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Nature of Business

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Business Studies

Although all businesses are different, interestingly, they all share a common purpose: to add value to customers. Almost all businesses have distinct characteristics and values, so it is essential to first understand: what exactly is a business?

A business is an individual or group of individuals that work together to produce and sell goods and services for a profit. Businesses can either be run for profit, such as restaurants, supermarkets, etc., or non-profit organisations developed to serve a social purpose. Non-profit organisations do not earn profits from their services, as all earned profits are used in achieving social objectives. An example of this is the non-profit organisation SafeNight, which offers a secure way for domestic violence shelters and anti-trafficking service organisations to crowdsource funding for immediate shelter.

A business is defined as an organisation or entity involved in commercial, industrial, or professional activities providing goods or services to the public.

Business meaning

Business is a broad term but is usually referred to as the profit-generating activities which include the provision of goods or services wanted or needed by people in exchange for a profit. Profit does not necessarily mean cash payments. It can also mean other securities such as stocks or the classic barter system. All business organisations have a few common characteristics: the formal structure, aim to achieve objectives, use of resources, the requirement of direction, and the legal regulations controlling them. Based on the factors such as the degree of liability, regulation on tax exemptions, business organisations are divided into the following: sole-proprietorship, partnership, corporations, and limited liability companies.

Sole proprietorships - local food joints and grocery stores, etc.

Partnerships - Microsoft (Bill Gates and Paul Allen) and Apple (Steve Jobs, Ronald Wayne, and Steve Wozniak).

Corporations - Amazon, JP Morgan Chase, etc.

Limited liability companies - like Brake Bros Ltd., Virgin Atlantic, etc., are also corporations.

What is a business concept?

A business concept is a statement representing a business idea. It includes all the key elements – what it offers, target market, Unique Selling Proposition (USP), and feasibility of succeeding. It explains why the businesses’ USP provides itself with a competitive advantage in the market. A developed business concept is then added to the business plan for the successful implementation of the concept.

What is the purpose of business?

The purpose of every business is to offer/add value to their customers’ lives through the products or services they offer. Every business markets its offerings with the promise of making its consumers’ lives a bit better by adding value. And the purpose of business is to act on this promise. Businesses should make sure that their corporate vision reflects their purpose.

Different stakeholders may have different answers as to what the purpose of business is. A shareholder might say that the purpose of business is to create profit, as it would only benefit him when the business grows financially. A politician may believe that the purpose of a business is to create long-term jobs. But profit and job creation are means to run a business, as businesses cannot generally be sustained without profits and employees combined.

What is the nature of business?

The nature of a business describes the type of business it is and what its overall goals are. It describes its legal structure, industry, products or services, and everything a business does to reach its goals. It depicts the business’s problem and the main focus of the company’s offerings. A company’s vision and mission statement also provide an insight into its nature.

A mission statement provides an overview of the overall purpose of an organisation. It is a short statement that describes what the company does, who they do it for, and what its benefits are. The company vision describes what it aims to achieve in the future, to fulfil its mission. It should provide guidance and inspiration to employees.

The following aspects determine the nature of business:

  • Regular process the profit-generating processes that are regularly repeated.

  • Economic activity – activities that maximise profit.

  • Utility creation – a kind of utility the goods or services create for the consumer, such as time utility, place utility, etc.

  • Capital requirement – the amount of funding required for the business.

  • Goods or Services – types of goods (tangible or intangible) offered by the business.

  • Risk – the risk factor related to the business.

  • Profit earning motive – the businesses’ profit-earning motive.

  • Satisfaction of consumers’ needs – based on the consumers’ satisfaction.

  • Buyers and sellers – the type of buyers and sellers involved in the business.

  • Social obligations – all businesses have corporate social responsibilities to undertake.

List of natures of businesses

The characteristics grouped in the following categories help to describe the nature of businesses:

Nature of Business List of natures of businesses StudySmarterFigure 1. List of Natures of Business, StudySmarter Originals.

Types of businesses explained

The meaning of the various natures of business is explained below.

  • Public sector: this sector consists of only the government and companies controlled by the Government. Examples are The National Health Service (NHS), The British Broadcasting Company (BBC).

  • Private sector: this sector consists of privately (individually or collectively) run businesses that are run for profit. Examples are Greenergy (fuel), Reed (recruitment).

  • International sector: this sector includes exports from foreign countries. Examples are McDonald’s and Coca-Cola.

  • Technological sector: this sector relates to the research, development, or distribution of technologically based goods and services. Examples are Apple Inc. and Microsoft Corporation.

