A business organization is frequently referred to as a business entity. A business entity is any business organization that exists as an economic unit. Business entities can be grouped according to the type of business activity they perform. 1. Service companies perform services for a fee. This group includes companies such as accounting firms, law firms, repair shops, and many others. 2. Merchandising companies purchase goods that are ready for sale and sell them to customers.
They include such companies as auto dealerships, clothing stores, and supermarkets. 3. Manufacturing companies buy materials, convert them into products, and then sell the products to the companies or to the final customer. Examples are steel miles, auto manufacturers, and so on. The business entity concept applies to all forms of businesses – single proprietorship, a partnership, and a corporation. A single (sole) proprietorship is business owned by an individual and often managed by that same individual.
Single proprietors include physicians, lawyers, electricians, and other people who are ‘in business for themselves’. In a single proprietorship, the owner is responsible for all debts of the business. Operating as a proprietorship is the easiest way to get started in a business activity. Other than the possibility of needing a local license, there are not any prerequisites to beginning operations. A partnership is a business owned by two or more persons associated as partners.
Partnerships are created by an agreement. Included in the agreement are such terms as the initial investment of each partner, the duties of each partner, the means of dividing profits or losses between the partners each year, and the settlement to be made upon the death or withdrawal of a partner. Accountants, attorneys, and other professionals frequently operate their firms as partnerships. A corporation is a business owned by a few persons or by thousands of persons.
The owners of the corporation are called shareholders or stockholders. They buy shares of stock. If the corporation fails, the owners lose only the amount they paid for their stock. The personal assets of the owner are protected from the creditors of the corporation. The stockholders do not directly manage the corporation; they elect a board of directors to represent their interests. The board of directors select the president and vice president, who manage the corporation for the stockholders.