Business, complex economic operations concerning those functions that govern the production, distribution, and sale of goods and services for the benefit of the buyer and the profit of the seller. The economic transformation ushered in by the Industrial Revolution brought with it new and constantly changing ways of conducting business, and the creation of new forms of business organization that themselves have subsequently evolved to a greater or lesser degree. The main forms of business organization are described below.
II SOLE PROPRIETORSHIP
A sole proprietor is in sole charge of a business and is responsible for its success or failure. Unless an activity is specifically prohibited by law, no line of business is closed to an owner.
The chief advantages of sole proprietorship for the proprietor are that the owner is in total control of the business (subject to the requirements of anyone who has provided finance for it), and is entitled to all the profit. The main disadvantage is that the owner is also personally responsible for all the losses and debts of the business. This is called unlimited liability.
A partnership is a business association of two or more people who have formally agreed to work together, each contributing skills, labour, and resources to the venture in return for an agreed share of the profits. The formal partnership agreement usually covers all the partners’ rights, responsibilities, and obligations, the circumstances in which their partnership may be dissolved, and a specific length of time during which the partnership is in effect.
Unless a limited partnership has been established, all parties share the burden of loss and debts.
IV THE CORPORATION
As businesses grew, it often became difficult for sole proprietors or partnerships to raise the required finance. It was to overcome this problem that the ingenious concept of the corporation, or company, came into being. A company is a legally defined business entity separate from its owners: it lives on if they die; it can own assets; it can sue and be sued in the courts. The legal requirements and limitations regarding the setting up of a company or corporation are determined by company law.
The concept of the company or corporation allowed investors to acquire a fixed ownership stake in a business, and thus get a much greater return than they would by collecting interest on money lent to it, provided that the business was successful. A further refinement was the concept of limited liability, whereby, however badly a company performed, its owners could only be held liable up to the amount of their investment (unless they had given additional personal guarantees). Any such investor who had a share in the ownership of a company knew the absolute extent of their risk; unlike sole proprietors, for instance, whose liability and risk is unlimited.
The ways in which corporations and companies operate vary considerably, and they may informally be classified in several ways. Vertical integration characterizes companies that engage in the different stages of manufacturing or marketing a product. Horizontal integration embraces companies engaged in the sale of the same or similar products. A conglomerate is where a holding company controls other companies conducting diverse types of business, ranging perhaps from financial services to electronics manufacture.
In modern business, there are complex webs of interest and ownership in which companies are connected with other companies through shareholdings or business alliances. These are further complicated by the large stakes held in businesses by banks and institutional investors such as pension funds. A multinational is a company that transacts business and has interests or branches in many countries. These huge concerns generate revenues that can be larger than the gross domestic product of some of the countries in which they operate.
V REGULATION OF BUSINESS BY GOVERNMENT
In order to ensure that businesses operate fairly with regard to, and in the best interests of, their owners, their customers, their competitors, and the economy as a whole, numerous laws have been passed to regulate business. These cover areas such as takeovers of one company by another and actions that inhibit competition, such as the formation of cartels or business monopolies. This kind of regulation varies from country to country, though some international legislation exists, as within the European Union. In general, the more economically developed the country, the more developed are the rules governing corporate behaviour.
Business is the dominant form in the modern free market economy, following the principle of the “invisible hand” developed by Adam Smith, whereby individual businesses seeking their own benefit in the form of profit tend to provide the greatest general benefit if left free to do so. Most business regulation, such as legislation on product safety, is designed to enhance this principle. Business ethics are determined by the competition system, which makes it profitable to satisfy the consumer. Businesses are sometimes tempted to make a profit by doing harm to others, and occasionally they do; but planned economies, command economies and other forms of economic organization developed to restrict or even eliminate business have proven far less able to maximize general benefit.