  • Sole proprietorship: this sector includes businesses run by a single person. There is no legal distinction between the owner and the business entity. Examples are local food joints and grocery stores.

  • Partnership: this sector includes businesses run by two or more people under a legal agreement. Examples are Microsoft (Bill Gates and Paul Allen) and Apple (Steve Jobs, Ronald Wayne, and Steve Wozniak). These started as partnerships.

  • Corporation: this sector includes a large company or a group of companies acting like one. Examples are Amazon and JP Morgan Chase.

  • Limited liability company: this sector includes a business structure wherein the owners are not personally liable for the debts or liabilities of the business.

  • Limited liability partnership: business structure wherein all partners have limited liability towards the business. Examples are Brake Bros Ltd and Virgin Atlantic.

  • Service business: this sector includes businesses that offer intangible products to their customers. They cater to their customers by providing professional advice, skills and expertise. Services may be business services (accounting, law, taxation, programming, etc.), personal services (laundry, cleaning, etc.), public services (recreational parks, fitness centres, banks, etc.), and many more.

  • Merchandising business: this sector includes businesses that buy products at wholesale prices and sell them at retail prices. Such businesses earn profit by selling products at a price higher than their cost price. Examples include all retail stores (stores selling clothes, drugs, appliances, etc.).

  • Manufacturing business: this sector includes businesses that buy products and use them as raw materials to produce their end product. The end product is then sold to the customer– for example, the purchase of eggs for cake production by a food manufacturer.

  • Hybrid business: this sector includes businesses practising all three activities. For example, a car manufacturer sells cars, buys old cars and sells them for a higher price after repair, and offers repairs for faulty car parts.

  • For-profit organisations: this sector includes businesses that aim to create a profit through their operations. Such businesses are privately owned.

  • Non-profit organisations: such organisations use the money they receive towards the betterment of the organisation. They are publicly owned.

Do businesses exist only to make a profit?

It is a common misperception that businesses exist only to make a profit. Although this was the previous understanding of business, this does not stand true anymore. Profit-creation is not a core reason for businesses to exist but is a means for a businesses’ existence - it can be considered a means to an end. Profits help a business to do better and improve its quality. Businesses will not survive in the market without making a profit; thus, this is considered a business objective. So businesses do not just exist to make a profit.

What is business? - Key takeaways

  • Business is defined as an entity involved in commercial, industrial, or professional activities that provide goods or services.

  • A business concept is a statement representing a business idea.
  • The purpose of every business is to offer/add value to their customers’ lives through the products or services they offer.

  • Business can be a for-profit or non-profit organisation.
  • Common forms of business organisations are sole-proprietorship, partnership, corporations, and limited liability companies.
  • The nature of business describes what type of business it is and what it does.

  • The nature of businesses can be differentiated based on the following characteristics operating sector, organisational structure, the type of products offered, the nature of the operation, and the profit orientation.

Frequently Asked Questions about Nature of Business

A business is an individual or group of individuals that work together to produce and sell goods and services for a profit. Businesses can either be run for profit, such as restaurants, supermarkets, etc., or non-profit organisations developed to serve a social purpose. Business means an entity or group of entities performing a commercial activity that involves some type of financial transaction, where both parties benefit from it.

The purpose of business is to add value to its customers and help them make their lives easier/better with its products or services. Businesses then better their product quality or widen their range of offering to further increase their customer satisfaction as this is very important for the longevity of the business and reflects the purpose of the business. 

A business plan is a document that guides a company to achieve its goal. It summarizes the operational and financial objectives of the business. It is a vital initial step to starting a business as it is a business’s road map to success. A business plan is an act of due diligence, which when executed correctly helps to save time and money.

 

A business model is a company’s plan that provides a holistic approach to understanding, designing, and testing a company’s plan for making a profit. It is important for both new and established businesses. It is used by investors to evaluate companies that interest them. 

It explains the following:

  • Type of product or service a company will sell.

  • How it intends to market that product or service.

  • The kind of expenses it will face.

  • How it expects to turn a profit.

The nature of the business can be written by looking into the following aspects of the business. The aspects are:


  • Regular process - the profit-generating processes that are regularly repeated. 

  • Economic activity - activities that maximize profit.

  • Utility creation - a kind of utility the goods or services create for the consumer, such as time utility, place utility, etc. 

  • Capital requirement - the amount of funding required for the business.

  • Goods or Services - types of goods (tangible or intangible) offered by the business.

