Business Owner

Business Owner Definition

A business owner is an individual who owns and operates a business, small or large, with the aim of deriving profit from its successful operation. He or she typically makes all important decisions for the business, whether related to the product/service on offer or its infrastructure, and may work with partners or employees, or be the sole proprietor.

Business owners typically follow established business models, preferring relatively low risk, and aim for moderate growth and profitability. They are contrasted with entrepreneurs, who tend to focus on new and innovative products or services, and run a higher risk with matching high profitability and rapid growth potential.

In the United States, small businesses are often referred to as the “backbone of the economy,” and the numbers bear this out: according to the U.S. Small Business Administration (SBA) Office of Advocacy, which defines a small business as an enterprise having fewer than 500 employees, as of 2016 there were 28.8 million small businesses in America, which made up 99.7% of all U.S. business. They employed 56.8 million workers, which is nearly half (48%) of the entire U.S. workforce. Interestingly, nearly 80% of small businesses were owned and operated by a single proprietor:

Small business study

Business Structure

For U.S. taxation purposes, a small business must be registered and will be categorized by the Internal Revenue Service as one of the following five structures:

Other countries have different incorporation structures and categorizations of course, but the risks and benefits to consider in deciding which structure works best are generally determined by the scope of the business, the parties involved and level of personal liability desired.

A key consideration is how debts are paid. A corporation, for example, offers the most protection from debts from a personal standpoint, but runs the risk of double taxation (as a corporation first, then as a shareholder of that corporation second). Partnerships can also offer limited protection, but require more than one party. For this reason, a limited liability company (LLC), where personal assets are protected and income is taxed either as a company or individual but not both, may offer the most benefits to the sole small business owner.

Forms of Compensation

As a business owner, you can choose to get paid in the form of an annual salary, or simply “draw” funds from the business account. Each method has advantages and taxation implications.

Owner’s Draw

This is analogous to getting paid a fee for a one-time service. The business owner can choose to draw funds from the business at any time, either from the profits generated or the capital initially invested, and pay personal income tax on the amount in addition to any self-employment tax.

The main consideration here is that by taking from the company’s coffers, you are reducing its capital, which may affect how it is valuated, and limit spending ability.

Salary

You may opt to pay yourself a salary instead, which has the benefit of having personal taxes withheld, and the salary itself being considered as part of the company’s operational costs.

This depends, however, on steady profitability, and requires that the company be financially stable, which may not be a given in the first few years of incorporation.

Quiz

1. What is the difference between a small business owner (SBO) and an entrepreneur?

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B.
C.

2. What is a key consideration for choosing a business structure?

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B.
C.

3. If you are a startup, you may choose the following method of compensation during your first year:

A.
B.
C.

 

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