Starting and Running a Business
So you want to start a business? Perhaps, you want to make money. Perhaps, you want to change the world. Perhaps, you don't want to work the "typical" job. This book will guide you through the process of starting and running your own business successfully.
In economics, business is the social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals, usually to generate profit.
Definition of business
The etymology of "business" refers to the state of being busy, in the context of the individual as well as the community or society. In other words, to be busy is to be doing commercially viable and profitable work.
The term "business" has at least three usages, depending on the scope — the general usage (above), the singular usage to refer to a particular company or corporation, and the generalized usage to refer to a particular market sector, such as "the record business," "the computer business," or "the business community" -- the community of suppliers of goods and services.
The singular "business" can be a legally-recognized entity within an economically free society, wherein individuals organize based on expertise and skills to bring about social and technological advancement.
In predominantly capitalist economies, businesses are typically formed to earn profit and grow the personal wealth of their owners. Notable exceptions to this rule include many cooperatives, non-profit organizations, and government institutions.
In other words, the owners and operators of a business have as one of their main objectives the receipt or generation of a financial return in exchange for their work — that is, the expense of time and energy — and for their acceptance of risk — investing work and money without certainty of success.
However, the exact definition of business is disputable, as is business philosophy; for example, most Marxists use "means of production" as a rough synonym for "business." Socialists advocate either government, public, or worker ownership of most sizable businesses. Some advocate a mixed economy of private and state-owned enterprises. Others advocate a capitalist economy where all, or nearly all, enterprises are privately owned.
Kinds of Business
- Sole Proprietorship
- A business owned by one person. The owner may operate on their own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business.
- A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership.
- Cooperative Business
- (often referred to as a Co-Op business or Co-Ops) use a cooperative business structure: for-profit, limited liability, but with members of the co-op share decision-making authority. Co-Ops normally fall into three types: consumer co-ops, producer co-ops (common in agriculture) and worker-owned companies. Co-Ops are fundamental to the ideology of Economic democracy.
- Private Limited Company (Ltd)
- A small to medium sized business that is often run by the family or the small group who own it. The owners and managers are only liable for the business up to the amount they have invested in the company, and are not liable for the debts incurred by the company unless they have signed a personal guarantee.
- Public Limited Company
- A business with limited liability, a wide spread of shareholders and in the UK, a share capital of over £50,000. The owners and managers are only liable for the business up to the amount they have invested in the company, and are not liable for the debts incurred by the company (unless they have signed a personal guarantee, which usually is not the case for a large corporation).
In the United States and some other countries, a limited company is known as either a corporation or a limited liability company, (LLC).
There are many types of businesses, and, as a result, businesses can be classified in many ways. One of the most common focuses on the primary profit-generating activities of a business, for example:
- Manufacturers produce products, from raw materials or component parts, which they then sell at a profit. Companies that make physical goods, such as cars or pipes, are considered manufacturers.
- Service businesses offer intangible goods or services and typically generate a profit by charging for labor or other services provided to government, other businesses or consumers. Organizations ranging from house decorators to consulting firms to restaurants and even to entertainers are types of service businesses.
- Retailers and Distributors act as middle-men in getting goods produced by manufacturers to the intended consumer, generating a profit as a result of providing sales or distribution services. Most consumer-oriented stores and catalogue companies are distributors or retailers.
- Agriculture and mining businesses are concerned with the production of raw material, such as plants or minerals.
- Financial businesses include banks and other companies that generate profit through investment and management of capital.
- Information businesses generate profits primarily from the resale of intellectual property and include movie studios, publishers and packaged software companies.
- Utilities produce public services, such as heat, electricity, or sewage treatment, and are usually government chartered.
- Real estate businesses generate profit from the selling, renting, and development of properties, homes, and buildings.
- Transportation businesses deliver goods and individuals from location to location, generating a profit on the transportation costs
There are many other divisions and subdivisions of businesses. The authoritative list of business types for North America (although it is widely used around the world) is generally considered to be the North American Industry Classification System, or NAICS.
- Unlimited Liability
- A situation in which owners of a business are liable for all the debts that the business may incur.
- Limited Liability
- A situation in which the liability of the owners of a business is limited to the full paid-up value of the share capital, (LLC).
