What Is a Business?

Definition and Examples of a Business

Man opening a store for the day
•••

Image Source / Getty Images

Business generally refers to organizations that seek profits by providing goods or services in exchange for payment. However, businesses don't need to turn a profit to be considered a business. The pursuit of profit, in and of itself, makes an organization a business.

Here's a full definition of what makes a business, along with some of the common types you'll encounter.

What Is a Business?

A business is any entity that seeks to profit from an activity. Business is a broad term, but these profit-seeking activities generally include providing some kind of good or service that people want or need. Businesses may experience a loss, but that doesn't stop them from being a business. All that's important—from the standpoint of defining a business—is that the entity seeks to profit from what it does.

Profit doesn't have to strictly refer to cash payments. It can refer to other securities, such as stocks and cryptocurrencies, or it can refer to barter-style trades of one good or service for another.

When an entity provides goods or services without seeking profit, it isn't a business. These entities include nonprofits and other charitable organizations, as well as government programs.

An entity doesn't need to have a storefront or website to be a business. A person selling flowers by a roadside is doing business, as they are offering a product in exchange for a profit. A person who offers their creative skills on a freelance basis could be a business within themself, otherwise known as a self-employed worker.

How Does a Business Work?

Before starting a business, make sure you have a clear understanding of what constitutes a business, as well as any business-related activities. That includes knowing the federal, state, and local laws that pertain to your business. This knowledge will help you avoid any penalties and fines, which could cripple or end your business soon after it starts. This information will also help you develop a strong business plan for a successful start in the marketplace.

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

In the United States, most businesses register with the government in some capacity. Individuals who conduct business under their own name may not need to register their business with the government, but they may miss out on tax deductions and credits, such as the small business deduction, that individuals cannot claim.

Some freelancers, hobbyists, and people with side gigs may be surprised to learn they are actually engaged in business and need to declare their business income, according to the way their government defines a business. Organizations such as the Internal Revenue Service (IRS) offer a sort of profit test to determine whether a person or corporation is operating a claimed business.

Any activities performed for profit or in expectation of a profit are considered a business activity. This includes selling items at a flea market, from the trunk of a car, or on eBay.

Types of Businesses

There are many types of business models, and businesses commonly operate in more than one area simultaneously. However, for the sake of generalizing the categories of business, the three main types are:

  • Service, such as restaurants
  • Manufacturing, such as industrial plants
  • Retail, such as clothing stores

Beyond the type of product or service provided, businesses can also be classified by their size and legal structure.

In North America, the North American Industry Classification System (NAICS) sets the standards for which businesses qualify as a small-to-medium-enterprise (SME). Size standards vary by industry. They may be determined by the size of the workforce or by the amount of revenue coming into an enterprise.

In the U.S., the IRS helps define the potential structures someone can choose while defining their business venture. Here are the most common business structures.

  • Sole proprietorships: These are unincorporated businesses owned and operated by a single person.
  • Partnerships: This occurs when two or more people share in the funding, labor, ownership, profits, and losses that come with a business venture.
  • Corporations: These businesses are owned by shareholders and can become massive enterprises.
  • S corporations: These businesses are similar to corporations, but they're taxed differently—passing income, losses, deductions, and any other credits through to shareholders to be taxed at individual rates.
  • Limited liability company (LLC): The rules that govern LLCs vary from state to state. Depending on where one lives, LLCs may offer favorable tax treatment or other perks.

Key Takeaways

  • A business is an entity that seeks to profit from a product or service.
  • An entity that seeks to profit is a business, whether or not it succeeds in obtaining profits.
  • The three main categories of business are service, manufacturing, and retail.
  • Businesses can be individuals with side hustles or massive corporations with hundreds of employees.

Article Sources

  1. Internal Revenue Service. "Business Activities." Accessed July 18, 2020.

  2. Small Business Administration. "Register Your Business." Accessed July 18, 2020.

  3. Internal Revenue Service. "Hobby or Business? IRS Offers Tips to Decide." Accessed July 18, 2020.

  4. Small Business Administration. "Table of Size Standards Matched to North American Industry Classification System Codes," Page 1. Accessed July 18, 2020.

  5. Internal Revenue Service. "Sole Proprietorships." Accessed July 18, 2020.

  6. Internal Revenue Service. "Tax Information for Partnerships." Accessed July 18, 2020.

  7. Internal Revenue Service. "Forming a Corporation." Accessed July 18, 2020.

  8. Internal Revenue Service. "S Corporations." Accessed July 18, 2020.