Key Takeaways
- A business is an entity that engages in economic activities such as buying and selling of goods and services.
- The two kinds of business organizations are For-profit Organizations and Nonprofit Organizations. The primary purpose of for-profit organizations is to earn profits. On the other hand, nonprofit organizations only exist to serve the public good.
- Businesses play a number of important roles in society. This includes providing goods and services, creating jobs, building wealth for the nation, paying different forms of taxes, and contributing to society’s progress.
Introduction to Business
A business refers to the economic activities of an individual or entity that encompass producing, buying and selling of goods or services in exchange of money or other goods and services, usually for a profit. It can also refer to the individual or entity that engages in those economic activities.
We live in a world where business takes the center stage towards driving economic growth and prosperity for many people and nations. This is the reason why we place a high regard on businesses and entrepreneurs who have reached the pinnacle of success in providing value to society.
The dream of many employees is to work for prestigious companies such as the big tech ones in the information technology industry. On the other hand, owning a successful business empire is what inspires many budding entrepreneurs to take on the challenges of starting and building a company.
Whichever side you’re on, whether you want to become a successful business owner or climb the corporate ladder as an employee, businesses will always have a profound impact to our lives in more ways than we can imagine.
Business is a comprehensive subject that encompasses many topics dealing with organizational structures, finances, operations, and social responsibilities. Understanding the basics of business is a good starting point in establishing a solid foundation that will help support your learnings on any topics related to business such as accounting.
Let’s begin by looking closer on these four key elements from our definition of business:
- Economic Activities
- Individual or Entity
- Exchange of Money
- For Profit
Economic activities
Doing business involves economic activities that encompass buying goods or services and then using them for any of the following purposes:
- To sell as merchandise inventory – you can sell the goods that you purchased from a supplier in their original form but at a higher selling price. An example is a retail company selling electronic goods;
- To use as manufacturing inputs – you can use the goods or services as inputs (raw materials, labor or overhead) for further processing, and then sell the output (finished goods) to your customers. An example is a manufacturing business engaged in microchip production; or
- To use as inputs in rendering services – you can use the goods or services as direct costs for rendering services to your customers. An example is a business offering laundry services to hotels.
Individual or entity
A business organization can be as simple as a sole proprietor offering brand consulting services, or as complex as an international software corporation with thousands of employees.
Generally, a business is treated as having a personality that is separate and distinct from its owners or shareholders, as described by the Economic Entity Assumption. This means that the owner or shareholder is not considered the same entity as the business that they own.
Exchange of money
When you’re a business owner, your primary goal is to sell products to customers in exchange of money or any acceptable currencies and hopefully earn a profit.
In some cases, the products of a business can be exchanged for the goods and services of another business without involving money as a medium of exchange. An example is in the form of X-deal or Exchange Deal, where a restaurant agrees to send food products to a social media influencer in exchange for a blog post review.
Most of the time, an x-deal or barter business model is not sustainable since it is hard to determine the exact value that each party receives in the exchange of their goods or services.
Usually for a profit
The primary purpose of a business, particularly a for-profit one, is to earn profits from the sale of its goods or services. These profits are either reinvested back to the business or distributed to the owners or investors in the form of dividends or interests.
Profits are the rewards of a business for all the risks and efforts it assumes to produce goods or services for its customers.
For-profit vs. Nonprofit
There can be countless reasons why someone would start a business. Oftentimes, it is with the expectation of earning substantial rewards in exchange for assuming the risks that are inherent in a business.
Is a business just intended to be a money-making machine for the capitalist entrepreneur? Or are there any real societal benefits that can be obtained from it?
If you’re new to the world of business, you may have encountered the terms For-Profit Organizations and Nonprofit Organizations. Obviously, their names are dead giveaways of what each form of organization does. For-profits earn profits while nonprofits don’t, right?
But an important question to ask is, how can nonprofit organizations operate and survive without earning profits? Let’s find out.
For-profit organization
A For-Profit Organization refers to an entity whose primary objective is to earn profits for their owners by selling goods or services.
Most businesses that you know are probably established as for-profit organizations. Think of Apple, Amazon and other big tech companies raking in profits each year.
The primary purpose of a for-profit business is to maximize profits. To maximize means to increase profits to a maximum value.
Profits are the result of earning revenues that exceed the total expenses incurred for selling goods and services over a period of time.
NET PROFIT (LOSS) = TOTAL REVENUE – TOTAL EXPENSES
For-profit businesses earn revenue by selling their goods and services to their target customers. These customers are the lifeblood that supports the existence of the business.
However, one of the challenges of a business is to ensure that the needs and wants of their customers are satisfied. Customers should be able to get their money’s worth from their purchases. Thus, having satisfied customers will improve the chances of a business to gain loyal customers and earn consistent profits in the process.
A sizable amount of profit can open the floodgates of opportunities to a business. These profits can enable the business to grow and improve their products.
