Types of Business Businesses are classified in accordance with the primary activity/ies they perform to earn profit. Originally, businesses are categorized into three major types, namely: commerce, industry and service. However, since the classification depends on the primary activity that they perform, and considering the fact that there are businesses which inevitably perform two or more primary business activities to produce their goods or service to generate profit, it is, therefore, important to consider hybrid as the fourth major type of business. 1. Commerce The word “commerce” commonly refers to trade or business and trade usually means the buying and selling or exchanging of goods and services between people, firms and countries. For purposes of classification, commerce refers to business firms which are engaged in the following business activities:- a. Buying and Selling s A buy-and-sell enterprise is simply the means of purchasing a new or second-hand goods and reselling it for a higher cost to gain profit. Usually, the quantity of goods involved in the transaction is lesser as compared to merchandising. The difference between the cost in buying the good and the cost in selling same automatically becomes your profit. The principle in buying and selling is simple: Buy low, sell high. Now that the world is under pandemic, buying and selling is often done on-line. b. Trading Trading, according to Webster Dictionary, means exchange, interchange or swap of goods. Trading companies work on buying specialized range of products, maintain a stock or a shop and deliver said products to customers, Importers or wholesalers maintain a stock and deliver products to shops or large end customers through Business-to-Business or B2B transaction. They work in a large geographical area, while their customers, the shops, work in smaller areas and often in just a small neighborhood. Examples of trading business are share brokers, forex trading, stocks trading, real estate brokers or agents of any good or service, import and export business. c. Marketing Marketing is the process of interesting or convincing potential customers and clients in your products and/or services. It involves researching, promoting, selling and distributing your products or services. Marketing is very different from selling in the sense that the former is business-oriented and focuses on customer satisfaction. Selling, on the other hand, focuses on the product being sold. Furthermore, business planning and even customer relationship in marketing is long term unlike in selling which is short term. What is important in selling is the transfer of title and possession and not customer satisfaction. Examples of marketing companies in the Philippines are Digital Marketing Agency, The Neilsen Company (Phils), advertising companies, and others. d. Merchandising Merchandise refers to products available for sale particularly in a retail setting. Merchandising, therefore, is the means of promoting and selling your products to potential customers. A merchandising business, sometimes called merchandisers, is one of the most common type of business we interact with daily. It is a business that purchases finished products in large quantities direct from a distributor or manufacturer and resells them to retailers or consumers. There are two types of merchandising businesses, namely: d.1 Retailer – a merchandising business that sells goods directly to the customers; and d.2 Wholesaler – a merchandising business that sells goods to retailers. Examples of merchandising business are those buying goods in large quantities such as: books from publishing companies, cigars and tobacco from manufacturers, duty-free shops, hardware stores, gadgets shops, department stores, grocery stores, clothing and accessories, and many more. 2. Industry Businesses classified as industry are those which are engaged in the production of goods intended for the ultimate consumption called as consumer’s goods; and those intended for the use of businesses or industries called as producer’s goods. Industry business is classified into four (4) categories, as follows:a. Genetic Industries. These are the industries which engage in agriculture, forestry and fish culture. b. Extractive Industries. Businesses that perform extraction of goods from the natural resources such as mining, hunting, fishing and lumbering. c. Manufacturing Industries. Businesses which convert raw materials into finished product such as manufacturing of drugs, food, sardines, meat processing, plastics, cigars, tobacco, household utensils, bags, gadgets, cars, furniture, etc. d. Construction Industries. These are the firms that engage in the construction of houses, roads, bridges, malls, and any other construction services. 3. Services This kind of business primarily sells, not a product but, a service to its customers. Services offered may be in the form of any of the following:a. Personal Service such as barber shops, coffee shops, computer shops, dress/tailoring shops, beauty shops, transportation service and the like. b. Recreational Service like moviehouses, gyms, theaters, play stations, and resorts. c. Financial Services such as lending institutions, 5/6 lenders, banks, insurance companies, credit unions and cooperatives. 4. Hybrid Hybrid businesses are companies that are engaged in more than one type of business activity. A restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine or soft drinks (buying and selling), and serves the customer’s orders (service). Other examples of hybrid business are bake shops, water refilling stations, ABC Real Estate Development & Engineering Services, and many more. Forms of Business Organization It’s not only the type or kind of business that the entrepreneur has to consider and decide on wisely before starting an enterprise but also the structure or form. Determining your business structure is important since it will define the costing, tax, ownership, and jurisdiction requirements of your enterprise. Many start-up entrepreneurs opt to do business alone or just with their own family members, probably due to financial concerns, better personal control, and possible disagreement. Anyway, business may change its structure anytime as