The nature of business is a key factor in setting up the type of entity you want to form for your company. It’s an important element that is frequently ignored. It can help you to know what you are getting into before you start a new business model, and also give insight into how to market it once it’s up and running! Now, what does the term “nature of business” mean? Let’s focus on it in detail.
Article Overview
What does nature of business mean?
The nature of business is the fundamental characteristic of a company or organization that defines its goals and strategies. It distinguishes your business from other types of organizations, such as nonprofits, government institutions, the public sector, or private sector companies.
Generally, businesses pursue profit as their chief objective, although there are some exceptions to this rule.
The nature of business means the complete structure of a company by which it operates its business to obtain its mission and vision under a specific industry or business sector. The nature of business varies from business to business according to the ownership of that business.
Key components For nature of business
There are a few essential components that define the nature of business.
Generating revenue
The first is its primary purpose: to make money. This means that businesses are typically structured around generating revenue and profits for their owners or shareholders.
Consumer and client
Another key component is the focus on customers and clients. Businesses must cater to the needs and wants of their customers in order to be successful, which often requires offering products and services that are not available elsewhere.
Competitiveness
Finally, businesses also tend to be competitive and aggressive in their pursuit of market share. They often strive to be the first or best option for consumers. The Nature Of Business decides how a company will compete in the market and it can be through innovation, price, or quality.
All three of these strategies are important in order to appeal to customers and obtain market share. A company that is able to offer a unique product or service that is not available anywhere else will likely be successful in the long run.
Characteristics of Nature of Business
A business is a legal person or entity that exists independently from its owners. This means that it can be owned by one person or many people. The owner may be called shareholders, partners, directors, officers, etc. In most cases, a business will have at least one shareholder.
A business produces goods or services for sale to customers. These products could be anything from food, clothing, electronics, furniture, cars, books, toys, etc. That means the industry or the category of business defines the business’s nature.
A business makes money through sales. Sales are when a customer buys something from a business. The sales pattern of a business can structure the business nature. For example Retail business and Wholesale business.
As you can see, The nature of the business can be classified by its characteristics into three parts:
- 1) Ownership;
- 2) Products/Services; and
- 3) Revenue.
Nature of business by Ownership
An ownership structure refers to who owns the business. There are two types of ownership structures: Publicly-traded companies and privately-held companies.
PTCs are publicly traded corporations where shares of stock are sold to investors. PHCs are not publicly traded but instead, they sell their shares directly to individual investors.
In both cases, the owners are called shareholders. Shareholders usually include individuals, trusts, partnerships, LLCs, and other entities.
Publicly-Traded Companies
In this case, the business is owned by shareholders who are listed on a public exchange such as NASDAQ or NYSE. Investors pay a price for these shares based on the current share value. For example, if a share is worth $100 today, then the investor would have to pay $100 to purchase a single unit of share.
Private-Holders
In this case, a private holder owns the business. Typically family members, friends, or close associates own the private holding company shares. They don’t list their businesses on any exchanges. Instead, they keep track of their holdings via a spreadsheet.
Private holders are liable to the company as per their shareholdings. That means the profit and loss of the company will be distributed according to the percentage of shares owned by each member.
Nature of business by Category
In most cases, you will have to define your business as per the product and services your business offers. It’s commonly specified in your articles of formation as a legal structure of your business.
For example, if your basic offering is software then your nature of business is software and if you sell your product online then it will be eBusiness.
Nature of business by Legal entity
A business legal entity is a term used to describe the type of organization or company a business is. your nature of the business can differ according to your business legal entity.
Some of the most common types include corporations, limited liability companies (LLCs).
Corporation
Generally, a business entity that is created by law and has a separate legal personality from its owners is called a corporation. This means that the corporation can own property, enter into contracts, and sue or be sued in its own name.
There are fewer types of corporations, but the most common type is the “C corporation”. A “C corporation” is a regular corporation that pays income taxes on its profit. This type of company can be owned by one or more owners. The most important fact is, it has no share limits.
Another type of corporation is called S corporation. S corporations avoid double taxation. Generally, the profits and losses of the S corporation are passed through to its shareholders, who then report them on their personal tax returns.
For this type of business, the maximum share limit is 100 and all its owners should have to be US citizens.
Limited liability company
An LLC is not a corporation. It is a form of entity used for holding assets, protecting personal assets, and avoiding double taxation.
This means that the personal assets of the owners are protected in the event that the business fails. LLCs are popular because they are relatively easy to set up and maintain, and they offer their owners a high degree of flexibility. For these reasons, LLCs are often used to start small businesses.
Another important feature of an LLC is that you can easily turn your sole proprietor business structure into multiple business owner partnerships. In that case the general partnership will be specified in the operating agreement.
If you’re going to use an LLC, I’d recommend using a Delaware LLC – it’s easy to get started, there’s lots of information online about it, and it’s very common.
How Does Nature Of Business Affect Your Company?
Having a well-defined nature of a business helps you to understand whether you need to incorporate or operate under a different set of rules than you do now. It also can help you understand the kind of customers you attract and how to better serve them.
Additionally, the nature of a business can help you understand what financing is available to you and how to go about getting it.
For example, a business that manufactures products might have an easier time securing a bank loan than a business that provides services.
Finally, the nature of your business can also dictate how you are taxed and how a company will operate in order to grow its target market.
For example, businesses in the manufacturing and retail industries are typically taxed at a higher rate than service-based businesses. Knowing the nature of your business can help you to better prepare your taxes, get loans and even hire employees.
Final Thought
There are a lot of different types of nature of business, and picking the one that’s right for you will depend on many factors. In this article, we explored some examples of what it means to have a small business or operate as a self-employed sole proprietorship. We hope readers were able to learn from these insights about how they can grow their own economic activity by starting a new enterprise in any number of ways.
