Nature of Business Meaning, Types & How It Works

The nature of a business defines a business’s fundamental identity, objectives, and core activities. Being aware of the nature of your business allows you to correctly position your business in the market and also helps you comply with regulatory norms. This blog is a complete guide to understanding the nature of business, its components, types and more. Keep reading!

What is the Nature of Business?

The nature of business determines what a company is all about, its operations, focus areas, and industry. Let's try to understand what it means with the help of an example. Suppose you own and run a bakery shop in Mumbai. A bakery’s nature of business is the manufacturing and retailing of freshly baked products like bread, cakes, pastries, and cookies.

As a bakery owner, understanding the nature of is significant as it determines all the aspects of the business, starting with the way the business is structured, to the rules and regulations that the business has to comply with. A clear definition of this nature assists in the planning of the resources, the targeting of the right customer segments, and the adherence to food safety and licensing regulations.

Why is Understanding the Nature of a Business Important?

Understanding the nature of your business is important, and here's why:

• For clarity: It helps you describe precisely what your business does. It further helps you position your business accordingly in the market.
• For legal and tax purposes: When you register a business, you must specify the nature of your business in plain terms. It determines your tax regulations, compliance, and more.
• For branding: The nature of your business defines your brand message, tone, and communication.
• For investors and lenders: Investors and lenders need to know what kind of business you do before lending you money.

Also Read: Impact of GST on Business Loan Interest & Processing Fee

Components of the Nature of Business

There are various components of the nature of business, such as:

• Purpose: The purpose of a business refers to the primary operation of a company. Some businesses are involved in product sales, while others are involved in providing services.
• Activities: It refers to the day-to-day activities of a business. For example, a manufacturing business has a different set of activities as compared to a marketing or sales business.
• Scale: The nature of a business also influences a business’s size and scalability. The scale and size of a business go on to define how a business operates, functions, and the challenges it is likely to face.
• Stakeholders: A business involves several stakeholders such as owners, employees, customers, suppliers, and other stakeholders, etc. These stakeholders have different interests in the business.
• Economic Contributions: Your business contributes to society. These contributions include job creation, taxes, motivation to innovate, boosting trade, etc.
• Risk and Challenges: The various risks and challenges that affect a business are shaped by both external and internal factors. These factors include competition, change in market trends, and other macroeconomic factors.
• Legal Structure: It defines the legal structure of the business, such as legal responsibilities, benefits, and its limitations, etc.

Overview of Different Types of Nature of Business

Here is a short overview of some of the most well-known nature of businesses you are familiar with:

• Manufacturing: These businesses are associated with converting raw materials into final products like clothes, smartphones, and more.
• Retail: Retailers sell goods and products directly to consumers in small quantities, like in supermarkets and electronics stores.
• Wholesale: Wholesale businesses buy products in large quantities from manufacturers and sell them to retailers or other companies.
• Services: Service industries involve intangible value, expertise, or support as opposed to physical goods. Examples include those providing legal or software services.
• Agriculture: Agricultural businesses are involved in the activities of farming, animal farming, and agro-processing, providing basic food and raw materials.
• Real Estate: These enterprises deal with the purchase, sale, lease, or management of real estate.
• Construction: These companies are responsible for building infrastructure, including houses, commercial buildings, roads, etc.
• Transportation: Transportation companies transport goods or people between two points, including logistics companies, courier services, and taxi services.
• Healthcare: They offer health care solutions and services, such as hospitals, clinics, and diagnostic facilities.
• E-commerce: E-commerce companies facilitate the purchasing and selling of goods or services online.

Nature of Business vs. Type of Business: Are They the Same?

The type of business refers to how a company is legally structured, like a sole proprietorship, a partnership, or an LLP. On the other hand, the nature of business meaning determines what your business does, like selling clothes or producing goods. Let’s understand it in brief with the help of the table below:

Can the Nature of Your Business Change?

Yes, you can change the nature of your business as you build or grow your business. For instance:

• You originally only sold clothes (trading) but now produce under your brand name (manufacturing).
• You once had a printing press, but now also undertake branding and design.

Each time there's a shift in your core activity, you should change the nature of your business in official documents, particularly with authorities such as GST, MCA, or MSME.

Common Mistakes to Avoid When Defining Your Nature of Business

When defining the nature of your business, here are some common mistakes you must avoid:

• Too General or Abstract: Do not be general and vague about what you do, such as by saying that you provide products and services, without stating what they are or the industry you operate in.
• Ignoring Legal or Regulatory Details: Failing to consider the compliance needs, such as licenses, tax issues, or industry-specific legislation which may result in operational hiccups or even legal problems.
• Confusion in Mixing Unrelated Activities: Attempts to mix unrelated natures of business, such as manufacturing and financial consulting, in a single description can be confusing to regulators, customers, and partners.
• Not Updating as the Business Changes: Sometimes businesses start with a particular product or service, but grow or shift in a different direction altogether. Failure to revisit and update your description of business may render your documentation inaccurate and may influence compliance or eligibility for funding.
• Inconsistent Descriptions: This can be confusing to stakeholders, and it can negatively affect your credibility when you use different descriptions in legal documents, marketing materials, and on your website.

How Does a Business Loan Help Start Different Types of Businesses?

A Business Loan helps start different types of businesses in India in the following way:

• Amount for investment like office spaces, equipment, inventories, licences, etc.
• For growth and expansion of the business, like hiring more staff.
• To adopt new technology and innovations.
• For managing adequate inventory.

How to Apply for a Business Loan?

You can apply for a Business Loan by following these three simple steps:

Step 1: Click on the ‘Apply Now’ button.

Step 2: Fill in the required details on the loan application form.

Step 3: Upload necessary documents.

On successful verification, the loan amount will be disbursed into your bank account instantly.

To Conclude

Understanding the nature of your business helps you gain enough knowledge to explore different types of businesses. Ultimately, you can make an informed decision to know which businesses can be profitable. From defining your core activities to ensuring legal compliance and aligning your brand identity, it plays a crucial role in shaping your business journey.  With Poonawalla Fincorp, you can avail of a Business Loan to expand your business and meet other business financial needs at attractive interest rates.

Frequently Asked Questions

1. Can I select more than one nature of business while registering a company?

Yes, you can choose multiple business activities if your company operates in more than one category, like trading and manufacturing.

2. What if the nature of my business changes after registration?

You can update it by filing an amendment with the relevant authorities like MCA, GST, or MSME, depending on your registration type.

3. How specific should I be while describing my business nature in official forms?

Be as specific as possible when describing the nature of the business. Mention your core product or service clearly instead of using broad or vague terms.

4. Does the nature of business affect my GST registration or tax filings?

Yes, your business activity determines the HSN/SAC codes and can impact your tax rates and compliance rules.

5. Is ‘startup’ or ‘entrepreneurship’ an acceptable form of business description?

No, those are labels, not activities. You must describe what your startup actually does, like app development, food delivery, etc.

6. Where Do You Need to Mention the Nature of Business?

The following are some of the places where you should mention the nature of your business:

• Company registration forms (MCA, GST, MSME, etc.)
• Applications for company bank accounts
• Tax registration and filing
• Applications for loans and funding
• Your company website or pitch deck
• LinkedIn or business directory listings

7. How to Choose the Right Nature of Business for Registration?

• Choosing the right nature of business during initial registration may seem difficult, particularly when your business does a little bit of everything. You must focus on the one thing that gives your company its fundamental identity. For example, even if you are a clothing store and occasionally give styling advice, the fundamental nature of your work is retail.