long as owners meet the qualifications set by the licensing office such as the Securities and Exchange Commission (SEC) for upgrading their business organization. Here’s an overview of the different forms of business structures that will guide you in choosing the best structure for your company 1. Sole Proprietorship A sole proprietorship is an unincorporated business owned by only one person. It is the simplest and easiest form of business to set-up since there are relatively few regulation requirements for sole proprietorships. Any profit earned by the business goes directly to the owner and enjoys tax benefits because they are taxed only once, as income of the business is considered the owner’s personal income. Finally, sole proprietorship requires relatively small amount of capital makes all decisions and is in complete control on the business operation. On the other hand, the owner of the business shares the same identity as the company. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them. In case the owner passes away or declares bankruptcy, the business is dissolved. Considering that there is only one owner, raising funds for additional working capital will be limited, thus, the owner may result to making consumer loans. 2. Partnership A partnership is a business owned by two or more persons who voluntarily enter into a Partnership Agreement which may be made orally or in writing. The partners, who usually have complementary skills needed by the business, contribute resources into the entity. Like in sole proprietorship, profits are also taxed only once. Partnership is easier to establish as compared to a corporation. Decisionmaking is divided among the partners. The death, inability to carry out specific responsibilities, bankruptcy, or the desire of a partner to withdraw automatically terminates the life of the partnership. Every time a partner withdraws or is added, a new partnership agreement is required if the business will continue to operate as a partnership Unlike in sole proprietorship wherein the profit goes to only one person, the sole owner, in partnership, the profit, as wells as losses of the business, is divided among themselves. Although partnership has also a separate juridical personality from that of each partners (even if they failed to register their partnership agreement with the Securities and Exchange Commission [SEC]), the owners are still responsible for the liabilities of the firm. Partnerships are taxed just like corporations and Philippines allows foreigners only up to 40% of ownership in a partnership. There are two (2) kinds of partnership in the Philippines, as follows:a. General Partnership Every partner in general partnership is considered as participating in the operations of the business. Each partner has no full control or autonomy over the business. They are all liable for the business decisions and debts of other partners, thus, have unlimited liabilities and puts one’s personal assets at risk. This means that every partner’s personal assets can be used to repay the liabilities of the partnership and each partner is responsible for every other partner’s actions. For example, Manny and Sony are general partners. If Manny is sued for any malpractice, Sony’s personal assets may be claimed against the lawsuit. b. Limited Partnership Limited partnerships are called as such since some partners will have unlimited liability, while others will have liability equal only to the amount of their capital contribution. A partner can lose only he amount of capital he has invested in the business. Creditors cannot go after the personal assets of the limited partners who acts only as a financial contributor because he has relatively little power, thus, not allowed to be actively involved in the management. Nevertheless, he has the right to be informed of all business matters relating to the company and to share in its profits. This type of partnership has at least one general partner who takes an unlimited liability for the partnership and manages the operations of the company. There are also limited partners in limited partnerships. Limited partners only take on as much liability as their financial stake in the business. However, as limited partners, they are not involved in management decisions and do not have any direct control over the company. 3. Corporations Corporations are owned by a minimum of five (5) and a maximum of 15 shareholders. Each of the incorporators must hold at least one share in the corporation, and their liability is limited only to the amount of their capital share. In the Philippines, a corporation is treated legally as an artificial being having a personality separate and distinct from that of the stockholders who own the corporation. A corporation is more complicated to create as compared to the other three forms of business organizations. Articles of Incorporation must be drafted and registered in the Securities and Exchange Commission. Ownership is represented by shares of stock. A foreigner can have up to 40% ownership in a corporation. The owners (stockholders) enjoy limited liability but have limited involvement in the company's operations. It is the board of directors, an elected group from the stockholders, who controls the activities of the corporation. As a rule, the shareholders are only responsible for the payment of their own shares. As owners, the shareholders are entitled to receive the profits of the company, usually in the form of dividends. The shareholders also elect the directors of the company who will be responsible for day-to-day activities. They owe a duty-of-care to the company and must act in its best interest. They are usually elected annually. The life span of a corporation is fifty (50) years. 4. Cooperative A cooperative is a business organization owned by a group of individuals and is operated for their benefit. The persons making up the group are called members. Cooperatives may be incorporated or unincorporated. Here are the top cooperatives in the Philippines:- • • • • • Philippine Army Finance Center Producers Integrated Cooperative (PAFCPIC) ACDI Savings and Credit Cooperative First Community Cooperative Cooperative Rural Bank of Bulacan Cebu CFI Community Cooperative
