Business Owner – A Definition of who are Business Owners, etc
Many people aim to be business owners as a means of achieving their highest goals and aspirations.
It is often advertised that owning your own business will give you the freedom and earnings you would not be able to achieve by being an employee.
While running your own business does come with its own perks, business owners are more than just the sum of their sales and below, we will be discussing what business owners are from its definition to the forms of compensations and the roles or responsibilities these owners have to take on to truly run a business in the way that is the most optimal to its existence.
The Definition of a Business Owner
“Business owner” is a term that refers to individuals who establish and operate an entity that is engaged in commercial, industrial or professional activities with the purpose of deriving profits from its successful operations.
Business owners also own the assets of the firm or entity they formed which they earn passive or active income from.
Business owners are the legal proprietors of a business.
Business owners are usually in charge of making decisions significant to the existence of the business in regards to the products or services offered, the properties or infrastructures and the partnerships or working relationships that are formed among other choices that have to be made.
Business owners can opt to work with employees or form partnerships with a business partner.
Business owners can choose to be the authority in charge of directing and controlling the daily operations of the business or, they can choose to employ a manager for that very purpose or even elect a Board of Directors to do so.
No matter the size of the company, it is the business owners who have the ultimate say on running their company.
It is because of the absolute internal control that business owners have over their business that they can decide to delegate or not to delegate specific executive functions that are vital to qualified professionals.
Business owners may earn monthly wages however, business owners are not considered as employees.
On the contrary, any other individual who is not an owner but is working in the company is considered as an employee regardless of what that individual’s place is in the hierarchy of the organizational structure which means that an individual can be appointed as the chief executive officer (CEO) or the president of the company and yet, that individual is not the actual owner of the business.
Furthermore, the business owners reserve the right to allocate the net profits acquired at the end of every single fiscal year by taking it as their own profits or by reinvesting the profits or portions of it back into the company.
It is customary for business owners to follow a certain standard when running their business.
Business owners will typically follow business models that are already established, choosing to offer products or services that have already been in the market and have proven over the years that there is a demand that allows for the continuous generation of sales.
Business owners prefer relatively low risk investments and they also tend to aim for moderate profitability and growth.
In contrast, entrepreneurs possess notable differences from business owners.
Entrepreneurs are willing to take higher risks when it comes to their investments.
Entrepreneurs aim for high profitability and massive growth potential.
Entrepreneurs are inclined towards products and services that are new to the market or bring new levels of innovation to products or services previously sold.
Small businesses are usually referred to as the “backbone of the economy” in the United States.
Statistics from the U.S. Small Business Administration (SBA) Office of Advocacy show that 99.7% of all U.S. businesses are made up of small businesses with nearly 80% of these small businesses being operated and owned by single proprietors.
The U.S. Small Business Administration defines a small business as enterprises that have fewer than 500 employees.
The Roles and Responsibilities of Business Owners
The prime role the business owner takes on is to maximize the company’s net profits which is the profit that remains after the total revenue has been lessened by the total expenses that include the cost of goods sold, operating expenses, interest expenses and tax expenses.
Business owners have the responsibility to maximize cash inflow, revenue, profit, and long term net worth which is the value of the assets owned by the business deducted by the liabilities the business owes.
Business owners execute their responsibilities by utilizing the same people, money, and activities already invested into the business and aiming to continuously produce better results and performances that will heavily influence the health of the company reflected by its financial position.
The secondary role of the business owner supplements the primary role by reducing the business’ costs and weaknesses.
When a business owner reduces the costs and weaknesses a business has, it leads to a greater profit margin potential which is a method that aids in attaining a higher net profit.
Business owners have the responsibility to constantly reduce costs; eliminate or neutralize weaknesses, risks and threats; and to develop strategic advantages that give the business an edge against its increasing competition.
Costs can be reduced by minimizing the waste of materials in the production line, lowering office space costs to what fits the needs of the company exactly as it is instead of paying more for space that is not fully utilized, and outsourcing processes that can be done for prices that undercut hiring an employee when necessary, among others methods that can be employed to reduce costs.
Eliminating or neutralizing weaknesses, risks and threats start by honestly conducting a SWOT analysis to measure and gauge your company’s strengths, opportunities, weaknesses and threats so the appropriate game plans can be designed to get you to understand the best advantages of your organization and reduce the hazards that will increase chances of failure.
Distinguishing the business from its competitors by positioning its brand in a way that the competitors do not or by offering an innovative twist or additional feature to products or services already existing, will help the business successfully compete in its market.
There are 6 business drivers also known as top key success factors that business owners will have to incorporate into their daily responsibilities.
The accomplishment of these 6 factors will be dependent on the business owner’s ability to identify, analyze, plan, implement and manage the operations as well as the performance of the business.
