In the world of commerce, the definition of business profit varies based on the type of business which you are dealing with. This also determines who gets to make the decision on how to spend the business profit.
In layman’s terms, the business profit definition basically means the excess of income over expenditure, income from an investment or transaction or the advantage derived from engaging in an economic activity. The choice on how this profit will be used varies from the type and structure of business in which one is engaged in. The following list shows various structures of businesses and how the decision on how to use profit can actually be reached:
Business Profit Usage
Sole Proprietorship: This is a type of business owned by one person. He/she is solely responsible of the day to day management of the business. It is the most common type of business. The greatest advantage is that the sole proprietor gets to enjoy all the profit made by the business without sharing it with anyone. The disadvantage of such a business is that the sole proprietor also bears all the loss, decision making and the burden of running the business rest solely on him/her.
General Partnership: In this type of business, two or more persons contribute capital, labor and managerial skills in the running of the business. They get to share profits, losses, management, and liability upon some agreed upon ratio written in the partnership agreement. In this type of structure the business profit made is also divided among the partners upon a given ratio.
Limited Partnership: This is somewhat similar to a general partnership with the exception that the liability of limited partners can only extend to as much as their capital contribution towards the business was worth. They cannot be called upon to meet liabilities of the business beyond the capital amount they contributed towards the business. They also have a limited managerial role towards the organization.
Limited Liability Partnership: In this partnership business, individual member’s liabilities cannot extend to cover liabilities that results from negligence of a particular individual. This type of business structure is mostly found in partnerships formed by lawyers and accountants. The business profit made in this type of business is shared out among the members based on the agreement made by the partners prior to commencing operations.
Limited Liability Company: This type of business is more complex than the rest mentioned. Two or more individuals come together and form a business then register it with the registrar of companies: a process known as incorporation. This gives a legal personality to the business separate from its owners. The business profit is shared out to the shareholders as dividends.
Corporation: In this type of business, you are given more privileges and rights, but you are able to handle less liabilities than would have been the case if dealing in the same business as an individual or a company. Some of the benefits of working as a corporation are you get some financial benefits and tax cuts. Corporations are run by a board of individuals who oversee how profits will be shared out among the members.
Spending The Business Profit
Before you take up the profit made from a particular type of business. It is important to understand the structure of business in which you are operating in. Then you will be able to determine just how much of the profit is due to you. It is also recommended that you seek the services of an accountant or a lawyer who is better placed to explain just how much business profit you ought to receive at the end of trading period in a particular type of business.
At Gutglass, Erickson, Bonville & Larson, we understand the challenges of dealing with legal issues and we are here to help. Give us a call and we will be happy to answer all your questions. Call us today at (414) 273-1144.