A business is defined by dictionaries as a commercial organization or business acting for economic benefit. The word “business” itself denotes the legal relation between persons, places, products, services, and the means of communication. The term “enterprise” connotes the corporate form of organization in which a sole proprietor or partnership controls the business. In the United States, businesses are generally separated into five distinct categories, namely: partnerships, corporation, trust, proprietary institution, and personal institution.
For Profit Corporations A corporation is said to be for profit if it makes a profit from the transaction or conduct of its activities and does not earn any income from the transactions or conduct. However, there are some corporations that are classified as non-profit, i.e., they receive some revenue or income but do not make any profit from their transactions or conduct. Other corporations are classified as sole proprietors or memberships. For-profit corporations generally have limited liability. But under certain circumstances such corporations may be treated as for profit, e.g., if they are majority shareholders in a corporation.
Sole Proprietorship A sole proprietorship exists when one person owns the firm. A partnership therefore combines two or more people into one firm. When a firm is a partnership, all the partners receive the profits or share the losses of the partnership, but are said to lose their profit if the partnership as a whole does not produce more revenue than its expenses. A sole proprietorship is called a pass-through entity. That is, it receives whatever it receives, in whatever quantity it pays, without having to distribute its remaining profits to other partners.
Shareholders If a firm has a number of owners, each owning a share of the firm’s profits, then the firm is said to be a corporation. In such a case the shareholders own not only their own shares but also a portion of the total profits. The shareholder’s economic value is thus the price it would be worth to buy that portion of the firm from the firm if it were to expand its operation and take on another firm.
Profit Maximization Under the principles of economic theory profit maximization means maximizing the total profits of a firm by increasing the total value of the firm. This can be done in many different ways. One way is to increase the market price of the firm to a point where production and demand are both increased. Another way is to provide incentives to buyers to invest in the firm and promote the firm to new customers.
Market Research To be able to maximize profits, firms must perform adequate market research. It is necessary for firms to understand their own and competitors’ needs and the corresponding markets. Doing market research enables firms to provide goods and services that meet people’s needs, tastes, and preferences. Doing market research also enables firms to establish the most appropriate prices for the goods and services they offer.