A business that earns more profits will most likely outlast any competitor who doesn’t earn enough profits to support its existence. Without profits, the business will run out of resources needed to manage its operations, which could lead to eventual bankruptcy and closure.
Nonprofit organization
A Nonprofit Organization refers to an entity that is dedicated to supporting a social cause and serving the public good.
A nonprofit organization focuses their efforts for the common good and advancement of society, instead of just earning profits for its investors.
Basically, nonprofit organizations are there to help others without the expectation of earning personal profits for its founders. Examples of nonprofit organizations are charities, foundations, schools, and hospitals.
Some nonprofit organizations are established with the intention of protecting the natural environment and mitigating the effects of climate change. Other organizations commit themselves to helping cancer patients.
The operations of nonprofit organizations are mostly funded by donations from different individuals and organizations. In addition, nonprofit organizations may also sell goods and services like souvenirs and other items that are related to the organization’s advocacy.
Supplementing any donations received with product sales enables them to earn some revenues, but without primarily doing it for personal gains. Instead, they reinvest any income they may earn to further support their advocacy.
One benefit that nonprofit organizations enjoy is that they won’t be subject to any income tax for the donations they may receive. Furthermore, any revenue they may earn from activities that are related to their mission are also exempt from taxes.
However, if nonprofit organizations earn regular income from activities that aren’t related to their nonprofit purposes, the income from these unrelated activities can be subject to income tax. Tax laws may differ in some areas so it’s advisable to do your research or consult with a tax expert if you plan to open or work for a nonprofit organization.
Below, we’ll compare some characteristics of for-profit organizations and nonprofit organizations.
Key differences between a for-profit and nonprofit
As to purpose -
For-profit organizations – the primary purpose is to generate profits by selling goods or services to their customers.
Nonprofit organizations – the primary purposes are to serve the public and further a social cause. Their success is based on them fulfilling their advocacy.
As to income taxation -
For-profit organizations – are required to pay income taxes on their income.
Nonprofit organizations – are exempted from paying income taxes on any donations they may receive. However, any revenue received from activities that are not related to their primary purpose can be subject to income tax.
As to funding -
For-profit organizations – can raise capital and money from creditors and investors in exchange of interest, dividends or capital gains.
Nonprofit organizations – can raise funds by accepting donations from individuals, businesses, governments, and other organizations. One benefit you should know when you donate to a nonprofit organization is that you could deduct the amount of your donation in your tax returns.
As to ownership and management -
For-profit organizations – are led and managed by individuals or board of directors, in the case of corporations. The individuals that form part of the management team can also be stakeholders and own a share of the business. As a result, their primary motivations is for the financial success of the business.
Nonprofit organizations – are led and managed by a board of directors or trustees who have no direct ownership in the organization. Their main concern is to accomplish the organization’s mission while maintaining sufficient resources to support their operations.
As to profits -
For-profit organizations – maximize profits by increasing revenues and decreasing costs. These profits can be distributed to the owners and shareholders or reinvested back to the business.
Nonprofit organizations – also aim to generate profits but only at a level that’s sufficient enough to support their operations and fulfill their purpose of serving society. Profits are retained in the nonprofit organization and not distributed to anyone.
As to target audience -
For-profit organizations – aim to market their goods and services to their target audience to have a higher chance of selling their products.
Nonprofit organizations – have a broader audience segment that may include the general public. Their goal is to reach a wider and more diverse audience who will benefit from their programs and advocacies.
As to organizational culture and staff -
For-profit organizations – employees earn wages and salaries. The culture of these organizations is mostly focused on expansion and profit maximization. Employee performance is based on meritocracy and measured by key performance indicators (KPIs).
Nonprofit organizations – have more community-oriented culture wherein the staff do voluntary work, usually outside their regular working schedule.
5 Important Roles of Business
While some may think of businesses as nothing more than cash cows for their owners, we actually benefit from them in a lot of ways that are not very obvious when we just look at the surface.
The function of the business as a provider of goods and services is only one of its several important roles in society. Businesses also play an important role in nation building and improving a society’s well-being.
History has proven time and again that a wealthy country is one where there are a lot of businesses that provide employment and taxes. People living in these countries tend to have a higher quality of life and above average satisfaction levels compared to those who live in countries that don’t prioritize attracting businesses and investors.
1. Businesses provide needs and wants
Much of the progress in our world today can be attributed to the availability of products in the market to satisfy everyone’s needs and wants. Examples of these products are as follows:
Food
Food is more accessible today than ever before. You can buy food from restaurants, supermarkets and convenience stores that can be found in every corner of the city and in every shopping center.
You can even have food delivered straight to your doorsteps with just a click of a button using your favorite food delivery app installed in your smartphone. Food delivery apps became very useful during the lockdowns that were implemented worldwide during the COVID-19 pandemic.
The wide-scale production of meat and vegetables is made possible by the food industry. Some companies nowadays even focus their efforts on meeting the demands of those who prefer healthier and more sustainable food.
