When exploring the nature of business, many people are confused about what a ‘business’ actually is and the difference between a ‘business’ and a ‘company’. Is there any difference at all? Can the terms be used interchangeably? In this article, we will help explain the nature of business and settle the business vs company debate once and for all.
In this article, we’ll explain the difference between a business and a company. Whether you’re trying to decide which is right for you, or you’re just interested to know, you’ll be an expert after reading this article.
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Is there really a difference between a business and a company?
So, is there really any difference between the terms ‘business’ and ‘company’?
The answer is yes. There is a significant difference between the two and they cannot be used interchangeably. In fact, there is a clear set of differences between the two which you need to be aware of.
Read on to discover the true difference between a business and a company.
What is the nature of a business?
The definition of a business is an individual or organisation which engages in commercial, professional or industrial activities on a regular basis. This includes profitable activities, as well as non-profit organisations which exist to support charitable or social causes.
A business will usually trade under a single name, through which it will aim to build a reputation based on its identity.
Types of business
There are two main types of business that you should be aware of: a sole trader and a partnership.
1. Sole Trader
A sole trader is an individual who is the exclusive owner of a business. Although they may employ other staff, they are solely responsible for the business. This means that if the business is successful, the entirety of the profits belongs to the sole trader. However, if the business fails, the sole trader is ultimately responsible for the business’s debts.
A partnership involves two or more individuals coming together to begin a business. In a similar way to a sole trader, any debt or profit of the business ultimately falls on the shoulders of the partners, however, it is shared between the partners rather than one individual. Partnership agreements can be created to establish alternative terms to define the relationship in a contractual form before trading is established.
What Is A Company?
A company is a legal entity in its own right, rather than being the legal responsibility of a single individual or group of individuals. You might also hear a company referred to as a corporate personhood.
The company will have many of the same legal rights and responsibilities as an individual. For example, the company is able to enter into contracts, to sue and be sued, to pay taxes, to hire employees and to borrow money.
Types Of Companies
There are many different types of company, from businesses which aim to make a profit, non-profit organisations and financial entities such as banks.
Here are some of the most common types of company that you should be aware of:
1. Public Limited Company (PLC)
A public limited company, often referred to as a PLC, is a company that offers shares of stock to the general public. This means that anyone can purchase shares in the company. The individuals who buy these shares have limited liability, meaning that they cannot be held responsible for any losses which exceed the amount that they invested in the company.
2. Private Limited Company (LTD)
A private limited company, also known as an LTD company, is similar to a PLC in that it is broken into shares. However, those shares are owned privately rather than being available to the public. It can be owned by a small group of shareholders or a non-government organisation (NGO). Like PLCs, the shareholders have limited liability so are not responsible for more than their investment.
3. Limited Liability Partnership (LLP)
A limited liability partnership, sometimes referred to as an LLP, is similar to a traditional partnership, with two or more individuals being responsible for the company. They have the same structure as a traditional partnership when it comes to internal management and distribution of profits. However, the partners in a LLP benefit from limited liability.
4. Royal Charter (RC)
Historically, every company in the UK was required to seek approval from the Royal Charter. This practice dates back to the 13th century. Seeking royal approval is no longer necessary to form a company, however royal charter (RC) companies have been granted power by the monarch. New charters are only usually granted to companies who work in the public interest. Examples of existing Royal Charter organisations include the BBC and the Bank of England.
5. Community Interest Company (CIC)
A community interest company, sometimes known as a CIC, exists to benefit the community rather than shareholders. Profits are primarily reinvested into the CIC, to enhance the benefit to the community and to achieve social objectives.
The Difference Between A Business And A Company
The key difference between a business and a company is the legal structure. A company is a separate legal entity, whereas a business is a person or group of people who are trading as a business name.
Let’s look at some of the important differences between a business and a company.
Setting up a business or company
There are some important differences in how a business or company is set up.
When you set up a business, you can simply put together a business plan, choose a name and then register with HMRC. You’ll need to think about any licences or insurance that you might need, but that’s the extent of your legal obligations to starting your business.
Starting up a company is a more complex process as it involves creating a separate legal entity which is distinct from the person who owns it. You’ll first need to choose a company name and decide on a company structure. You’ll choose the directors and appoint a company secretary, as well as choosing shareholders or guarantors. You’ll also need to identify people with significant control over the company.
