The general definition of a business is when a person or organization profits by providing goods or services in exchange for money. However, profit can include other items of value, such as credit, and items and services that are exchanged in lieu of money.
Types of Business Profit
Profit can be made on paper and even in other currency systems such as cryptocurrencies. These include bitcoin, ethereum and ripple, which are digital coins or tokens that can be used as payment.
Profit can also be based on a promise, which occurs when two or more parties engage in a contract. In English contract law, to create a binding contract that the law will recognize and enforce, there must be an exchange of consideration between the parties. Duhaime’s Law Dictionary defines consideration as “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.”
Barter is considered profit that may be used in exchange for a product or service. For example, a person is promised a dinner in exchange for fixing a neighbor’s plumbing.
Expectation of Business Profit
A person selling flowers by a roadside is doing business, as they are offering a product in exchange for a profit. However, stopping to give money to a homeless person is not doing business, as there is no expectation of profit.
In the United States, Canada and 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 run a business. Therefore, organizations such as the Internal Revenue Service (IRS) and Canada Revenue Agency routinely use a profit test to determine whether a person or corporation is operating a claimed business.
People are sometimes surprised to learn 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.
Explanation of Running a Business
The other tax-related problem—from the view of the federal, state/provincial and municipal governments—is that people can be running a business and not even know it.
People may believe that a certain number has to be reached before their work qualifies as a business, or that certain activities are not business-related. However, selling a $6 bracelet on eBay is a business activity. 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 at any other location.
You can lose money and still be running a business. While you experienced a loss, you had the expectation of earning a profit that was not met.
Types of Businesses
There are many types of businesses, however, the three main types are:
In North America, businesses are classified both by industry using the North American Industry Classification System (NAICS) and by size such as small-to-medium-enterprise (SME). Businesses may also be classified by their type of business model.
Forms of Business Ownership
The legal structure of businesses varies among countries and not all possible forms of business ownership are available in all countries. The most common forms are:
- Sole proprietorship
- Limited liability company (LLC)
A person who operates a business is described as self-employed, a business owner, a contractor, or sometimes an entrepreneur. The terms business owner and entrepreneur are not universally considered to be synonymous.
In the United States and Canada, not all businesses need to be licensed or registered that meet certain conditions.
Starting a Business
Before starting a business, make sure you have a clear understanding of what constitutes a business, as well as any business-related activities. Also know 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. You will also be prepared to develop a strong business plan for a successful start in the marketplace.