What Is a Business? 4 Types of Businesses You Need To Know (2024) - Shopify (2024)

Whether you open a bar or just set up a lemonade stand, you may not have thought much about it, but you’re in business.

It may seem like a basic question to ask, but: What exactly is a business? Read on to learn what businesses are, how they function, and what makes a successful business.

What is a business?

A business is an organization that sells goods or services for profit. Businesses can range in size from sole proprietorships run by one person to multinational corporations with thousands of employees around the world. Someone who creates a business organization is called an entrepreneur, which is French for a person who undertakes an enterprise and is a business owner.

Types of businesses

• Sole proprietorship
• Partnership
• Corporation
• Limited liability company

Businesses come in various forms, referred to as business structures. Choosing which structure to use depends on the size of your business, its ownership structure, its risk of liability or loss, and its tax status. Here are some of the main types of businesses:

Sole proprietorship

As the name indicates, sole proprietorships are the equivalent of a one-person show in the business world. A single individual owns the business, but may employ others.

A sole proprietorship is an unincorporated business, meaning it has no formal legal structure. You typically do not need to register with government agencies such as tax authorities or state business regulators because your business is associated with your Social Security number.

As a sole proprietor, you report profits on your personal income tax return and pay tax at your personal rate based on Internal Revenue Service tables. The main risk of a sole proprietor is that you are personally liable for any debts or legal judgments against the business. Unlike some other business structures, a sole proprietorship does not have a separate legal identity.

Because it’s so simple and easy to create, the sole proprietorship structure is how almost any small business gets started.

Partnership

A business owned by two or more people is considered a partnership. Partnerships usually need to register with state and local governments, as well as federal authorities to get a tax identification number. Partnerships, like proprietorships, are pass-through entities for tax purposes. The profits pass through to the owners, who are responsible for reporting their share of profits on their personal tax returns. Partners share the profits equally, unless otherwise specified in a formal partnership agreement.

There are two main types of business partnerships: general and limited.

General partnership

In a general partnership, the partners all participate in managing the business, and they share in the profits. They also share full liability for each other, called joint and several liability. This means that if one partner is sued, the property and assets of any or all of the other partners could be included in a legal judgment against the sued partner.

Limited partnership

In a limited partnership, the partners have limited involvement in the business, except for the one general or managing partner, who runs the partnership. This structure offers limited liability risk for all partners except the general partner, who typically assumes full liability for the business and receives a management fee. Other partners, along with the general partner, share any profits. Oil and natural gas businesses sometimes organize as limited partnerships, as do some law firms, group medical practices, and architectural and design firms.

Corporation

A corporation is the most formal and complex business structure, involving extensive paperwork and costs for registering required documents. These include articles of incorporation and bylaws in the state where the business is based. Creating and maintaining a corporation often requires a business to pay for outside legal and financial advice.

The main benefit of a corporate structure for its owners and managers is that the business is a separate legal entity. This shields the owners and managers from personal liability for the corporation’s debts or and legal judgments against it.

The two main types of legal structure for corporations are C corps and S corps.

C corporation

C corporations, or C corps, are owned by shareholders represented through a board of directors, which oversees the business’s executives. A publicly traded corporation must comply with various federal disclosure regulations, such as filing audited financial statements with the Securities and Exchange Commission, informing current and prospective investors of the business’s condition. C corps and their owners face double taxation on their earnings. First, the company pays taxes on any profits; then, if profits are distributed to owners, typically as dividends, the owners pay taxes on that income.

S corporation

An S corporation is a separate legal entity that limits the liability of its owners, but is taxed like a partnership or sole proprietorship. Profits are passed through to the owners, and each must report their respective share of earnings on their personal tax returns. There is no taxation at the corporate level, thus avoiding the problem of double taxation. S corps are limited in their ability to issue stock because they can have no more than 100 shareholders. Like C corps, S corporations must still comply with registration and record-keeping requirements.

Limited liability company

A limited liability company (LLC) shares some characteristics of partnerships and corporations. Limited liability companies provide liability protection for owners, but they’re less expensive to set up and have fewer regulatory and registration burdens. A small business moving up from sole proprietorship or partnership status often finds that it’s easy to transition to a limited liability company.

How businesses are categorized by size

Businesses often are characterized as small, mid- or large sized businesses, depending on their size and revenue.

Small business

The US Small Business Administration provides guidelines that define a small business based on employees, revenue, whether the business is for-profit or nonprofit, and whether it operates mainly in the US. It generally defines small businesses as having fewer than 1,500 employees and maximum annual revenue of about $41 million. The SBA reviews size guidelines for small businesses every five years.

Mid-size business

There is no government agency or organization like the Small Business Administration that sets criteria for mid-size businesses. Among financial analysts and investors, a mid-sized business is generally characterized as having less than $1 billion in annual revenue. Employment criteria vary widely.

Large business

Likewise, there is no universally recognized employment or revenue standard for a large business, other than exceeding $1 billion in a year in revenue. Many well-known publicly traded companies are considered large businesses. Among the biggest are Walmart Inc., with 2.1 million employees and yearly revenue of almost $611 billion, as of January 2023. There’s also Amazon.com Inc., with 1.5 million workers and $575 billion in revenue as of December 2023.