Telling the truth about SME life today

Business vs Company

Business vs company

For many, the terms “business” and “company” are used interchangeably in everyday conversation. This is understandable – both have many similarities, such as their commercial activities that provide goods and services, and both can exist at the same time.

But as far as legal and operational structures, distinctions between the two are worth knowing if you operate on the higher ends of either a business, a company, or any organisation that works with them.

The following article will provide a clear distinction between the two, by outlining and comparing them directly.

What Is A Business?

A business is an activity or organisation that engages in the creation, distribution and sale of goods or professional services. This can be anything from a small-scale affair, such as a local handyman, to large, multinational corporations such as Amazon. The goals of business entities differ, with some being non-profit, but most look to generating profit. This profit is not only given to the workers of a business but also stimulates the economy overall through taxation outside of their services.

Two key features:

  • Ownership and Structure – A business entity can be owned by a single individual, which is called a sole proprietorship, or a group of individuals, which are named partnerships. A business can operate under sole proprietorship freely under the law, but partnerships may have specific outlines of ownership percentages, profit sharing and decision-making.
  • Legal Liability – The owner(s) are personally liable for all debts and obligations within a business. If a business cannot pay its bills, then creditors are free to come and seize the owners’ assets.

Example of a Business

What Is A Company?

A company is a separate legal entity that is created through a formal registration process with designated bodies. In the UK, this body is the Companies House. Once registered, a company becomes its legal entity that is distinct from its owners, or the people who manage it (directors). The company can enter into contracts, own assets and property, and incur debts in its name. That being said, being a separate legal entity, its liability is restricted to its assets, whilst its shareholders are protected outside of extreme circumstances, such as misconduct.

A company also has a perpetual existence, meaning that, unlike a business, a company can continue to operate beyond an owner’s death or departure as usual. For long-term goals, a company may have more worth than a business.

This advantage comes with caveats depending on the type of company you want to establish, however.

Limited Company

Limited companies are limited liability companies. They are a common type of company structure over the globe, but even these have two subcategories.

  • Private Limited Company – A private limited company structure holds shares that are not offered to the public. Shares can only be transferred to a small group of investors, and are suitable for a wide range of businesses, with small businesses often opting for them.
  • Public Limited Company – A public limited company has its shares on the open stock exchange, which it uses to raise capital by reaching a larger pool of investors. However, to become a public limited company, you have to abide by strict regulations and reporting requirements.

Limited Liability Partnerships

A limited liability partnership blends traditional partnerships and a limited company. There is flexibility in internal management and profit sharing like a business, but is still a separate legal entity.

LLPs enjoy a “pass-through” tax year, meaning the LLP itself doesn’t pay income tax, but the partnerships do instead. This is split across their individual tax returns. This is a popular option for professional services firms, such as law firms, where partners want protection from each other’s potential liabilities.

Royal Charter

Royal Charter companies are a historic and prestigious designation that can only be given by a reigning monarch. They enjoy degrees of self-regulation alongside their prestigious title.

That being said, a royal charter company is rather rare and is not often given out. They are reserved for organisations that operate in the nation’s interest, are non-profit, have high ethical standards, or demonstrate a strong track of stability that will be an asset to the country. Big companies such as the BBC and the Royal Mail are both royal charter companies.

Community Interest Company

CICs are purpose-driven businesses that focus on benefitting communities through social justice. The key difference between these styles of companies and others is the “asset lock”, which means profits are reinvested back into the business to further social aims. This means that shareholders receive limited returns.

CICs are regulated for community benefit via a dedicated regulator, such as the Office of the Regulator of Community Interest Companies. They are a popular model for social entrepreneurs and organisations that look to make positive impacts whilst functioning as a business.

Key Differences Between Businesses And Companies

Here, we will directly compare the two.

  • Legal Status – The fundamental distinction between a company and business entities is the legal structure that companies provide. A business owner has legal responsibilities towards their business, but a company owner does not. This separation protects owners and shareholders both.
  • Taxation – A company’s tax affairs are different from a business. A business does not pay taxes, but rather, the owner reports its profits and losses on a self-assessment tax return. The owners pay at the end of a tax year as they would on any other income. However, a company, as we’ve said before, is its own legal entity. A company will file corporation tax returns and pay tax on profits.
  • Regulations – Companies have stricter reporting and filing requirements than a business entity. You will be required to appoint directors, who are responsible for overseeing the management of the company to ensure it abides by all regulations. This is something many businesses do not have to do.

