Business activity refers to the core functions of a business to generate revenue. Understanding the three types of business activities is critical to preparing a business plan and gaining a greater knowledge of how to manage a business.
Regardless of the type of business activity, all business activities generate the majority of a company’s cash flow and, ultimately, their profitability.
The description of business activity is simple and set in stone. Business activities relate to all economic activities carried out by a business. A business activity may be direct or indirect and involves making the goods/services available to the consumer.
All types of business activity are dependent on each other to ensure customers are satisfied and that the business can continually meet the needs of its target market.
Please Note: Activity can also include marketing and finance, rather than simply product/service-related activities.
It is important to know that there are three main types of business entities: sole proprietorship, partnership, and corporation. Although there are many other types of business entities, most small businesses will fall in one of these three categories. For this reason, we’ve also included details on limited liability corporations (LLCs).
A sole proprietorship is the simplest and most common form of business. A sole proprietorship is an unincorporated business that operates under the personal supervision of one individual. Often, there is no distinction between the owner and the business because the personal resources of the owner are also used to fund it. In the case of a sole proprietorship, all income and expenses are assumed by the owner personally, thereby incurring all potential liabilities for the business.
A limited partnership is a type of business entity in which the general partner (GP) decides the ratio of individual partners and the amount of capital that each receives. This means that there are no specific time limits or allowable sales for a limited partnership, unlike with a corporation or general partnership.
A general partnership is a type of business entity in which the partners have unlimited liability for the debts and obligations of the business. This means that each partner can be held responsible for financial losses incurred by the company, even if they did not cause them.
Corporations are formed by filing articles of incorporation with the secretary of state (state where company's registered) and having their articles approved.
While these entities can have many practical advantages, they also offer some substantial restrictions due to the nature of the structure that requires high levels of responsibility and accountability on the part of partners.
An "C" corporation, or "C" corp, is a type of company that has a separate legal entity from its owners and shareholders. The company has shareholder records – it has stockholders and board of directors like any other company.
A C Corp derives its income primarily through the filing of a single federal tax return. In general, the business entity must pass three tests in order to qualify for being classified as an eligible corporation: (1) existence test, (2) asset ownership test and (3) where income is primarily obtained test.
An "S" corporation, or "S" corp, combines elements of a partnership or sole proprietorship with double taxation of a standard business entity. This unique company structure provides by default that the company has no separate legal existence from the owners who own its shares. That makes it easier to have pass-through taxation where profits are taxed at the individual owner level instead of at the business entity level.
A limited liability company (LLC) is a hybrid business structure that's designed to combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs are very popular because they offer both the tax benefits of partnerships and corporations, and they provide personal protection from business losses.
There are multiple types of business activity to consider. Any primary business activity will fall under one of three categories.
Operations will include any activity needed to provide a service or create a product. These are essential business functions because organizations have no products or services available for their customers without operational activity.
This type of business activity may involve acquiring raw materials, putting those resources into something that can be sold, and managing production schedules.
In short, anything that creates a saleable product or service counts as an operational business activity.
Businesses need customers to maintain cash flows and ensure that they achieve profitability. Marketing operations go beyond creating ads. They are intricately connected with the products and services sold by the company.
Marketing activities involve understanding the needs of customers and how to address their pain points. When it comes to marketing, types of business activity may include determining product specifications, identifying customer needs, and uncovering the best distribution channels.
Money is the lifeblood of any organization. Run out of money, and the business fails. Financial operations create the ecosystem that ensures the future survival of an organization.
Examples of this type of business activity include creating business budgets, determining suitable investments for the business, and preparing financial reports.
Breaking down which type of business activity each organization is involved in helps understand the business world better domestically and globally.
Building a business is tough, especially if you are moving into a new sector or launching a small business for the first time.
Get help in managing your organization’s finances and maintaining regulatory compliance worldwide with the award-winning Chicago CPA firm—Porte Brown. To learn more about our tax and accounting services, contact the team today.
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