Business Entity, Its Features , importance and necessity.

Business Entity

The word “entity” means a firm or an Organisation which performs various task and operations for some commercial purposes. Profit is the reward of those operations. Business entity plays the most important role in reaching the goods to the final consumers. It works as a link between the manufacturers and the ultimate consumers. Business entity takes several types of risk in the whole cycle. Until and unless entity doesn’t take risk, he would never profit.

The main focus and goal of business entity is to satisfy the need and aspirations of the consumer. The entity who does not satisfy the wants of consumers cannot survive in the long run. The members who own the business are the owners of that business entity. All these entities are made by the legal body or law.

For Example: Nokia mobile company launched his keypad mobiles without having more features in it. The consumers do not get that satisfaction which they are expecting. So, the result is that, Nokia Company lost his customers. Although, he takes first mover advantage but he did not survive due to the lack of customers. 

         

Nature of Business Entity

Above, we have read that business entity cannot survive without profit but if the entity does not expand its business he cannot stand in the market in such a high competition. Now let us talk about the characteristics of business entity. These are as follows:

1.  Separate Identity: Every business entity has its separate legal identity except sole trader. The separate legal existence means that the owners of the entity are considered as separate from its members. If an owner of a person retires or dies, the entity cannot be wind up or there is no dissolution of any firm. It has a distinct name and identity.

Once the name is registered, you cannot change the name of the firm or any other entity except sole proprietor, it is so because sole trader does not necessarily be bound by law. One can freely open and close this type of business.    

2. Profit earning: At first, the idea of opening a business firm or entity comes due to the desire of earning profit. It is the sole motive of business firm. Profit is important for business because it helps the business in various ways such as for investing in some asset, financing the business when it is in need of funds and various other activities. You get the ability of investing in the foreign markets and expand your business. 

3. Stability: When the new business is setting up, it is difficult to say that the business is stable. A business is stable when an entity gets the goodwill and the functioning of the business firm is good and it reaching the greater heights. One more factor which keeps the business stable is the regularity in business. If your entity does regular transactions you will be able to attract more customers which lead to greater profit. You will slowly achieve stability.  

4. Easy Formation: Every business entity except Joint Stock Company can be easily formed. It is so because it does not require any legal formalities. It saves time and money of the owner and they can easily start business without necessarily having any certifications.  

5. Personal Liability: In sole trader and other entity except Joint Stock Company have their personal liabilities. You can understand in this way that if a member has certain liability in the form of debt and if those liabilities does not fulfilled by selling the assets of business then the member has to attach its personal assets also.   

Types of Business Entity

Business entity is classified into three categories:

1. Private Business Entity: Private entities are those Organisation or firms which can be owned and are fully under the control of their owners. Private sector business contributes a great part in the development of economy. In these sectors, government does not play any role but still, private business has to work under the law and has to follow the policies of government.

2. Public Business Entity: These entities are fully under the control of government. These entities strictly follow the rules and regulation of government and have to adopt the policies of government. This entity does not aim at earning profit like as private sector but the main motive is service of society. They work for public. It helps in developing the economy and increasing GDP.

3. Joint Business Entity: It is the combination of the above two entity. In this entity both the government and the private owners control the business. Our India has joint business entities. Share capital in the joint sector is divided in the following ratios:

Government takes 26%, Private businessmen 25% and public 49% of share capital. A private businessman does not take more than 25% of share capital.              

Forms of Business Entity

In early times, there may be only one type of business form i.e. sole trader. But, modern world is the world of technology and advancement. Now, there are various forms of business entity. Business entity may differ in their size, shape operation and type of product produced. You cannot choose any form on its own wish but should have the ability and adequate resources to start that form of business entity. These entities are as follows:

1. Sole Proprietorship: This form of business is also called sole trader. It is the primary source of business firm. It requires very less capital and anyone having limited resources can start this type of business. It does not require any legal formalities and not necessarily be registered by the law. It is started by one person who is the sole owner of the business. He is solely responsible for all business activities, bears risk and earn profit. The liability is unlimited.

2. Partnership: As the word suggest, this form of business entity is made by two or more persons who are collectively known as partners. They are holding a lawful business. There is an agreement which is made orally or in written also which is known as partnership deed. It is not necessary to have a partnership deed but the partnership firm who has this partnership deed may get various benefits. If any disputes and conflict occurs among the partners the deed act a proof in the court of law.

3. Joint Hindu Undivided Family: It denotes the family business of a person. When a person start his business and after the completion of his age, his son become the next owner and CEO and after his son, his grandson holds the business and likewise the business goes on. So, this chain of continuing business operation is called joint Hindu undivided family.

4. Joint Stock Company: Joint Stock Company is an artificial person because it has separate legal entity. According to the Companies act 2013(revised) Section 2, the members of company is nothing more than its subscribers. If the owners and the members of a company take retirement from the company or if there is death of a member then the company would not stop or close. He would continue its operations until and unless any provision of winding up is passed by law. It is started by and it will be closed by law only.

5. Cooperative Society: You can define cooperatives as “voluntary association of individuals who come together in order to work together and fulfill their personal Interest.” You are free to enter in form of entity and free to take exit from this entity. There are no legal boundations on any member and the liability of member is unlimited.                     

   Also Read: Business Environment, Its Internal and External Forces

Choice of the form of Business Entity

The choice of the most suitable and convenient business entity is a very difficult decision. For choosing such a form which is best suited to you are based on various factors. First you need to see your budget and resources which are available with you.