Once you’ve made these decisions, you can then prepare documents which detail how the company will be run and begin keeping detailed records. At this point, you’ll register your company with Companies House, as well as with HMRC.
Ownership of a business or company
One of the key differences between a business and a company is how each are owned.
A business is owned by the individual, who is self employed and trading under the name of the business. A business can also be owned by a partnership consisting of two or more self-employed partners. Any profits from the business are split directly between partners.
A company exists as its own legal entity, meaning that it is responsible for itself. Shares of the company are owned by shareholders or directors, depending on the legal structure of the company. Profits are retained by the company, with employees paid a salary and shareholders earning dividends.
Liability as a business or company
Another important difference between a business and a company is how liability is divided.
In a business, the owners are trading under the business name but it does not exist as its own legal entity. That means that the business owners, whether that’s a sole trader or a partnership, are responsible for the debts and legal responsibilities of the business.
As a company is its own legal entity, it is responsible for its own debts and legal affairs. Shareholders and directors have limited liability, with their liability typically limited to the investment that they have made into the company.
Paying taxes as a business or company
A final difference between a business and a company is in the way that taxes are filed and paid.
In a business, the individual or individuals are self-employed. This means that they are responsible for filing their own self-assessment tax return at the end of each tax year. If the business is being run as a partnership, a partnership tax return must also be completed by the business partners. The self-employed individuals will then pay their tax through the self-assessment process.
A company is responsible for filing an annual corporation tax return at the end of each tax year. This will include all elements of the company’s tax affairs. The company will then pay corporation tax based on their corporate tax return.
Pros and cons of trading as a business
There are many advantages, but also disadvantages of choosing to trade as a business. It’s important to weigh up both the pros and cons before making a decision as to which is right for your circumstances.
Pros of trading as a business
- Easy to set up.
- Minimal paperwork required, other than an annual self-assessment tax return.
- Increased privacy as your financial documents are not publicly available.
Cons of trading as a business
- Not regarded as a separate legal entity in UK law, meaning that liability is unlimited. This means that if the business gets into debt, the business owner is personally liable.
- It can be difficult to raise finance without the backing of a limited company, meaning that expansion opportunities are limited.
- Tax rates may become unfavourable as your income increases.
Pros and cons of trading as a company
There are also many advantages and disadvantages that you should be aware of when deciding whether to trade as a limited company.
Pros of trading as a company
- A limited company is regarded as a separate legal entity, meaning that liability is limited. You only stand to lose what you put into the company.
- Corporation tax is a lower rate than income tax, meaning that limited companies are usually more tax efficient than sole traders.
- Registering a company name means that no one else can use it. Sole traders do not benefit from this protection.
Cons of trading as a company
- Limited companies have additional responsibilities. This includes filing a yearly annual return and keeping annual accounts.
- There are fees involved with incorporating, in comparison to registering as a sole trader for free.
- Company information is available freely on Companies House, meaning that details of directors and the company’s earnings are displayed publicly.
Business or company: Which is better?
Although the terms are often used interchangeable, there are many differences between a business and a company. It’s important to be aware of these differences if you’re beginning to trade and unsure how to legally structure your business.
The decision between business and company is a personal choice which really comes down to the type of trading that you’ll be doing, the level of profits that you expect to earn and the amount of liability that you’re happy to accept.
If you’re unsure which option is best for you, it’s always advisable to speak to an accountant to weigh up your options.
Is a small business considered a company?
Whether or not a small business is considered a company will depend on how it has been registered. If the business owner has registered as a sole trader with HMRC, it is considered a business. However, if the business owner has registered the small business with Companies House, it can be considered a company.
What makes a business a company?
A business becomes a company when it is registered with Companies House and directors and shareholders are appointed. This is when the company becomes its own separate legal entity, with its own legal responsibilities and liabilities. There are many different types of company structure which must be carefully considered before a company is registered.
The true difference between a business and a company
The key difference between a business vs a company is that a company is a separate legal entity, whereas a business is simply an individual trading under a business name. Being a separate legal entity affords a company with limited liability, as well as added legal responsibilities.
There are many advantages and disadvantages of both businesses and companies, and which path to take is ultimately a personal decision for the business owner to make. An accountant is best placed to advise on which business or company structure will be most beneficial to achieve future goals.