There are millions of different companies spread out around the world, each with varying levels of complexity and different amounts of resources. All companies are businesses of one type or another. But legal documents often require more precise terms, especially when it comes to offering legal protections or determining who is liable in a lawsuit. Though the terms company, enterprise, and corporation are sometimes used interchangeably, this is not technically correct. Enterprises and corporations are types of companies and carry multiple differences between them, as well. This guide can break down the differences between all three terms – company, enterprise, and corporation – to help you know which your business likely qualifies for.
The best way to think of a company is a collection of individuals doing business. Whereas a business can theoretically be run by a single person, a company by definition must have multiple people with ownership stakes in the business. For example, someone could run a small carwash business and hire a few family members as workers. That would count as a business. But a company could be formed by two siblings starting a car washing business together where they both own the business's assets and are financially and legally liable for the business's activities. Companies are, after business, the basic and distinct legal entity that separates individuals from commercial organizations. Furthermore, both corporations and enterprises are types of companies, not the other way around.
A corporation, therefore, is best thought of as a larger business. Indeed, this is the context in which the term is usually used both in day-to-day conversation and in legal documents. But technically, corporations are any companies that have become incorporated , which is a distinct legal process. Becoming incorporated grants a company a few advantages compared to other business structures, in addition to distinct legal limitations. Like companies, corporations are treated as distinct and separate entities from the owners. The reason people form companies (and indeed, corporations and enterprises) is so that they don't lose everything in the event that their business endeavor goes under for one reason or another. Companies, corporations, and enterprises all insulate the owners financially and legally to some extent. When a company becomes a corporation, the business as an entity is totally separate from the founder(s), which protects them even more effectively from any financial or legal blowback due to business activities or eventual bankruptcy. Technically, corporations can be thought of as legal people since they are granted several key rights and obligations. For instance, all corporations can or must:
In many cases, companies decide to incorporate when their business activities become large enough that any financial issues or drawbacks would be devastating to the individuals who founded the company. In many cases, companies become incorporated to take advantage of the above defenses, as well as to expand even further and become larger, international businesses. All of these factors don’t necessarily mean that every business should automatically try to become a corporation. There are many reasons why smaller companies may wish to stay the same, ranging from greater control to less risk of taking out large amounts of debt.
An "incorporated" company is any company that's gone through the formal steps to become a corporation. When a company becomes a corporation , its name must then have "Inc." after the rest of its title. In the U.S., companies can become incorporated by following a certain process based on their state, though the incorporation process is essentially the same with a few minor differences. Companies must:
The requirements for becoming a corporation are relatively arbitrary, particularly for companies that are large enough to start considering this as an option. For example, companies must usually register in a single state and identify the key executives. But corporations aren't required to conduct business in the state in which they are incorporated.
An enterprise is essentially any business that is large and complex enough to qualify. Technically speaking, even a single person business can be an enterprise, although most people will not recognize it as such. Enterprise as a term is not protected the same way incorporated is, however. In most cases, an enterprise is any company that has multiple divisions, levels, departments, or groups that all contribute toward shared company goals and profit targets. Thus, businesses that may have multiple stores in several locations, or have several different departments that handle manufacturing, quality assurance, customer relations, and other tasks. Other complex companies will qualify as enterprises in most cases. These days, "enterprise" is typically used as a term for larger companies that require certain types of software and large-scale solutions that can be rolled out and implemented across all of their divisions. In fact, the software industry has a distinct category for enterprise risk management or ERM software, which is software that helps businesses manage complex or sprawling processes and resources.
In many cases, yes. For starters, it's not legal to call yourself a corporation or add "Inc." to your business's name if you are not legally incorporated in at least one state. Thus, only companies that are legitimately incorporated will usually take this step. Furthermore, being an incorporated company carries a connotation of complexity and market power that smaller businesses simply don't have. This is a relatively soft benefit compared to actual physical assets, but it does make a big difference. For instance, incorporated businesses may be able to demand greater amounts of investment income from funding rounds , or they may be able to negotiate differently with their shareholders. By the same token, "enterprise" carries connotations of complexity and is usually only used by larger companies that are expanding and that have multiple divisions. While smaller businesses can call themselves enterprises, vendors, manufacturers, and business partners may look upon them strangely for using the title when they technically haven't "earned" it.
As your small business develops, you may find the idea of adding either enterprise or "Inc." to its name for some of the above reasons. But be sure to make this decision carefully, as there could be consequences later down the road.
Becoming an enterprise is relatively risk-free, as it usually just requires adding a subtitle to your business's name or changing your business's name to include the word itself. You should only try to call your business and enterprise after it has multiple stores, departments, or levels of complexity. That's because larger companies that really deserve the term enterprise will be able to interact with vendors and manufacturers in a different way than typical small businesses. They simply require more resources and different types of software. If your small business isn't at the enterprise level and you try to obtain those resources, you might find it difficult to afford that software or strike deals with key vendors.
Becoming a corporation brings with it some benefits, as well as some risks. Turning your company into a corporation will protect you significantly from any legal or financial blowback that could arise as a result of employee behavior, shareholder decisions, or even market conditions. For instance, it's a lot easier to survive the bankruptcy of your company if it's a corporation compared to if it's a regular business or some other type of limited liability company. Furthermore, while being a corporation by its very nature allows you to draw greater and greater amounts of debt to finance new ventures, this also opens your company up to greater debt risk. Many companies have become corporations, taken on way too much debt in short succession, then have gone bankrupt shortly after. Many small business owners also dislike the size of corporations and the lack of control that naturally follows. No matter how attached you are to your business, you will need to start delegating when it becomes a corporation, and you'll have either shareholders or other board members to work with. Thus, some small business owners may prefer to avoid becoming incorporated in order to keep as great of control as possible over their small business.
Ultimately, it's important to know what to call your company if you're founding a new small business , just like it's important to secure business funding so your dreams can take off. For more resources on all things small business, check out the other articles in our blog! Sources https://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work https://www.nolo.com/legal-encyclopedia/form-corporation-how-to-incorporate-30030.html https://www.lrrc.com/experts-corner-supreme-court-rulings-limit-where-a-corporation-may-be-sued