A business is simply defined as an entity or organized set of activities undertaken for the purpose of earning a profit. In the most basic sense, a business is any entity that performs a specialized act or activity for the accomplishment of an object. Most businesses are for-profit enterprises, though some, such as the armed services, are primarily volunteer associations. Non-profit businesses may be social concern organizations, like church-based ones, or civic groups that seek to achieve political, social, or environmental goals through volunteer work.
Profits and losses are calculated in terms of their net income or gain from doing business. Some businesses also issue shares of stock to the membership as a way of sustaining the growth and well-being of the business and its members. The concept of profit is a complex and controversial one, with many people on all sides of the issue having varied and opposing views. Although there is great debate about profit, there is general agreement that there are two basic types: a “hard” profit – which is made up of products or services sold at a higher price than that paid for them; and a “soft” profit – which is made up of the value of the services or products supplied by the business itself, less the value paid for them. Hard and soft profits are usually confused, but in actuality there is only a difference in the accounting methodologies.
The biggest difference between hard and soft profits is that hard profits are not tax-deductible, while in most other cases they are tax-free. Another difference is that a sole proprietorship or a limited liability company is a separate entity from its owners, giving rise to the issue of double taxation. That is, businesses pay taxes both on the income earned by the business and on the value of the goods or services it delivers to customers. A sole proprietorship is treated as a business for tax purposes, meaning it must report its income and pay taxes to the federal government and may also be subject to state and local taxes. A limited liability company is generally not taxable.
Because companies must pay taxes on the value of their products or services, businesses can effectively minimize their tax liabilities by using an entity to protect their profits, referred to as a pass-through entity. These entities are formed for the specific purpose of allowing a business owner to shield the income and expenses of the business from taxation. Pass-through entities can include partnerships, corporations, LLCs, S corporations, and sole proprietorships.
Businesses providing goods and services to customers at a retail establishment, for example, may be able to benefit from the protection of pass-through status. Under this system, the retailer pays the business owner an amount per sale for ensuring that the business owner does not have to pay corporate taxes on behalf of his customers. Many states allow some variation of this protection, so check with your accountant if your business qualifies. While some companies will insist that only individuals work in the stores, others recognize that there are a variety of different jobs that could be performed by the small business owner.
Finally, there are some businesses that may be looked as pass-through entities but perform commercial activities other than selling goods and services. These types of businesses may engage in leasing, real estate activities, manufacturing, outsourcing, intellectual property ownership, charities, and even gaming. One should take care to ensure that they are not considered pass-throughs and that their business activities are reported to the IRS. This tax code makes it very easy to avoid paying any federal tax liability, so long as one complies with all of the state tax laws. One should consult their accountant for advice on the classification of their business activities for tax purposes.