The business owners themselves do not have to do the tasks that fall under the top key success factors however, it is still their responsibility to ensure that qualified professionals are the ones handling these factors in the way that is most efficient and effective to the business.
Managing the time, effort and resources that the business utilizes in producing its goods or services and closing a sale. Inclusive of this management is the business owner’s own time, effort and resources to get the most optimal outcome out of it.
Managing the finances to ensure that the cash inflows of a business is never significantly outnumbered by the cash outflows
Marketing and Sales
Managing the increase or decreases of sales to cover the business expenses such as paying for the employees’ salary and having profits to distribute to the owners or investors, managing the marketing including pushing out advertisements that actually close sales while sticking with the allocated advertisement budget, and managing the prompt and helpful service of customer support to build up customer satisfaction
Managing the development of employees, suppliers and partners through productivity methods, rapport and training.
Product and Service
Managing the quantity and quality of products and services sold as well as its pricing, packaging, inventory and distribution.
Process and Systems
Managing daily operations, bookkeeping and other administrative duties.
Different businesses will have different situational factors that will produce different outcomes for the business owner to sort through.
It is the business owner’s responsibility to identify its current situation relative to those factors and to measure them to know how to shape the company as it moves forward.
The Business Owner’s Choices: Different Business Structures to Form
A business no matter how small has to be registered to not only become a legally recognized business entity but to also be categorized by the Internal Revenue Service (IRS) into one of the 5 common business structures.
The business owner’s choices of what kind of business structure to form is also done in part for United States taxation purposes.
The 5 most common business structures business owners can choose to form are the following:
- Sole proprietorships – unincorporated businesses that have only one owner who will receive all the business’ profits but also shoulder all of its unlimited liability. Owners of a sole proprietorship are known as sole traders or proprietors and pay personal income tax on the profits they have earned from operating their business.
- Partnerships – formal arrangements between two or more individuals to own and oversee business operations while sharing the business’ profits and liabilities. There are several kinds of partnership arrangements ranging from having the partners split profits and liabilities equally to having one part as a “silent partner” so that partner essentially functions as a passive investor without much personal liability or involvement in daily operations. Tax responsibilities of partnerships goes directly to the partners involved who are not considered as employees for tax purposes which means that the partnership itself does not pay for income tax. It is because of this tax arrangement that partnerships are not double taxed like owners of a corporation are.
- Corporations – incorporated business entities that limit the personal liabilities of its owners to prevent the financial obligations of the corporation itself from being reimbursed, settled or paid straight from the individual bank accounts or assets of the owners. Corporations allow for massive growth and expansion however, they are also double taxed which means that its gross profits will be charged tax and from that net profit that will be distributed to the corporation’s owners, the owners will also have to pay tax from the very same profit on their personal income tax returns.
- S Corporations – incorporated business entities that are a hybrid of corporations and partnerships. S corporations is a type of corporation that has met the distinct requirements of the Internal Revenue Code to allow it to pass its income directly to its owners and shareholders without needing to pay federal corporate taxes which is the same privilege that partnerships enjoy.
- Limited liability companies (LLC) – unincorporated businesses that limit the personal liability of its owners to shield the personal assets of the owners from financial obligations that their company incurs. Limited liability companies are considered as pass through entities so corporate level tax is not paid. Instead, owners declare their share of the LLC’s profits or losses on their individual income tax returns.
Different countries will have different legally recognized business structures and categories.
The risks and benefits to deliberate over when deciding which business structure to form will usually be influenced by the scope of the business being established, the parties involved in the upcoming business and the level of personal liability protection the parties involved choose to have.
A vital consideration on what business structure to establish is by how debts are settled.
To demonstrate this, a corporation will provide the most personal liability protection out of all the business structures mentioned; however, taxes will be paid by the corporation’s income and then the shareholder will have to pay tax on income that has already been taxed.
Partnerships can also offer limited liability though not as robust as that of a corporation and in order for the liabilities to not be taken in fully by one individual, more than one party needs to be present to form a partnership.
It is for these reasons that small business owners may benefit more from forming a limited liability company as their personal assets are still protected but at the same time, the profits of the business are only either taxed as a company or as an individual but never as both.
The Business Owner’s Forms of Compensation
Business owners can choose to either get paid in one of two ways: in the form of an annual salary or in the form of drawing funds originating from the business’ account.
Each method will have its respective advantages and subsequent tax implications.
An owner’s draw occurs when a business owner withdraws funds from their business to finance their personal matters.
An owner’s draw is the alternative form of compensation when an owner would not like to pay themselves a set salary.
Owner’s draw is typically taken from the owner’s equity bank account.