1.  Nature of business: The nature defines the type of business you are working in. It is one of most important factor which has important bearing on the choice of the business. We look nature of business on the basis of type of good sold. Generally, business provides two sectors: One is service sector and another manufacturing sector. This affects the choice. If you choose service sector, you might require a professional degree and a specific code of conduct. On manufacturing side, you require resources such as capital, land, labor and entrepreneur. For entering into these sectors, you must have adequate finance to make stable your entity.

2. Size of Business: Size of the firm matters the most. Size determines the type of business you choose such as capital or commodity market. If you want to do production in large amount, you require more funds and factor of production but if your production is small, you are in less need of funds. Large scale enterprises may invest in the national and also the international markets such as joint stock Company but small scale firms may be limited to a particular region and city only such as partnership firms and sole trader.

3. Amount of capital required: As we know, finance is the life blood of every business entity. Finance helps the business to stand in the market. All the losses are being recovered through finance. The business may also depend on the funds available with the firm. If the firm has large amount of funds, then he may buy larger resources and may increase the wages of workers and may expand its business.

4. Amount of risk taken: As you know that, a firm without profit is like human body without heart. Most of the entrepreneur takes risk to earn profit. It is obvious that no businessmen can commence business with a high risk. Most of the people want to get job in a company instead of starting a sole proprietorship or a partnership firm. It is so because liability of company is limited while others have unlimited.

5. Desired Control: Many people start business on the basis of control they have on their business. If a person has full control of business such as sole trader or partnership firm, they can easily commence it. Joint Stock Company is the entity in which ownership separated from its members. It is fully governed by law.     

 Also Read: Classification of Business Activities

Objectives of Business Entity

Now, we will know the main reason for commencing a business. Up till now, you understand that what is business entity? But now we will understand that why we are making entities? See, There are certain needs and aspirations of every human being and he has the desire to fulfill that wants. So, in order to fulfill their need, the business firm came into existence. The main objectives are as follows:

1. To increase GDP: The major aim for the formation of business entity is to raise the national income of our economy. Business entity yields a lot of profit which may add up in the economy.  GDP can be increased by the expansion of business. If an entity or a firm expands its operations on a wider region, then it may lead to the better welfare economy of a country.

2. Supply goods at a reasonable price: Many products of a firm are demanded by the customers when it is sold at a reasonable price or the price in which they can afford that product and avail the services. It makes the customers to visit again and again. The customer is rational; he tries to buy more quantities of goods at a less price. If the price is high the consumer will not buy products from you.

3. To promote social welfare: Besides earning profit, business firm also serve the society. It fulfills all the needs and aspirations of the people of society. It also provides various facilities and services to the society. Firms may also open charitable trusts, in order to provide basic necessities to the middle or lower class people. Various schemes and projects are being made to sort out various problems of rural and other backward areas.

4. Developing Small Scale industries: The economy of India is not very highly developed. It cannot directly invest in the large scale industries. Therefore, he started investments in MSMEs (Micro, Small and Medium Enterprises). MSME generate large scale of turnover and it requires small capital in comparison of large industries. Due to small industries, size of labour and machinery is also small. It helps in development of small industries which led to the rise in economy.       

      

Importance of Business Entity

Business entity plays the most important role in the development and the expansion of the country. Nowadays, India is also keeps the ability to compete with other countries. It is so, due to the need of industrialisation. Proper industrialisation helps in the growth of the economy. Now the importance of entity is follows:

1. To reduce deficit: Business entity helps in reducing the deficit in the balance of payment. Deficit led to the increase in expenditure over income. Now, how does deficit be reduced? If the business entity increases its operations, it will earn more profit and more funds will be available in the economy which gradually decreases in the expenditure and reduction in expenditure will lead to reduction in deficit also.

2. Economic Growth: One more reason for the requirement of the business firm is economic growth. In today’s world, economy is growing very rapidly. New and advanced technology and change in the environment is the very most factor which affect the economy. It providing and producing all the goods and services needed by the consumers. It raises the business of imports and exports.

3. Rural development: In India, mostly the rural areas are underdeveloped. It contains lack of facilities which is required in that area. There are various schemes which are launched by the government for the steady growth in the rural areas. Such as Pradhan Mantri Adarsh Gram Yojana(PMAGY), Rashtriya Gram Swaraj Abhiyan(RGSA) etc. Various transport facilities, warehousing facilities and other facilities are being provided so as to improve the irrigation and the harvesting process.

4. Production of goods: The root of all activities of business entity is the production of business entity. An entity produce goods which in turn gives him profit from it sale. It increases the efficiency and effectiveness of workers. It plans and controls all the activities of business entity and reach the commodity to the consumers safely.           

FAQ

Q.1. What is Business Entity Example?
Answer 1. Two brothers Mukesh and Anil had a wish to make the growth of economy and satisfy the needs and wants of consumers. They also see the critical condition of poor people and try to resolve it. There are various situations which come out toward Anil and Mukesh. The situations are so large and numerous they think that they need to become prosperous for improving the conditions of economy. So they decided to start a business Organisation which would yield him greater profits.
Q.2. What are the business entity types?
Answer 2. Normally, there are five types of business entity and each of which distinct in its features. It includes sole trader, partnership, Joint Stock Company and cooperatives. Except joint stock company every business entity has unlimited liabilities.      

The Last Saying

Lastly, I would like to conclude that business entity is come into existence for making the economy better and improving the standard of living. The objective of business entity is not just earning profit but to play an important role in serving the society. It enables to reduce poverty and helps in creating job opportunities for large number of people.