Business

• 1. Introduction

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  Business is the practice of making one's living, or making money, by producing or buying and selling products such as goods and services. The source offers a second, blunter definition: any activity or enterprise entered into for profit. That single word, profit, sits at the center of nearly every working life. In almost all countries, most individuals are employed by a business, formal or informal, whose primary goal is to generate profit through the creation and capture of economic value above cost. So who counts as in business, and who does not? Why does the law treat a corner shop owner and a corporation as different kinds of creatures? And how did the rules governing trade reach so far back that a code from nearly four thousand years ago already worried about shipping costs? The answers run through liability, taxation, the activities inside every firm, and a body of law that has been evolving for a very long time.

• 2. Who Bears The Risk

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  A sole proprietor has unlimited liability for all obligations incurred by the business, whether from operating costs or from judgments against the business. The owner operates alone and may hire employees, but every asset of the business belongs to that person. That includes computer infrastructure, inventory, manufacturing equipment, retail fixtures, and any real property the proprietor owns. A business entity is not necessarily separate from the owner, and creditors can hold the owner liable for the debts the business has acquired. The proprietor is personally taxed on all income from the business. A partnership spreads ownership across two or more people, yet in most forms each partner still carries unlimited liability for the debts the business incurs. The three most prevalent types of for-profit partnership are general partnerships, limited partnerships, and limited liability partnerships. General partners, plus anyone who personally owns and operates a business without creating a separate legal entity, are personally liable for everything the business owes. Where two or more people own a business together but fail to organize a more specialized vehicle, the law treats them as a general partnership by default. No paperwork or filing is necessary to create one.

• 3. The Separate Person

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  Corporations are separate and unique legal entities from their shareholders, which is why they provide limited liability for their owners and members. The word corporation derives from the Latin corpus, meaning body, and the source notes that the Maurya Empire in Iron-Age India accorded legal rights to business entities. A privately owned, for-profit corporation is owned by its shareholders, who elect a board of directors to direct the corporation and hire its managerial staff. It can be privately held by a small group, or publicly held, with shares listed on a stock exchange. This protection comes at a price. Corporations are more complicated and expensive to set up, and they must file quarterly or annual financial information with national or state securities commissions or company registers. They are subject to corporate tax rates, unlike a sole proprietorship, whose structure does not allow for corporate tax rates at all. Corporations are also required to pay tax much like real people, and in some tax systems this gives rise to double taxation. First the corporation pays tax on its profit. Then, when those profits are distributed, individuals must include the dividends in their personal income, where a second layer of income tax is imposed.

• 4. A Catalogue Of Forms

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  A cooperative, or co-op, is a limited-liability business that differs from a corporation in one telling way: it has members, not shareholders, and they share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives, and the source calls them fundamental to the ideology of economic democracy. A franchise works on a different logic. Entrepreneurs purchase the rights to open and run a business from a larger corporation. Franchising in the United States is widespread, and the source reports that one out of twelve retail businesses there is franchised, with 8 million people employed in a franchised business. The company limited by guarantee is common in England, and it is built for non-commercial purposes such as clubs or charities. Its members guarantee the payment of certain, usually nominal, amounts if the company goes into insolvent liquidation, but otherwise hold no economic rights in it. The company limited by shares is the most common form used for business ventures, defined as one in which each shareholder's liability is limited to the amount individually invested. Rarer creatures survive too. Charter corporations were the only types of company before modern companies legislation, and the Bank of England is named as a corporation formed by a modern charter.

• 5. Inside The Firm

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  Accounting, the source notes, was established as a modern field by the Italian mathematician Luca Pacioli in 1494, and it has been called the language of business. It measures the results of an organization's economic activities and conveys that information to investors, creditors, management, and regulators. Human resources is a far younger discipline; HR departments are described as relatively new, having begun developing in the late 20th century. The term human resource was coined by John R. Commons in his novel The Distribution of Wealth. Information technology departments support computer systems in pursuit of enterprise goals, led by a chief information officer. The source offers one vivid measure of scale: Ford Motor Company in the United States employs more than 3,000 team members with advanced computing, analytical, and technical skills. Marketing carries its own formal definition, attributed to the American Marketing Association, as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. Safety is the line item easiest to overlook, yet injuries cost businesses billions of dollars annually. New technologies such as wearable safety devices and online safety training keep being developed to push employers beyond the canary in the coal mine.

• 6. Raising The Money

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  When businesses need to raise money, called capital, they sometimes offer securities for sale. Capital may be raised by private means, by an initial public offering on a stock exchange, or in multiple other ways, including crowdsourcing on the Internet, venture capital, bank loans, and debentures. Going public through an IPO means part of the business will be owned by members of the public. It requires organization as a distinct entity, disclosure of information to the public, and adherence to a tighter set of laws and procedures. A general partnership, the source is clear, cannot go public. The world's trading floors anchor this system. Major stock exchanges named in the source include the Shanghai Stock Exchange, the Singapore Exchange, the Hong Kong Stock Exchange, the New York Stock Exchange and NASDAQ in the US, the London Stock Exchange in the UK, the Tokyo Stock Exchange in Japan, and the Bombay Stock Exchange in India. Ownership itself can stack into hierarchies. A parent company owns enough voting stock in another firm to control its management and operations by influencing or electing its board of directors, and that second company is deemed a subsidiary, which may still keep a board of its own.

• 7. The Long Reach Of Law

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  The Code of Hammurabi dates back to about 1772 BC, and it already contained provisions relating to shipping costs and to dealings between merchants and brokers. The need to regulate trade, resolve disputes, and govern commerce helped shape the creation of law and courts in the first place. Today that body of rules is vast. The source observes it is often difficult to compile all the laws affecting a business into a single reference. Some trades cannot operate without a license at all. The source lists law, medicine, piloting aircraft, selling liquor, radio broadcasting, selling investment securities, selling used cars, and roofing among professions that require special licenses. Public companies face their own oversight. In the United States these rules are primarily enforced by the United States Securities and Exchange Commission, with the China Securities Regulation Commission in China, the Monetary Authority of Singapore, and the Securities and Futures Commission in Hong Kong playing comparable roles. Intellectual property carries its own legal architecture. In the United States, patents and copyrights are largely governed by federal law, while trade secrets and trademarking are mostly a matter of state law. To guard trade secrets, companies may require employees to sign noncompete clauses. The complexity has grown so steep that the source notes certain corporate transactions can require a team of five to ten attorneys.