The Nature and Purpose of Business

Nature and Purpose of Business:

Business refers to the process of buying and selling either goods or services. It is an economic activity that focuses on the purchase of raw materials and the sale of finished goods. The businessman owns and manages the organization that he/she established. In this article, find out about the nature and purpose of business.

A businessman is also known as an entrepreneur. Moreover, there are different types of entrepreneurs based on the type of businesses.

  1. Trading entrepreneurs
  2. Agricultural entrepreneurs
  3. Technical and non-technical entrepreneurs
  4. Men entrepreneurs
  5. Women entrepreneurs
  6. Manufacturing entrepreneurs
  7. Private entrepreneurs and state entrepreneurs.
  8. Small-scale, medium-scale and large-scale entrepreneurs.
  9. Innovative entrepreneurs
  10. Imitating entrepreneurs
  11. Drone entrepreneurs

However, an entrepreneurial organization doesn’t necessarily have to be a company or a partnership. It does not have to be a formal organization. The activities undertaken by retail vendors, street peddlers and local flower vendors are also called businesses.

DIFFERENT FORMS OF BUSINESS OWNERSHIPS

Discussed below are the different forms of business organizations:

Sole Proprietorship

A single person owns and manages a sole proprietorship. The person who owns this organization is either called the sole trader or the sole proprietor. The owner operates this establishment all by himself. He may or may not hire additional help. The sole proprietor is responsible for making decisions when it comes to his organization. He is the sole decision maker of this firm. A sole trader has an unlimited liability against all the obligations of the establishment.

The sole trader bears all the loss incurred by the establishment and enjoys all the profits and gains so earned. All organizational assets belong to the sole trader. Therefore, the sole trader is the sole analyst, sole accountant and sole decision maker of his establishment.

For examples:  the street peddler, local supermarket, locality vegetable vendor and the local flower vendor are all sole proprietors.

Partnership Firms

Unlike the sole proprietorship establishment, partnership firms have more than one decision maker. In other words, partnership firms involve two or more people. There are 2 main categories of partnership firms. The general partnership allows all partners to have unlimited liabilities. Whereas, the limited partnership allows partners to have limited liabilities against the obligation of the firm.

In partnership firms, the profits made are proportionately distributed among the partners. Profit distribution ratios, however, decide the proportion of the profit that each partner receives. The Memorandum of Association (MOA) and the Article of Association (AOA) should state the profit sharing ratio of the partners.

Accordingly, the Memorandum of Association is a document that includes fundamental information about the firm. It provides clarity about the inception and incorporation of the partnership firm. Thus, the MOA contains information about:

  • date of incorporation
  • the official address of the firm
  • partners of the firm
  • nature of each partner
  • admission details of each partner
  • capital investment by each partner
  • nature of the firm, etc.

Similarly, the Article of Association is a document that includes fundamental and an in-depth information about the governing rules of the firm. It provides clarity about the functioning and managerial decisions of the firm. Thus, the AOA contains information about:

  • procedure for resigning of a partner
  • profit sharing ratio
  • procedure for admitting a partner
  • procedure for retirement of a partner
  • loss sharing proportion, etc.

Joint Stock Company

A Joint Stock Company (JSC) is also called ‘corporation’. Stockholders is another name for the owners of a JSC. Not only do they have a limited liability but the organization has an independent identity of its own. Therefore, this legal identity is different from that of the owners.

THE NATURE OF BUSINESS

Discussed below are a set of unique essential natures/ features/ characteristics of a business.

A business:

  1. Is an economic activity that deals with the purchase and sales of commodities and services. Every activity undertaken by it is supported by the exchange of money. Not only do businesses sell their goods or services for profit but they also purchase raw materials. As a result of this purchase, businesses have to shed out funds in order to acquire resources that can bring them profits.
  2. Focuses on profits because profits are the entrepreneur’s (and employee’s) earnings. Profits are different that incomes or revenues. They refer to that margin of income which is not a part of the cost price. Thus, profit = selling price – cost price.
  3. Is a continuous process of buying and selling. Raw materials and inventories are crucial for the functioning of a business. As a result of the business activities, the raw materials and inventories undergo conversion into finished goods or services. These finished items are then marked at a price higher than the cost price and the cost of materials (or inventory). Finally, they are ready to sell at a specific profit margin. This continuous process of buying and selling is crucial to keep the business running.
  4. Undergoes risks and uncertainties related to loss of goods via theft. Risks of accidents within the business premises is a crucial matter that all firms must address and prepare for. Insurance of the entire firm with the assets and inventories is also very important. Similarly, there is also the risk of incurring a loss and one should prepare for these contingencies.

PURPOSE OF A BUSINESS

Discussed below are a set of purposes/ objectives of a business undertaking.

  1. Profit motive – The primary motto or purpose of undertaking a business is to make profits. Thus, the creation of profit is of paramount importance. Similarly, along with profit creation, profit maximization is equally as important.
  2. Quality goods – Manufacturing firms and other technology firms should focus on providing qualitative goods to their consumers or customers. A strong inspection process should be in place. Consequently, any goods or products with defects must be scrapped and not sold.
  3. Quality services – Consultancy firm, hospitals, law firms and other accounting and bank sector firms should focus on providing qualitative services to their customers.
  4. Avoiding loss – Incurring losses is never an option for businesses. It is best if the business goes to extreme extents to work ethically and avoid incurring minute or huge losses. A loss not only reduces the income but also decreases the organization’s reputation and goodwill.
  5. Abiding by regulations – Abiding by regulations laid down by the state and the central government is of paramount importance. For instance, the Competition Act, the Indian Companies Act, the Environment Act and many other Acts. A morally strong ethical business ensures to undertake business activities within the limits of these rules.
  6. Social responsibilities – It is the corporate social responsibility (CSR) of a business to allocate a portion of their earnings to develop the surroundings. They could either focus their CSR activity towards the environment, children welfare, women welfare, animal welfare, etc. An ethical business would make their CSR activities an important priority in order to enhance the welfare of the society around them.

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