Types of Business Organizations

Types of Business Organizations

Business is an organization in which basic resources, called inputs, are assembled and processed to provide goods or services, called outputs, to customers. People who are engaged in business activity are called Entrepreneurs or Businessman.

In general, a business can be defined as follows:

“Business consist of an individual, group of individuals or organizations engaged in the trade of goods, services, or both to consumers, in exchange for money or other items of equivalent value, and for profit.”

Types of Business Operations

There are three (3) different nature and types of businesses that are operated with the purpose of earning profit. Each type of business has distinctive features.

1. Service Business

This type of business operation provides services, instead of product, to its customers. It includes, but not limited, to the following:

  • Professionals such Lawyers, Doctors, Accountant, Engineer, etc.
  • Consultation
  • Hospital
  • Hotel and Lodging
  • Restaurant
  • Transportation
  • Entertainment
  • Banking and Financial

2. Merchandising Business

This type of business operation sells products to its customers. However, they don’t make the products they sell; instead, they buy or purchase it from other business. It includes, but not limited, to the following:

  • General merchandise such as grocery store and retail business
  • Toy stores
  • Electronic stores
  • Apparel stores
  • Online stores such as Amazon.com, iTunes.com, Audible.com, eBay, etc.

3. Manufacturing Business

This type of business operation converts basic inputs, such as materials, labor and overhead, into finished products which are sold to customers. It includes, but not limited, to the following:

  • Computer and electronic manufacturer
  • Car, trucks and vans manufacturer
  • Shoe and clothes manufacturer
  • Canned goods manufacturer
  • Soda or beverage manufacturer

Types of Business Organizations

Once you’ve identified the nature and type of operation the business runs, the next thing you need to know is what type of organization the business was formed.

Manufacturing, merchandising and service businesses are commonly organized and formed as either of the following:

1. Proprietorship

It’s a type of business organization that is owned by a single individual. The individual or person who owns this type of business is referred to as Proprietor.

It is the most common and popular type of business organization because it is easier and cheaper to organize. However, the primary disadvantage of proprietorship is that the business resources are limited to the single owner’s resources. Also, the owner assumes all the risk, liability and decision making of the business.

Small businesses like repair shops, laundries, restaurants, and professional services are organized as proprietorship.

2. Partnership

As a business grows bigger, it needs more financial, people and managerial resources. Two or more individuals may join together and form a business called partnership. The group of individuals who own the partnership business is referred to as Partners.

Partnership is a type of business organization that is owned by two or more individuals. It is a little harder and more expensive to organize than the proprietorship. The benefit, however, is that the risk, liability and management is shared by group of individuals, depending on the percentage of ownership agreed upon.

There are many small and medium-size businesses such as repair shops, laundries, and professional firms that are organized as partnership. The difference it has from proprietorship is that it is owned by more than one individual and the requirements of organizing a partnership is more tedious than a proprietorship.

3. Corporation

It’s a type of business organization that is owned by shareholders and it is structured as a separate legal entity under the operation of law. The ownership of a corporation is divided into shares of stock. A corporation issues the stock to individuals or other businesses, who then become owners or stockholders, of the corporation.

The benefit of the corporation is that the risk and liability is not shouldered by the owners called as stockholders. And the management or decision making is shared by the board of directors. Also, it is easier to increase resources of the business by means of issuing stock.
Large size businesses usually form a corporation because of its complexity and high need of resources.

I hope this article has been helpful for you to learn and understand the different types of business operations and organizations. You may share your thoughts, additional knowledge, questions or concerns via comment box below.

Recommended Readings:

To learn more about the laws and legal forms in organizing and running a business, you may refer to these books:

1. Legal Forms for Starting & Running a Small Business

This book consists all the essential forms and step-by-step instructions a small business owner needs to start and run a business. It’s an affordable solution which provides you with over 60 legal forms and documents and all the step-by-step instructions you need to use them. Read more here.


2. Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships

The book helps determine the best business structure to allow principles to devote more time and energy to running the business successfully and avoiding potential financial risk. You’ll get tips on how to: (1) Clarify fundamental legal principles for business formation, (2) Access state-specific information covering all 50 states and the District of Columbia, (3) Walk step-by-step through every part of the process, and (4) Speak the lingo using the complete business law glossary. Read more here.

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  1. Chhanchhuaha says:

    Now a day.our world is a global village. Because, one person who are in foreigner ,we can talk or messages to with him/her.
    In a global village , the businessmen is one of the user of internet today.. To trade a goods with in computer internet is very essentially used. Businessmen are the important for the living in this global village.
    So, business is the important for today and SO ON!

  2. what is different between sole trader and proprietorship

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