Business vs company: What’s the difference?

For many, the terms “business” and “company” are used interchangeably in everyday conversation. This is understandable – both are involved in commercial activity and can provide goods or services, but they are not the same thing: a business is the trading activity or organisation itself and can operate under different legal structures, while a company is a formally registered legal entity that exists separately from its owners, usually with limited liability and ongoing existence.

As far as legal and operational structures go, that distinction matters most to people running a venture, planning to start one, or working with one, because it affects liability, tax treatment, control, compliance, and what happens to the organisation over time. The following article compares business vs company directly, including the core definitions, common company structures, legal and tax differences, the advantages and disadvantages of each, and when it makes sense to incorporate a business into a company.

What is the difference between a business and a company?

A business is a broad term for an individual or organisation that sells goods or services, usually with the aim of making a profit. A company is a specific legal structure that can be used to carry on a business and, once incorporated, exists as a separate legal entity from its owners. Put simply, a business does not have to be a company. A sole trader, for example, can run a business without forming a limited company, while a company can also exist without actively trading.

Business vs company: key differences

• Legal structure: A business can operate under several structures, including as a sole trader, partnership or limited company. A company is a formally incorporated legal entity.
• Legal identity: Sole traders and their businesses are legally considered the same entity, whereas a limited company has a separate legal identity from its owners.
• Liability: Sole traders can be personally responsible for business debts. Shareholders of a limited company generally benefit from limited liability.
• Registration: Sole traders usually register with HMRC for tax purposes, while limited companies must be incorporated with Companies House.
• Tax: Sole traders normally pay Income Tax and National Insurance on their profits, while limited companies generally pay Corporation Tax on company profits.

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 can be owned by a single individual operating as a sole trader, or by a group of people operating in partnership. A sole trader can operate without incorporating a company, while partnerships may have specific arrangements covering ownership, profit sharing and decision-making.
• Legal Liability – Sole traders have unlimited liability and are personally responsible for the debts of their business. Partners in an ordinary business partnership also personally share responsibility for the partnership’s debts, although different rules apply to limited partnerships, LLPs and companies.

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 Companies House. Once registered, a company becomes a legal entity that is distinct from its owners and the people who manage it (directors). The company can enter into contracts, own assets and property, and incur debts in its own name. In a company limited by shares, shareholders’ liability is generally limited to any amount unpaid on their shares, although directors or shareholders can still become personally liable in certain circumstances.

A company also has continuing legal existence, meaning that, unlike a sole trader business, the company can continue to exist beyond an owner’s death or departure. 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 companies in which members’ liability is limited, usually by shares or by guarantee. They are a common type of company structure in the UK, with private and public limited companies being two important categories.

• Private Limited Company – A private limited company cannot offer its shares for sale to the general public. Its shares can still be transferred or issued privately, subject to the company’s articles and any relevant agreements, and this structure is suitable for a wide range of businesses, with small businesses often opting for it.
• Public Limited Company – A public limited company can offer its shares for sale to the general public, and its shares may also be listed on a stock exchange. However, to become and operate as a public limited company, you have to abide by additional regulations and reporting requirements.

Limited Liability Partnerships

A limited liability partnership blends features of a traditional partnership and a limited company. There is flexibility in internal management and profit sharing, but an LLP is still a separate legal entity from its members. For most tax purposes, an LLP carrying on a business with a view to profit is generally treated like a partnership, meaning the LLP itself does not normally pay Income Tax on its profits. Instead, individual members are taxed on their share of the profits through their own tax returns, while corporate members may pay Corporation Tax. This is a popular option for professional services firms, such as law firms, where members want limited liability alongside a partnership-style structure.

Royal Charter

Royal Charter bodies are a historic form of incorporation granted by the Sovereign on the advice of the Privy Council. They generally have independent legal personality and a degree of self-regulation under the terms of their Charter. That being said, new Royal Charters are now granted rarely. They are normally reserved for bodies that work in the public interest and can demonstrate pre-eminence, stability and permanence in their field. The BBC is a prominent example of a body incorporated and governed under a Royal Charter.

Community Interest Company

CICs are purpose-driven companies that operate to provide a benefit to the community they serve. A key difference between CICs and ordinary companies is the compulsory “asset lock”, which restricts how assets and profits can be transferred or distributed so they continue to benefit the community. CICs limited by shares can pay dividends in some circumstances, but payments to private investors are subject to a dividend cap.

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 some forms, especially those limited by guarantee, are also used by non profit organisations, and organisations that look to make positive impacts whilst functioning as a business.

Key Differences Between Businesses And Companies: The Concept of a Separate Legal Entity

Here, we will directly compare the two.