Functions of a business
Most businesses must accomplish similar functions regardless of size, legal structure or industry. These functions are often organized into departments. Common departments include (but are not limited to):
- typically responsible for financial reporting, financial controls and the raising of the capital necessary to run the business.
- Human Resources
- typically responsible for hiring, firing, payroll, benefits, etc.
- Marketing and sales
- responsible for selling the business' goods or services to the customer and for managing the relationships with the customer
- typically responsible for promoting interest in, and generating demand for, the business' products or services, and positioning them within the market
- finding likely purchasers and obtaining their agreement (known as a contract) to buy the business' products or services
- makes the product or delivers the service
- Production, costs, and pricing|Production
- produces the raw materials into the delivered goods, if they require processing
- Customer service
- supports customers who need help with the goods or services
- responsible for acquiring the goods and services necessary for the business. Sometimes organized as:
- Strategic sourcing
- determines the business' needs and plans for acquiring the necessary raw materials and services for the business
- processes the purchase orders and related transactions
- Research and Development
- tests to create new products and to determine their viability (e.g. pilot plants)
- Information Technology
- manages the business' computer and data assets
- Communications/Public Relations
- responsible for communicating to the outside world
- provides administrative support to the other departments (such as typing, filing, etc)
- Internal Audit
- an independent control function typically accountable to the Board of Directors for reporting on the proper functioning of the other departments
Management is sometimes listed as a "department" but typically refers to the top level of leadership within the business regardless of their functional role.
Legal forms of a business, and the advantages and disadvantages of each form
Most legal jurisdictions specify the forms that a business can take, and a body of commercial law has developed for each type. Some common types include partnerships, corporations (also called limited liability companies), and sole proprietorships.
The major factors affecting how a business is organized are usually:
- The size and scope of the business, and its anticipated management and ownership : A smaller business is more flexible, larger businesses or those with wider ownership or more formal structures, will usually tend to be organized as partnerships or (more commonly) corporations. In addition a business which wishes to raise money on a stock market or to be owned by a wide range of people will often be required to adopt a specific legal form to do so.
- The sector and country : private profit making businesses are different from government owned bodies. In some countries, certain businesses are legally obliged to be organized certain ways.
- Limited liability : corporations, and limited liability partnerships, protect their owners from business failure, and are treated as separate entities, whereas an unincorporated business or person working on their own is usually not so protected.
- Tax advantages : Different structures are treated differently in tax law, and may have advantages for this reason.
- Disclosure and compliance requirements : different business structures may be required to make more or less information public (or reported to relevant authorities), and may be bound to comply with different rules and regulations.
Many businesses are operated through a separate entity such as a corporation, limited partnership or limited liability company. Most legal jurisdictions allow people to organize such an entity by filing certain charter documents with the relevant Secretary of State or equivalent and complying with certain other ongoing obligations. The relationships and legal rights of shareholders, limited partners, or members, as the case may be, are governed partly by the charter documents and partly by the law of the jurisdiction where the entity is organized. Generally speaking, shareholders in a corporation, limited partners in a limited partnership, and members in a limited liability company are shielded from personal liability for the debts and obligations of the entity, which is legally treated as a separate "person." This means that unless there is misconduct, the owner's own possessions are strongly protected in law, if the business does not succeed.
Where two or more individuals own a business together but have failed to organize a more specialized form of vehicle, they will be treated as a simple (USA: general) partnership. The terms of a partnership will be partly governed by a partnership agreement if one is created, and partly by the law of the jurisdiction where the partnership is located. No paperwork or filing is necessary to create a partnership, and without an agreement, the relationships and legal rights of the partners will be entirely governed by the law of the jurisdiction where the partnership is located.
A single person who owns and runs a business is commonly known as a sole proprietor, whether he or she owns it directly or through a formally organized entity.
A few relevant factors to consider in deciding how to operate a business include:
- General partners in a partnership (other than a limited liability partnership), plus anyone who personally owns and operates a business without creating a separate legal entity, are personally liable for the debts and obligations of the business.
- Generally, corporations are required to pay tax just like "real" people. In some tax systems, this can give rise to so-called double taxation, because first the corporation pays tax on the profit, and then when the corporation distributes its profits to its owners, individuals have to include dividends in their income when they complete their personal tax returns, at which point a second layer of income tax is imposed.
