Business Definition

The Term Business Encompasses a Wealth of Activities

A pair of restaurants in Paris.
••• A typical retail business. Dave McLeod

Definition:

A simple business definition is to say that business occurs when a person or organization profits by providing goods or services in exchange for money.

Profit Isn't Just Money

While we tend to think of profit in terms of money, it's actually a more encompassing term. In this business definition, profit includes symbols of money, such as credits, and items and services that are exchanged in lieu of money, such as barter.

Profits can be made on paper and even in whole other currency systems such as Bitcoins.

And profit can be based on a promise, too, as occurs when two or more parties engage in a contract.

In English contract law, in order to create a binding contract which the law will recognize and enforce, there must be an exchange of consideration between the parties. 

"Consideration is simply something of value received by a promisor from a promisee.  It can take the form of a right, interest or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility, given, suffered or undertaken by the other" (Duhaime's Law Dictionary).

The Expectation of Profit is Central

So a person selling flowers by the side of the road is "doing business". But when you stop on the street and give money to a homeless person, you're not doing business, because you have no expectation of profit.

This concept of expectation of profit is so central to the notion of doing business that, for example, the IRS and Canada Revenue Agency use it as a test of who's doing business and who's not. In the U.S. and Canada (as in many other countries) there are tax deductions and credits available to businesses (such as the Small Business Deduction) that individuals cannot claim, making it a potential tax advantage to be running a business. So to determine whether or not a person or corporation who claims to be operating a business actually is, the IRS and Canada Revenue Agency use a profit test.

You Can Be Running a Business and Not Know It

The other tax-related problem (from the point of view of the federal, state/provincial and municipal governments, who all tax businesses) is that people can be running a business and not even know it.

Some people seem to think that there is some sort of magic number that has to be reached before what they are doing qualifies as a business or that certain activities don't count.

Both of these ideas are myths. The truth is:

1) Any revenue is revenue. So if you make a profit of $6 selling a bracelet you made on eBay, it counts. You don't get to "not count" your profits until you get to $100 or $10,000 or any other magic number.

2) All activities done for profit or in expectation of profit count. So selling things at a flea market or out of the trunk of your car or wherever counts.

Nor does it matter if you actually make money. You can lose money (suffer a loss) and still be running a business. Your expectation was not met, but you still had one.

Types of Businesses

There are many different types of businesses, but the three general types are:

  1. service businesses
  2. manufacturing businesses
  3. retail businesses.

In North America, businesses are classified both by industry (see NAICS, a system used in Canada, the U.S. and Mexico) and size (see SME (Small-to-Medium-Enterprise) for instance).

Businesses may also be classified by the type of business model they use.

Forms of Business Ownership

The legal structure of businesses varies from country to country and not all of the possible forms of business ownership are available in all countries. The most common ones are:

In the U.S. and Canada, not all businesses need to be licensed and/or registered that meet certain conditions - see Do You Need to Register Your Business Name?

Small Business Owners Are Also Known As

A person who operates a business is described as self-employed, a business owner, a contractor, or sometimes as an entrepreneur. (The terms business owner and entrepreneur are not universally considered to be synonymous.)

Want to Start a Business?

If you are interested in starting a business, refer to one or more of these articles:

Examples: People are sometimes surprised to find out that they are actually engaged in business and need to declare their business income according to the business definition of the IRS or Canada Revenue Agency.