  • Risk - the risk factor related to the business.

  • Profit earning motive - the businesses’ profit-earning motive.

  • Satisfaction of consumers’ needs - based on the consumers’ satisfaction.

  • Buyers and sellers - the type of buyers and sellers involved in the business. 

  • Social obligations - all businesses have corporate social responsibilities to undertake.

A statement describing the overall purpose of a business and its existence is called the nature of the business. It describes the types of business, its offerings, legal structure, industry, and the business's problem.  

A legal form of business agreement between two or more parties to jointly operate a business is called partnership business. Both parties invest money into the business and benefit from the profits or suffer the loss together. Some partnerships can also have partners with limited participation and limited liability. A partnership business can either be a general partnership, limited partnership, or a limited liability partnership.

Final Nature of Business Quiz

Question

What is the definition of a sole trader?

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Answer

A sole trader is a business that is owned and managed by one person. People operating a sole trader business work for themselves and are responsible for all business activities and decisions involved in running the business.

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Question

What is another term for a sole trader? 


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Answer

A sole proprietor. The terms 'sole trader' and 'sole proprietor' are synonymous.

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Question

Define unlimited liability. 


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Answer

Unlimited liability is when an individual is personally responsible for all the actions of their business. For a sole trader there is no distinction between the individual and the business. This means that the individual is personally responsible for their business losses and problems. For instance, if a sole proprietor borrows money from a bank and cannot repay their debt, they may risk losing personal possessions.

Show question

Question

Which one of the following is not a common characteristic of a sole trader?

  1. Confident in making decisions 

  2. Has business and management skills. 

  3. Can manage their time effectively. 

  4. Reports directly to their manager. 

Show answer

Answer

D.

Show question

Question

One of the main disadvantages of a sole trader is:

  1. It is very complicated to set up and register. 

  2. It can get quite lonely working on your own. 

  3. You have direct contact with clients, making it hard to keep up with all the communication. 

  4. You rely on your employees for a lot of different business procedures. 

Show answer

Answer

B.

Show question

Question

Why would someone choose to operate as a sole trader rather than work for a company?


Show answer

Answer

  • Flexible working hours.

  • Ability to make all decisions without having to report to a manager. 

  • Being 'your own boss'. 

  • Direct relation to the market and clients. 

Show question

Question

Does operating as a sole trader mean that a business will always be able to make the right decision?


Show answer

Answer

No, this is not true. A sole trader has the freedom to make all decisions on their own without the involvement of a manager or other team members. However, this does not mean that a sole trader will always make the correct decision for their business. It is easy to get demotivated, lack appropriate time management skills and become disorganized when you are working without supervision and the guidance of others.

Show question

Question

Does operating as a sole trader mean that you cannot hire anyone to help you with certain tasks?


Show answer

Answer

No, as a sole trader it is possible to hire employees. However, it is the sole trader's responsibility to make the right decisions when hiring help, as they are personally liable for all the operations and actions of their business.

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Question

Does operating as a sole trader mean that you are not allowed to take out a loan from the bank?


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Answer

As a sole trader, it is possible to borrow money from a bank or other financial institutions. However, it could be disadvantageous to do this since they often charge high interest rates. Banks do this because they are worried about the sole trader being able to repay their debts in case of failure.

Show question

Question

Which one of the following is not a benefit of operating as a sole trader?

  1. Easy to set up. 

  2. Quick and efficient decision-making process. 

  3. Unlimited liability. 

  4. Keeping all the profits the business makes. 

Show answer

Answer

B.

Show question

Question

Is it true that there are no downfalls to operating as a sole trader?


Show answer

Answer

No, this is not true. The disadvantages of a sole trader include: 

  • The risk of losing customers if you take time off

  • Pressure to deal with everything by yourself 

  • The sole responsibility for all business-related decisions 

  • The loneliness of working alone.

  • Unlimited liability. 

Show question

Question

Is it true that by hiring an employee, they are also responsible for the actions and decisions of the sole trader?


Show answer

Answer

No, the sole trader is individually and solely responsible for all the actions and decisions they make.

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Question

Name some of the disadvantages of the freedoms a sole trader experiences.


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Answer

One of the advantages of a sole trader is that they can set their schedule and work flexibly. However, this can result in the sole trader having to work long hours and not being able to take any holidays.

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Question

Name three examples of a sole trader. 