An owner’s equity is composed of different kinds of funds that includes money that has been invested into the business to keep it going.
Business owners can withdraw the income earned by the company or withdraw the funds that they have contributed to the business.
Owner’s draws are comparable to receiving payment as a one time service fee.
Business owners can withdraw funds from the business at any date or time.
Once the funds are withdrawn, personal income taxes will need to be paid in addition to any pending self employment tax.
Certain business structures can opt to take owner’s draws such as partnerships, limited liability companies and sole proprietorships.
Owner’s draws will not restrict the owner in the form of a set, regular income which provides the owner with increased flexibility and the capacity to adjust how much money is withdrawn depending on the state of the business’ operations.
The main consideration to take note of is that capital will be reduced for every withdrawal.
When capital is reduced, it may proceed to affect how the business is valuated while restricting or even reducing its spending capabilities.
The alternative to withdrawing funds that decreases the business’ capital is to set yourself with an annual salary.
The benefit of an annual salary is that state and federal personal taxes are automatically withheld from your paycheck.
The salary paid will also be considered as part of the operational costs a company incurs.
When applying for mortgages, personal travels, or credit related matters, earning a regular salary will display proof of a steady source of income.
Paying a regular salary also simplifies the process of keeping track of business capital since the amounts of what is spent every month does not fluctuate sporadically.
Tracking expenses and managing cash flow will also be easier since there is a specified amount from the company’s funds that is paid every month instead of having money taken out of the company’s accounts whenever the need arises with withdrawal amounts varying every single time.
Annual salaries are not set in stone and can evolve as the business evolves over time.
The Internal Revenue Service mandates that setting compensations must be “reasonable” and according to the IRS’ definition of reasonable compensation, your annual salary will have to be “an amount that would ordinarily be paid for like services by like organizations in like circumstances.”
Paying annual salaries will really depend on how stable the company’s profits are since financially unstable companies may not be able to pay an added fixed amount of expenses every month.
This is especially true for businesses in their first few years of incorporation.
Any individual or group of individuals that have established and pooled resources together in order to operate a commercial entity no matter how small of a business it initially is, is considered as a business owner.
Business owners are the legal proprietors of their company and are different from entrepreneurs in the sense that they cement their trade into offering products or services that have already been proven to generate sales through utilizing established business models.
Business owners have the roles and responsibilities to maximize profit and reduce costs.
They do not have to be personally in charge of doing every daily operation however, they are the ones that oversee the appointment of qualified personnel to efficiently execute the management, money, people, marketing and sales, and products and services needed to keep the business running.
Business owners have to know what their strengths and opportunities are to play it to their advantage.
Weaknesses and threats should also be listed so the business can know what strategies it should employ to fix where it falls short and what competitive strategies it should employ to reduce the chances of competitors from monopolizing the business’ share in the market.
Business owners have many decisions they need to make and one of them is the fact that they will need to pick a business structure that suits their needs in compliance with state mandated laws and regulations.
Each business structure from sole proprietorship, partnership, corporation, S corporation to limited liability company will have their own taxation policies to adhere to while having varying degrees of personal liability protections.
Ultimately, a business owner will benefit from forming a business structure depending on how debts are collected.
Most businesses start small and when they have expanded to the point that calls for incorporation, a corporation is then formed.
Many businesses in the US are limited liability companies for their ability to grant their owners protection from the liabilities the company incurs while allowing them to declare their income on their personal income tax returns to eliminate the double taxation that corporations face.
Business owners can choose to be compensated by owner’s draw or annual salaries though both ways will be more suitable for one business structure and state over the other.
In the first few years of a business, especially that of a sole proprietorship, business owners will find that as their business’ profits fluctuate, paying themselves a set salary monthly will not be consistently possible.
On the other hand, being able to receive more than a set salary per month is an attractive choice to certain owners who would rather not be limited by the bounds of a regular salary.
Although annual salaries have several clear benefits, owner’s draws are also a way for business owners to get compensated while they build their business into an entity that is financially stable.
Many people aim to be business owners as a means of achieving their goals and dreams.
While businesses have paved the way to higher income prosperity, there will be more things to consider as a business owner than as an employee.
Nevertheless, business owners contribute greatly to the nation’s economy through the taxes they pay, the products and services they offer as well as the employment opportunities they provide.
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Advocacy.sba.gov "US Small Business Adminstration Office of Advocacy" 1. June 14, 2021
SBA.gov "Table of Size Standards" 1. June 14, 2021
Community Tool Box "SWOT Analysis: Strength, Weaknesses, Opportunities and Threats" 1. June 14, 2021
IRS.gov "Business Structures" 1. June 14, 2021
IRS.gov "Paying Yourself" 1. June 14, 2021