- In most countries, there are laws which treat small corporations differently than large ones. They may be exempt from certain legal filing requirements or labor laws, have simplified procedures in specialized areas, and have simplified, advantageous, or slightly different tax treatment.
- In order to "go public" (sometimes called IPO) -- which basically means to allow a part of the business to be owned by a wider range of investors or the public in general -- you must organize a separate entity, which is usually required to comply with a tighter set of laws and procedures. Most public entities are corporations that have sold shares, but increasingly there are also public LLCs that sell units (sometimes also called shares), and other more exotic entities as well (for example, REITs in the USA, Unit Trusts in the UK). However, you cannot take a general partnership "public."
Business laws and regulations
Most commercial transactions are governed by a very detailed and well-established body of rules that have evolved over a very long period of time, it being the case that governing trade and commerce was a strong driving force in the creation of law and courts in Western civilization.
As for other laws that regulate or impact businesses, in many countries it is all but impossible to chronicle them all in a single reference source. There are laws governing treatment of labor and generally relations with employees, safety and protection issues (OSHA or Health and Safety), anti-discrimination laws (age, gender, disabilities, race, and in some jurisdictions, sexual orientation), minimum wage laws, union laws, workers compensation laws, and annual vacation or working hours time.
In some specialized businesses, there may also be licenses required, either due to special laws that govern entry into certain trades, occupations or professions, which may require special education, or by local governments who just want your money. Professions that require special licenses run the gamut from law and medicine to flying airplanes to selling liquor to radio broadcasting to selling investment securities to selling used cars to roofing. Local jurisdictions may also require special licenses and taxes just to operate a business without regard to the type of business involved.
Some businesses are subject to ongoing special regulation. These industries include, for example, public utilities, investment securities, banking, insurance, broadcasting, aviation, and health care providers. Environmental regulations are also very complex and can impact many kinds of businesses in unexpected ways.
When businesses need to raise money (called 'capital'), more laws come into play. A highly complex set of laws and regulations govern the offer and sale of investment securities (the means of raising money) in most Western countries. These regulations can require disclosure of a lot of specific financial and other information about the business and give buyers certain remedies. Because "securities" is a very broad term, most investment transactions will be potentially subject to these laws, unless a special exemption is available.
Capital may be raised through private means, by public offer (IPO) on a stock exchange, or in many other ways. Major stock exchanges include the New York Stock Exchange and Nasdaq (USA), the London Stock Exchange (UK), the Tokyo Stock Exchange (Japan), and so on. Most countries with capital markets have at least one.
Business that have gone "public" are subject to extremely detailed and complicated regulation about their internal governance (such as how executive officers' compensation is determined) and when and how information is disclosed to the public and their shareholders. In the United States, these regulations are primarily implemented and enforced by the United States Securities and Exchange Commission (SEC). Other Western nations have comparable regulatory bodies.
Other business laws and regulations
As noted at the beginning, it is impossible to enumerate all of the types of laws and regulations that impact on business today. In fact, these laws have become so numerous and complex, that no business lawyer can learn them all, forcing increasing specialization among corporate attorneys. It is not unheard of for teams of 5 to 10 attorneys to be required to handle certain kinds of corporate transactions, due to the sprawling nature of modern regulation. Commercial law spans general corporate law, employment and labor law, healthcare law, securities law, M&A law (who specialize in acquisitions), tax law, ERISA law (ERISA in the United States governs employee benefit plans), food and drug regulatory law, intellectual property law (specializing in copyrights, patents, trademarks and such), telecommunications law, and more.
Businesses often have important "intellectual property" that needs protection from competitors in order to stay profitable. This could require patents or copyrights or preservation of trade secrets. Most businesses have names, logos and similar branding techniques that could benefit from trademarking. Patents and copyrights in the United States are largely governed by federal law, while trade secrets and trademarking are mostly a matter of state law. Because of the nature of intellectual property, a business needs protection in every jurisdiction in which they are concerned about competitors. Many countries are signatories to international treaties concerning intellectual property.
Management and ownership
The study of the efficient and effective operation of a business is called management. The main branches of management are financial management, marketing management, human resource management, strategic management, production management, service management, information technology management, and business intelligence.
Businesses can be bought and sold. Business owners often refer to their plan of disposing of the business as an "exit plan." Common exit plans include IPOs, MBOs and mergers with other businesses.