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Answer

Several different types of jobs are suitable for a sole trader:

  • Plumbers 

  • Electricians 

  • Gardeners

  • Copywriters

  • Artists

  • Taxi drivers

  • Nannies

Show question

Question

Name and outline an example of someone who would want to set up a sole trader.


Show answer

Answer

An example of someone who would want to set up as a sole trader would be a freelance copywriter. They would enjoy the benefits of managing their own schedule, making their own business decisions and the freedoms that come with being their 'own boss'. Their business can respond directly to the needs of her clients, engage with her clients on a personal level, and make decisions freely on the number of clients they take on.


Show question

Question

What is incorporation?

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Answer

Incorporation is a process through which a business establishes itself as a company. Through incorporation, the business establishes that it is its own legal entity, separate from its owners and shareholders. It allows the company to benefit from limited liability. 


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Question

What is limited liability?

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Answer

Limited liability ensures that the personal assets of the owners and shareholders of a company are safe. If the company were to experience financial troubles, shareholders would only lose up to the amount they originally invested in the company when they bought shares. Limited liability ensures that their personal belongings are kept safe, even if the company is struggling financially.

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Question

What is the difference between limited liability and unlimited liability?


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Answer

In limited liability companies, the company is a separate legal entity to its owners. This means that they are not personally responsible for the debts of the company. In an unlimited liability business, the owner is personally responsible for the debts of the business. This means that if the business were experiencing financial difficulties, the personal assets of the owner are at risk.

Show question

Question

Is it possible to set up a limited liability sole proprietorship?


Show answer

Answer

No, it is not possible to set up a limited liability sole proprietorship. The owner of a sole proprietorship has unlimited liability, meaning that their personal belongings and assets are at risk if the business is experiencing financial difficulties. 


Show question

Question

What is a dividend?


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Answer

A dividend is a part of the firm's profits that is paid to its shareholders. The more shares an owner has in the company, the more dividend payments they receive.

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Question

Are dividend payments equal to the original investment shareholders made into the firm?


Show answer

Answer

No. Dividends are paid based on the profits the company has made. This does not mean that shareholders receive the value of their original investment each time a dividend is paid to them.

Show question

Question

Why do companies have limited liability?

  1. Because owners do not want to be taxed. 

  2. Because they do not want to pay dividends. 

  3. Because they do not want to be incorporated. 

  4. Because owners do not want to be personally liable for losses. 

Show answer

Answer

D.

Show question

Question

A difference between a limited liability company and a sole proprietorship is that: 


Show answer

Answer

A limited liability company can own property and a sole proprietorship cannot

Show question

Question

The difference between a private limited company and a public limited company is that:


Show answer

Answer

Private limited companies can decide who they sell shares to but public limited companies cannot

Show question

Question

What type of company would be at risk of a takeover?

  1. Private limited company 

  2. Public limited company

  3. Sole proprietorship 

  4. Partnership

Show answer

Answer

B.

Show question

Question

Imagine you are running a family business. The business is doing really well, so you decide you are going to incorporate your business. What type of company would you set up if you did not want to risk the family business getting into the hands of non-family owners?


Show answer

Answer

You would set up a private limited company. This type of company would ensure that the owner (you) has control over who the company sells its shares to. 


Show question

Question

What are some of the advantages of a limited liability company?


Show answer

Answer


  • Owners are not personally responsible for the losses and debts of the company - they have limited liability.

  • The company is a separate legal entity.

  • No restriction on the number of owners.

  • Easier access to capital and resources (compared to a sole proprietorship).

  • The business can raise finances through share capital. 

  • Flexibility when it comes to company management.

  • The potential to benefit from economies of scale. 

Show question

Question

What are some of the disadvantages of a limited liability company?

Show answer

Answer

  • It is expensive to set up if the company is just starting up. 

  • You must pay your shareholders dividends. You cannot keep all the profits your company makes.

  • Takeovers are also a possibility for public limited companies, which could lead to a loss of control for the current owners. 

Show question

Question

One of the disadvantages of a limited liability company is that: 

  1. There are restrictions on the number of owners.

  2. There are restrictions on the number of shares you can sell. 

  3. The owners are personally liable for the debts of the company. 

  4. The company is potentially at risk of takeovers.

Show answer

Answer

D.

Show question

Question

Other than limited liability, what are some of the advantages of operating as a limited liability company?


Show answer

Answer

  • Easier access to capital and resources (compared to a sole proprietorship).

  • The business can raise finances through share capital. 

  • Flexibility when it comes to company management.

  • The potential to benefit from economies of scale. 

Show question

Question

What is the definition of a non-profit business?

