile as raw material
• Wood and metal works, such as in building cabinets, tables, chairs
• Oil refineries, chemical labs, plastic and rubber production
• Ship builders, aircraft manufacturers, car makers
• and many other producers and factories

More than 1 classification

Many companies engage in more than one type of business, typically segregated through different departments or divisions.

Take for example a tech company that produces phones (manufacturing), sells them through their distribution centers (merchandising), and provides repairs and maintenance (service). A restaurant combines ingredients in making a meal (manufacturing), sells a cold bottle of beer (merchandising), and provides a dining venue (service).

Forms of Business Organization

These are the basic forms of business ownership:

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them. The sole proprietorship form is usually adopted by small business entities.

Advantages of sole proprietorship:

• easy to set up
• owner has full control over business decisions

Disadvantages of sole proprietorship:

• no independent legal status, owner is liable for the liabilities of the business
• limited source of funds

2. Partnership

A partnership is owned by two or more persons who contribute capital to conduct business. The partners divide the profits of the business among themselves based on agreed terms.

In general partnerships, all partners are have unlimited liability. In limited partnership (or Limited Liability Partnership, LLC), at least one partner is a limited partner. The creditors cannot go after personal assets of limited partners.

Advantages of partnership:

• more source of capital, resources, knowledge and skills from more people versus in a sole proprietorship
• easier to set up, manage, and control compared to a corporation

Disadvantages of partnership:

• no independent legal status, and general partners can be liable for the liabilities of the business
• possibility of disagreements between partners
• limited source of capital and restrained growth potential compared to a corporation

3. Corporation

A corporation is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock.

The owners, known as stockholders, enjoy limited liability but have limited involvement in the company's operations. The board of directors elected from the stockholders, controls the activities and direction of the corporation.

Advantages of corporation:

• prestige from passing more formal requirements
• shareholders' enjoy limited liability since the company is an independent legal entity separate from its owners
• extensive sources of capital though issuance of stocks and bonds, and with it an amplified growth potential
• ownership can be easily transferred through stocks, hence allowing corporations unlimited life, compared to partnership that gets dissolved when any of the partners decides to leave, dies, or becomes incapable to fulfill role

Disadvantages of corporation:

• more difficult to set-up and manage due to greater requirements and heavier government scrutiny
• stockholders of big corporations have limited involvement in business operations and decisions
• double taxation, taxes are charged on the company's net income and stockholders are also taxed on dividends received from the company

Other Forms of Businesses

In addition to these basic forms of business ownership, these are some other types of organizations that are common today:

Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for their mutual benefit. The persons making up the group are called members. Cooperatives may be incorporated or unincorporated. Some examples of cooperatives are: utility cooperatives (water and electricity), cooperative banking, credit unions, and housing cooperatives.

Limited Liability Company (LLC)

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have characteristics of both a corporation and a partnership or sole proprietorship. An LLC is easier to establish. It is not incorporated; hence, it is not considered a corporation. However, the owner/s enjoy limited liability like in a corporation.

An LLC may choose to be taxed like a sole proprietorship or partnership (flow-through taxation, where the company is not taxed and income is only taxed in the owners' tax returns) or like a corporation. By default, an LLC is taxed through flow-through taxation.

What about S Corporation?

An "S Corporation" is not really a type or form of business entity, rather it is a tax classification in the US. This classification allows income to pass-through to the owners like in a partnership. In effect, the business is not taxed; instead, taxes are charged in the tax returns of the owners. In contrast, a "C Corporation" is a business that is taxed separately from its owners.