What is a business?
A business is a legal entity that is set-up or designed to make goods, sell goods, or provide a service. Many businesses are for-profit organizations as opposed to a non-profit organization or hobby job. How an organization is structured affects how a business is run, how it is taxed, and how profits are distributed. The actual business structure can also affect the personal liability of any owners of the business.
Business Categories
Two general categories of businesses are for-profit and not-for-profit. A profit-based organization is designed, as the name implies, to make a profit. The types of business structures available in every state include sole proprietorships, partnerships, limited liability companies, and corporations. Other hybrids of these types of business entities may vary by state.
State rules control how a business entity can be started and structured. Federal rules will control how a business entity will be required to pay federal income taxes. Before you start a business, you should visit with a corporate, business, or tax attorney about the goals of your business so that you structure the business to reduce income taxes and your own personal liability.
Not-For-Profit Businesses
A not-for-profit business follows many of the same rules for incorporation. However, instead of being owned by a set of partners, a not-for-profit organization is usually run by a board of directors. In addition to state rules regarding incorporation, a not-for-profit must file additional paperwork to be classified as a non-profit organization. The IRS limits the types of organizations that can obtain 501(c) or non-profit status, so as to be exempt from certain federal tax laws. Some states will require a separate filing to obtain non-profit status with the state. Failure to comply with any of these filing requirements can result in a loss of status and the business being required to pay taxes.
Other Things to Consider About Businesses
Regardless of whether the business is a for-profit or not-for-profit business, a business is generally characterized as running in a systematic, continuous and regular businesslike manner, and having ordinary commercial principles governing it, such as business and accounting records. For example, a person who collects and sells baseball cards on a regular basis from a store is engaged in a business, while a casual collector, who will occasionally trade cards with friends, is probably engaged in a hobby. The distinction is important for tax purposes as losses from a business are tax-deductible, while losses generated from a hobby are not.