Clothing
Basic clothing and footwear are made accessible to the masses by the fast fashion industry that sell affordable products that can even compete with those in the luxury fashion space. Customers now have the option to buy clothing items via e-commerce stores or thru traditional brick-and-mortar boutiques.
While the fast fashion clothing industry has made clothing more affordable, it has its own issues. It is one of the major pollutants of the environment.
Furthermore, poor working conditions and unfair wage practices are also one of the issues that overshadow the fast fashion industry. To address these issues, more people today choose to buy quality clothes from brands that focus on sustainability.
Shelter
As the economy of a country expands and more affordable housing becomes widely available, more people can afford to own a house. Real estate developers are taking advantage of the housing construction boom that’s happening in many high-growth economies.
Entertainment
When basic needs such as food, clothing and shelter are met, people tend to spend more on entertainment. Cinemas, amusement parks, and gaming are some of the many forms of entertainment that many businesses provide.
When it comes to entertainment, look no further than the smartphone that you’re holding right now. Countless gaming apps, social media and streaming platforms like Netflix and Spotify have made entertainment more accessible anytime and anywhere with just a single click of the app in your device.
Health
As quality of life improves, people tend to become more mindful of their well-being. The rising popularity of fitness centers, dietary supplements, health spas, and organic products are some of the effects of consumer demand for healthier products.
Sanitation and clean water becomes priority which results to more businesses providing these services in developing countries.
Technology
Technology has democratized many things in the modern world. A person who has access to a device that is connected to the internet can now run their own business and compete with the larger, more established ones with only a fraction of their costs.
Consumerism has also reached unprecedented levels because of e-commerce. So many products can now be accessed and conveniently bought in online stores around the world.
The fierce competition between technology companies that provide hardware and software products resulted to more affordable and high quality electronic goods and software services.
2. Businesses provide employment.
Employment opportunities are created when there are more businesses since companies need employees to run their day-to-day operations.
Labor, which includes mental and physical skills, is a very important resource for a business. Even if modern businesses today utilize artificial intelligence, no algorithm could replace the human aspect of running a business, at least for now.
Employees and laborers receive compensation from companies in exchange for their services. From their wages and salaries, they can buy more goods and services that other businesses sell. This mutual relationship between businesses and employees, both of which are consumers, are one of the major drivers of long-term economic growth.
Companies invest in their employees by spending on trainings and seminars that are tailored towards the development of employee skills and knowledge. Technological changes happening at accelerating rates have forced businesses to ensure that the skills and knowledge of their employees should always be ahead or at least aligned with those changes.
When the COVID-19 pandemic hit the entire world, businesses were forced to allow their employees to work remotely. The challenges of this “new normal” have brought into focus the importance of technological and online literacy for employees.
Lastly, programs such as employee profit sharing plans and stock purchase plans help employees to have a sense of ownership in the company they’re working for.
3. Businesses create more wealth for the nation.
Businesses play a vital role in nation-building. They help the government build the necessary infrastructures that underlie the foundation of a robust economy.
A country where entrepreneurship is encouraged and private businesses are incentivized is often a wealthy one. On the other hand, a country without meritocracy and where living conditions are not conducive to business often suffers from poverty and high unemployment rates. The lack of available jobs and equal opportunities are one of the main causes of poverty.
4. All forms of taxes are made possible by businesses.
A large portion of the taxes that are collected by a government comes from private businesses and its employees. Examples of these taxes are individual and corporate income tax, excise tax, capital gains tax, employment tax, and sales tax. Taxes may differ depending on the tax laws of the country where the business is registered.
Employees also pay their share of taxes in the form of payroll taxes when they receive their salaries. Other taxes paid by employees and businesses alike are social security and medicare.
Taxes, which are derived mostly from businesses, finance the government’s operations. If business operations stop, the machinery of the government will grind to a sudden halt because no taxes are paid to fund the government’s programs. As a consequence, the economic development of the country will be at a standstill.
5. Businesses contribute to social progress.
Businesses also contribute to social development through Corporate Social Responsibility (CSR). CSR promotes social and environmental progress through the efforts of the business.
Due to the amount of carbon footprints that businesses produce that causes detrimental effects to the environment, many businesses today are focusing their efforts in finding solutions to minimize their carbon footprints and offset the negative effects of industrial wastes. Furthermore, many businesses are also implementing steps to source their supplies ethically and in a sustainable way.
Businesses are also partners of the government in developing local communities by offering free medical and sanitation services as well as building schools and hospitals. Incentives also motivate businesses to donate to charities and provide goods and services to the community.
Review Questions
- What are the main differences between a For-Profit Organization and a Nonprofit Organization?
- What do you think are the roles that a business play in society?
- What are examples of an economic activity?
- How do nonprofit organizations differ from for-profit organizations when acquiring funding?
- A large portion of the government’s revenue is from the taxes collected from businesses. What could possibly be the result when businesses ceased to operate and were unable to pay taxes?