Shareholder Meeting

Turning A Business Entity Into A Company

To make a business into a company, you have to go through a process known as “incorporation”. You will need to create a company name through registration with companies house (in the UK). The overall process is done through specific governments, including a memorandum of association and articles of association. Once the incorporation process is complete, the business becomes a company and its own legal entity.

Many small to medium-sized enterprises wish to become companies for the legal structure alone. That being said, not all businesses go this route.

Why Would A Business Entity Not Become Incorporated?

There are four main reasons why a business owner may choose not to incorporate:

  • Costs – Incorporation involves registration fees and an ongoing administrative cost, as well as requiring accounting for the new legal and administration requirements. Small businesses, or businesses with limited budgets and simplistic operations, can view this as a significant barrier, and an unnecessary one, especially for businesses that operate in a low-risk industry.
  • Control – Sole proprietorships or partnerships have more control over a business than a company. Decision-making is shared within a company, meaning it may not always be in line with the specific goals of a shareholder.
  • Tax Considerations – Businesses can sometimes have a much lower tax burden than a company, depending on the specific jurisdiction or the business’ profit.
  • Suitability to Business Size – A business can remain small, and be highly profitable. All in all, if a business does not face significant risk, the protection offered by a company may not hold much weight for them.

Pros And Cons Of Trading As A Business

The following section will go over the pros and cons of remaining and trading through a business.

Pros

  • Simplicity – Sole traders can set up and begin right away. There’s minimal paperwork required, and soon after it’s out the way, you’re ready to begin trade. This is advantageous because it allows you to start developing core business activities right away, like developing your goods or services.
  • Control – Business owners make all the decisions, big or small, without having to answer to a board of directors or consult with partners. This is particularly useful in businesses that require swift decision-making and react to market changes. For individuals with a strong vision for where they want their business to go, this is a fine advantage.
  • Potential Tax Advantage – Taxes are messy, but depending on your income level, business profit and taxation method, you could potentially reap tax rewards. Nonetheless, remember you must submit a self-assessment tax return on behalf of the business. So it’s important to ensure your business records are correct and well-compiled.

Cons

  • Full Liability – The significant difference between companies and businesses will always be the legal entity status. If your business fails and you incur debts you cannot repay easily, then your business may face debts or legal issues and it will come back to you as the business owner.
  • Difficulty Raising Capital – It can be harder to secure loans or attract investors, as many will consider the business’s unprotected status and will require further proof that your business is safe.
  • Business Continuity – A business ends when the owner passes on, or if you become unable to work, or decide to leave. This can create an uncertain future.

Business and Company Conclusion

Pros And Cons Of Trading As A Company

Next, we have the pros and cons of trading as a company.

Pros

  • Limited Liability – Limited liability companies mean that your assets are shielded from most of the company’s liabilities and legal obligations. A shareholder’s liability, then, is restricted to what they invest.
  • Increased Credibility – Operating as a company with a registered company name can enhance your credibility, as you’ll be operating with lower risks, whilst having more oversight via companies house. Furthermore, the company will continue after the death of its owner, ensuring long-term viability.
  • Capital Raising – Companies can freely sell shares to investors, issue bonds, and have better access to loans.

Cons

  • Taxation – Companies pay corporation tax, and shareholders may also pay income tax on dividends.
  • Increased Regulation – Companies must adhere to stricter reporting than businesses.
  • Reduced Control – As we’ve said, a company may be owned by one or more people, so decision-making is split between several directors and the shareholder’s agreement.

Conclusion

All in all, incorporating into a company comes with protections not available for normal businesses. Compared to a company, a business is a risk, but incorporating into a company means not only accounting for the increased regulations but also losing control.

Whether or not the decision to make the switch is right for you depends entirely on your circumstances. Nonetheless, we hope this article helps you make informed decisions about your business or company’s future. 

 

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!