Nature and Types of Small Business

What are Small Businesses?

Businesses that need less investment, labor, and work within a specified area are called small businesses. These businesses usually need an investment of a maximum of one crore. Small businesses operate locally and may be involved in manufacturing products that are sold and have a demand in the local market.

Small businesses usually have fewer than 500 employees; since these businesses have access to fewer resources, they can ask for government support. Small businesses often have only one owner. However, there are small businesses that operate on a partnership basis.

Small businesses are also known as small-scale industries because they produce items on a small scale. These industries play a crucial role in the development of the economy. In small businesses, the owner invests once in equipment and machinery. Some examples of small businesses include paper, pens, toothpicks, candles, bakeries, local chocolate, etc.,

Types and Nature of Small Businesses

The limitations of a small business’s operation are often dictated by the structure of the business. The structure of the business shows how many owners are there, who is liable, and how the taxes apply to the business unit. Depending on these factors, small businesses are usually divided into seven types.

Sole Proprietorship

A sole proprietorship is a type of small business that usually has only one owner who is responsible for business transactions, debts, and legal procedures. As the assets of the business are the asset of the owner, the owner of sole proprietorships has to consider all taxes as personal taxes. Moreover, in the case of a sole proprietorship, the business losses can be deducted from the returns in most cases during filing income tax returns.

Apart from having one owner, sole proprietorships often have a single employee that is the owner of the business. A sole proprietor may not need to register his/her business depending on the state laws. Examples of sole proprietors include web designers, consultants, and copywriters, etc.

General Partnerships

General partnerships usually have two or more owners who are liable for the financial and legal aspects of the business. The liability of the business in the case of the general partnership is shared equally. However, the income from the business may differ depending on the terms of the agreement about capital, shares, and contribution to the business.

• Like sole proprietorships, owners of a general partnership may deduct the losses from their personal income tax returns.

• Partners in a general partnership file their small business taxes with their own personal income taxes along with self-employment taxes. Individuals of the same profession, such as Doctors and Lawyers may find the general partnership to be more beneficial. As these businesses have more than one owner, they may be able to get loans with two or more lines of credit.

Limited Partnership

A limited partnership is similar to a general partnership as it has two or more owners but the legal and financial involvement may not be owned by the partners in the case of a limited partnership company. In the case of a limited partnership, investors may take part in a business through investment, but the legal and financial matters may remain on others' shoulders who are liable for the operations of the firm.

• The limited partnership business allows investors to act as limited partners without needing them to be liable for the financial and legal aspects of the business.

• As the partners are not directly involved in the business, they may have to pay less in taxes too.

• Limited partnerships may be a good option for Doctor’s or Lawyer firms as this shifts the liability of malpractice to an individual instead of the entire partnership concerned with the matter.

Limited Liability Company (LLC)

In an LLC, the business owners are not personally liable for business transactions; so they have no risk to their personal property. However, starting an LLC requires businesses to pay state-specific fees while filing for the start of the business.

• Owners of LLCs may file their taxes either as personal or corporate income taxes, along with their self-employment taxes.

• The profits and losses of an LLC can be applied to the personal income tax returns of the partners. In the case of an LLC, the profits and losses may not be shared equally among partners depending on the terms of the agreement.

• LLCs can be general or limited partnership firms while they file for liability protection.

Non-profit Company

Non-profits are companies that use the revenues and profits for their operations and funding of their own programs. These firms do not distribute the profit among partners or owners and depend on the network of donors for the funding of local community programs.

• Non-profits may ask for government assistance because they do not work for profit and may be involved in community development projects.

• These firms need to follow operational guidance and maintain specific records for taxation and documentation purposes.

C Corporations

A C Corporation is a business of two more owners who are personally not liable for the business outcomes. The partners in a C Corporation may have to go through double taxation as corporate and self-employment owners. However, they may file their small business taxes at the corporate level. C Corporation owners may get a wider range of tax deductions and may have to pay less in personal taxes.

S Corporation

S Corporation is a type of small business in the US that has a maximum limit of employees of one hundred. S Corporation owners are not personally liable for the business, financial and legal aspects. Moreover, they can file taxes with their personal tax returns. Unlike C Corporations, they do not need to face double taxation but may get the liability protection applicable to corporations.

Note − This tutorial has represented the small business types available in the US. However, almost all other countries have similar small businesses with different names. Therefore, it can be used as a reference for countries other than the U.S too.

Conclusion

Small businesses are the most common and widest range of businesses and they are key to the improvement of the economy of the countries in which they operate. Therefore, one must be aware of the various types of small businesses and their nature. Knowing how these small businesses fare in terms of liabilities and taxes provides an easy way to understand what types of business it is and it is important for everyone.

FAQs

Qns 1. What is meant by small business? Describe briefly.

Ans. Businesses that need less investment, labor, and work within a specified area are called small businesses. These businesses usually need an investment of a maximum of one crore. Small businesses operate locally and may be involved in manufacturing products that are sold and have a demand in the local market.

Qns 2. How many types of small businesses are there?

Ans. There are seven major types of small businesses.

Qns 3. How many maximum employees a small business can have?

Ans. A small business can have a maximum of 500 employees.