• Legal Status – The fundamental distinction is that an incorporated company has its own separate legal identity. Sole traders do not have this separation and are personally responsible for their business liabilities, whereas shareholders in a limited company generally benefit from limited liability. Directors and shareholders can still have legal duties and responsibilities of their own.
• Taxation – A company’s tax affairs are different from those of a sole trader, and the tax implications are one of the clearest differences. A sole trader does not pay tax separately from the individual; instead, business profits are reported through Self Assessment and the owner pays Income Tax and, where applicable, National Insurance on those profits. 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, with Corporation Tax rates ranging from 19% to 25%, with Marginal Relief applying to qualifying profits between the main thresholds.
• Regulations – Companies have stricter reporting and filing requirements than sole traders and many partnerships. You will be required to appoint at least one director for a private limited company, who has legal responsibilities for running the company. Limited companies must prepare and file annual accounts, submit a confirmation statement and meet other ongoing Companies House and tax requirements. This is something sole traders do not have to do.

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 choose a company name and register the company with Companies House in the UK. The overall process includes documents such as a memorandum of association and articles of association.

Once the incorporation process is complete, the new company becomes its own legal entity, although assets, contracts and other parts of an existing sole trader or partnership business may need to be transferred to it separately. 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, especially when weighing a sole trader business or partnership against a company:

• Costs – Incorporation involves registration fees and ongoing administrative costs, as well as accounting for the new legal and administrative requirements. Many owners fund an unincorporated start with personal savings, which can make those extra costs harder to justify early in the business journey, especially for small businesses with limited budgets, simple operations, or those operating in a low-risk industry.
• Control – Sole traders can have very direct control over their business, while partnerships share decision-making between partners. In a company, decision-making is governed by the roles and powers of directors and shareholders and by the company’s articles, although a single shareholder-director can still retain substantial control.
• Tax Considerations – It is important to weigh the tax implications of each structure, since the way profits are taxed can vary by jurisdiction, business type, and profit level.
• 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 – For self-employed people running their own business as a sole trader, setup is straightforward and the legal requirements are lighter than incorporation. There’s less company administration 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 perfecting your goods or services.
• Control – Sole traders make all the decisions, big or small, without having to answer to a board of directors or consult with partners, with direct control over business assets and no separate pool of company money in this structure. This is particularly useful in businesses that require swift decision-making and reactions to market changes. For individuals with a strong vision for where they want their business to go, this is a major advantage.
• Potential Tax Advantage – Taxes are messy, but depending on your income level, business profit and taxation method, a sole trader structure may be tax-efficient in some circumstances. Nonetheless, remember that sole traders may need to submit a Self Assessment tax return and pay National Insurance where applicable. So it’s important to ensure your business records are correct and well-compiled.

Cons

• Full Liability – One significant difference between a limited company and a sole trader business is separate legal status. If your business fails and you incur debts you cannot repay easily as a sole trader, you remain personally responsible for business debts, and financial difficulties can put personal assets and savings at risk.
• 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 sole trader business does not have a separate legal identity that continues independently of its owner in the way a company does. If the owner dies, becomes unable to work or decides to leave, arrangements would need to be made for the business or its assets to continue under new ownership. This can create an uncertain future, which can be a drawback of an unincorporated business.

Pros And Cons Of Trading As A Company

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

Pros

• Limited Liability – A limited company generally separates the company’s liabilities from the personal liabilities of its shareholders. In a company limited by shares, shareholders’ liability is generally limited to any amount unpaid on their shares, and they are not usually liable for the company’s debts.
• Increased Credibility – Operating as a company with a registered company name can enhance your credibility with some customers, suppliers or lenders, whilst having more formal oversight and public filing requirements via Companies House. Furthermore, the company can continue to exist after the death or departure of a shareholder. Around 37% of UK businesses are limited companies.
• Capital Raising – Companies limited by shares can issue shares to investors and may have better access to some forms of finance, helped by their formal ownership structure. Private companies cannot offer their shares to the general public, while public limited companies can do so subject to the relevant rules.

Cons

• Taxation – Companies pay corporation tax, and shareholders may also pay income tax on dividends; the company files a separate tax return and has its own tax identity, unlike a sole trader.
• Increased Regulation – Companies must adhere to stricter reporting than businesses, including annual accounts and ongoing compliance requirements.
• Reduced Control – A company is owned by its shareholders and managed by its directors, although the same person can be both. Where there are several shareholders or directors, decision-making may be shared and will be governed by the company’s articles and any shareholders’ agreement.

Business vs Company Differences: Conclusion

All in all, incorporating into a limited company can provide protections that are not available to a sole trader, particularly through limited liability. Compared with remaining a sole trader, incorporating means accounting for increased regulation and administration, while control will depend on how the company’s shares, directorships and decision-making arrangements are structured. 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.