Types of Businesses and Forms of Business Organizations

Types of Businesses and Forms of Business Organizations

A business is an organization which uses economic resources to offer goods or services to customers in exchange for money or other goods and services. The main aim of setting up a business is to make profit for its owner(s). There are different types of business organizations and different forms of ownership.

3 Types of Business

Below are the three major types of businesses:

1. Service Business

A service type of business provides customers with intangible products (products that are not seen, felt or touched). Service based firms offer professional skills, ability, advice, and other similar products. Examples of businesses offering services are: salons, repair shops, schools, banks, accounting firms, law firms etc.

2. Merchandising Business

A merchandise buys products at wholesale price from the wholesale and sells the product at retail price to the consumer. Merchandising businesses are "buy and sell" businesses. They make profit when they sell the products at prices higher than their cost price. A merchandising business sells a product without changing its original form. Examples of merchandising businesses are: grocery stores, convenience stores, distributors, and other resellers.

3. Manufacturing Business

A manufacturing business purchases products with the aim of using them as materials to make a new product. They usually buy capital good. Thus, the manufacturer transform the products after purchase. A manufacturing business puts together raw materials, labor, and overhead costs in its production process. The manufactured goods (end products) will then be sold to the wholesalers, retailers or consumers depending on the channel of distribution used.

4. Hybrid Business

Hybrid businesses undertake in more than one type of business. They involve in manufacturing, merchandising and services. A restaurant, for instance, puts together ingredients in preparing a meal (manufacturing), sells chilled wine (merchandising), and fills customer orders (service).

Forms of Business Organization

The following are the fundamental forms of business ownership:

1. Sole Proprietorship

A Sole Proprietorship is a form of business owned by only one person. Sole proprietorship business is easy to set up and it is cheapest among all forms of ownership. The owner faces unlimited liability; this means that the creditors of the business (the people the business owe) may go after the personal assets of the owner if the business become insolvent. Small business entities usually adopt the sole proprietorship form of business.

2. Partnership

A partnership is a form of business owned by two or more people who contribute resources (finance, name and time) into the business with the sole aim of making profit. The partners share the profits of the business among themselves in a profit-sharing ratio depending on the amount of capital contributed into the business. 

There are different types of partnership. In general partnerships, all partners have unlimited liability. In limited partnerships, creditors take over the personal assets of the limited partners.

3. Corporation

A corporation is a business that has a separate legal personality from its owners. In corporation, the business organization is separated from its owners. Ownership in a stock corporation is by shares of stock. In a corporation business, the owners (shareholders) liability are limited but have limited involvement in the company's operations. The board of directors controls the activities of the corporation.

4. Limited Liability Company

Limited liability companies (LLCs) are hybrid in nature, they have the features of both a corporation and a partnership business. A LLC is not incorporated; hence, it is not considered a corporation. But, the owners enjoy limited liability like in a corporation. A LLC may Choose to pay its tax as a sole proprietorship, a partnership, or a corporation.

5. Cooperative

A cooperative is a type of business organization owned by a group of people, operated for their mutual benefit. The people making up the group are members. Cooperatives are either incorporated or unincorporated. Examples of cooperatives are: cooperative banking, water and electricity (utility) cooperatives, housing cooperatives and credit unions.

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