Show answer

Answer

A non-profit organization is a social enterprise that has social aims and operates to benefit a community or society as a whole. The mission of non-profit organizations can range from community service projects, childcare, recycling companies, apprenticeship programs, etc.

Show question

Question

What is one of the key differences between a non-profit and a for-profit organization?


Show answer

Answer

A non-profit is an organization that is not set up to make profits. For non-profit organizations, the goal is not to maximize profits. Rather, their objectives are to operate for the benefit of a community or society as a whole.

Show question

Question

What are the three different types of non-profit organizations?

Show answer

Answer

  • Philanthropic organizations

  • Advocacy organizations

  • Mutual benefit organizations

Show question

Question

What are the three different types of public sector businesses?


Show answer

Answer

  • Public corporations

  • Public services

  • Municipal services 

Show question

Question

What is the general mission and purpose of non-profit organizations?


Show answer

Answer

The mission and purpose of non-profit organizations are to create social benefits, also known as social capital. By creating social capital, non-profit organizations aim to solve an existing problem or issue in order to advance humanity in a certain way.

Show question

Question

What is the definition of privatization?


Show answer

Answer

A process in which the state transfers their businesses or services from public to private ownership.  


Show question

Question

Give an example of a potential downfall of privatization.

Show answer

Answer

A potential problem that could arise as a result of privatization is short-term unemployment.

Show question

Question


Which of the following statements about non-profit organizations is true?

  1. They do not make any profits. 

  2. Stakeholders are not involved in the business. 

  3. They do not distribute profits. 

  4. They can only be established as hobbies. 

Show answer

Answer

C.

Show question

Question

Which of the following statements about co-operatives is false?

  1. They are run for the benefit of the government.

  2. Co-operative are a common type of mutual business. 

  3. Co-operatives must represent social responsibility. 

  4. Co-operatives are run by members who each have a say in the management of the business.

Show answer

Answer

A.

Show question

Question

Which one of the following does not make up one of the ethical values ​​of a co-operative?

  1. Honesty 

  2. Social responsibility 

  3. Adaptability

  4. Openness

Show answer

Answer

C.

Show question

Question

What are the different types of co-operatives?


Show answer

Answer


  • Consumer co-operatives

  • Worker co-operatives

  • Producer co-operatives 

Show question

Question

What is the difference between a public corporation and a public service?


Show answer

Answer

A public corporation is an enterprise owned by the state but offers products and services to both private and public sectors. A public service includes organizations that provide services to the entire nation. Public corporations include the BBC or Channel 4 television. Public services include the NHS or the HMRC.

Show question

Question

Which one of the following statements is correct?

  1. Non-profit organizations are all charities. 

  2. Non-profit organizations only benefit their members and donors. 

  3. Non-profit organizations do not make any profits.

  4. Non-profit organizations aim to benefit the community. 

Show answer

Answer

D.

Show question

Question

What is a municipal service?


Show answer

Answer

These are services offered by local governments and councils. Examples include libraries, street lighting, and municipal parks and recreation.

Show question

Question

Which one of the following statements holds true for public services?

  1. Public services only serve local governments.

  2. Public services only serve national governments.

  3. Public services serve the whole nation. 

  4. Public services only serve local communities.

Show answer

Answer

C.

Show question

Question

What is a franchise?

Show answer

Answer

A franchise is a business, which has an established owner, that sells the rights of operating the business to a franchisee. Franchising is a two-party contract. The franchisor provides a set of information to the franchisee on how to run the business. The franchisee essentially receives the whole 'business package' from the franchisor.

Show question

Question

What is a franchisor?


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Answer

A franchisor is an established business that sells the rights to its name. The franchisor also provides training and input to the franchisee on how to run the daily operations and manage the franchise. The franchisor receives royalty payments from the franchisee.

Show question

Question

What is a franchisee?


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Answer

The franchisee is the party that purchases the rights to the franchise. Upon purchase, they receive the right to the business name and are allowed to operate their business with the same business model as the franchisor. The franchisee is also granted the right to use the name, branding and marketing as the franchisor.

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Question

What is a royalty payment?


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Answer

A royalty payment or royalty fee is a fee the franchisee must pay to the franchisor. This fee is usually calculated based on a percentage of the franchisee's yearly sales and profit. They must pay this fee in order to continue operating as a franchise.

Show question

Question

What is a franchising system?


Show answer

Answer

In a franchising system, individual business owners are a tightly knit group, whose operations are directed and controlled by the franchisor.

Show question

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