Corporation vs Business: The Difference Between Corporations and Companies

In America, starting your own business is the surest way to follow the entrepreneurial spirit that permeates our culture. But while forming a business can be exciting and a great way to get your new venture off the ground, you have to determine what type of business you want to create. Although most business news focuses on corporations, you don’t have to form a corporation right off the bat. You may not even want to! Let us break down the differences between corporations and companies in detail to know what type of company to form in the future.

What is a Company?

At its core, a company is a separate business entity established for tax breaks, limiting legal liability for the owner or employees, or similar reasons. A company is any business entity that:

• Provides goods or services to customers or clients and
• Is legally distinct from its owner(s) or operator(s)

All companies are primarily focused on turning profits. Technically speaking, a corporation is a type of company. However, not every company is a corporation! Companies can be structured in various ways, which may affect the tax breaks they can take advantage of, the structure of the company (i.e., who is in charge, who makes major decisions, and so on), and more. Most businesses begin as basic companies before eventually developing into a specific type of company or growing into a corporation. In some ways, corporations can be understood as large companies.

Types of Non-Corporate Companies

There are a few different company types that do not count as corporations.

Sole Proprietorships

A sole proprietorship is a very easy type of company to set up. It’s a business comprised of a single individual, and it doesn't count as the same type of formal organization as other types of businesses. Note that, while companies must be legally distinct, they are not separate from their owners. Indeed, a sole proprietorship doesn’t count as a separate entity from the owner, although it maintains some distinctions that can assist for liability purposes. Under a sole proprietorship, the owner will pay taxes on any revenue from the business under his or her own name. Furthermore, the owner is solely responsible for business needs or liabilities, like paying off business debts. Although sole proprietorships are simple and are much more tied to their owners than other types of companies, owners can still decide to come up with a new company name rather than rely on their own name when conducting business transactions or services.

General Partnerships

The next size of a basic company is a general partnership , including two or more people. The structure of this company type is very similar to that of a sole proprietorship, the primary difference being that it involves at least two people. In a general partnership, each partner in the company will pay his or her taxes separately and use their own Social Security or tax ID numbers. Again, the company doesn’t exist as a fully separate entity, though it is legally distinct from the owners. Still, the financial resources of business partners may be at risk in the event of a lawsuit or another business problem. As with a sole proprietorship, the partners in a general partnership can use their own surnames or decided to assume a new business name.

What is a Corporation?

The big difference between companies and corporations is that corporations are legally separate from their owners. It’s a small difference, but it has massive ramifications in legal cases or in determining which tax breaks a company can take advantage of. When a corporation is formed, the owners become shareholders, and the proportion of corporate stocks or shares they own directly corresponds to how much of the business they own. Shareholders may often choose to create a Board of Directors to assist with the management of business operations, or they may manage the business directly by creating a shareholders’ agreement. Because of this structure, corporations are always more complex than other types of companies. Corporations, being legally distinct entities, can assume liability for business problems, like assumed business debt. For example, suppose a corporation is sued for debts that were unpaid past their due date. In that case, the owners will not necessarily be legally liable, and their personal financial resources may not be used to pay the debt. Instead, the company may be liquidated (i.e., sold off) in order to pay off the debt, saving the finances of individual owners or shareholders. In general, companies only become corporations when they reach a size large enough that the possibility of a lawsuit becomes significant. Company owners might also decide to run their businesses as corporations if they have too many members to suit an LLC or similar organization style. In addition, because corporation owners are separate from the company they run, they have to file separate tax returns rather than filing a shared tax return with the company. Thus, the IRS assigns any corporations their own tax numbers (sort of a company Social Security number), and taxes are paid both on the money earned by a corporation and any earnings paid to owners (such as salaries or dividends). Note that this does mean that corporations are typically taxed twice on earnings: once at the individual level and once at the corporate level. 

Types of Corporations

Corporations come in two major types: S corporations and C corporations . Both types are more complex than the other businesses mentioned above, but they aren’t necessarily the best choice if your business is small and only has a handful of members.

S Corporations

An S corporation does not necessarily fall under the double taxation rule mentioned above. Under certain circumstances, S corporations can recognize corporate earnings and losses like those from owners' tax returns. In other words, the owners of S corporations only need to pay taxes once. These corporations are only possible with specific business types or entities. In addition, larger corporations are almost always C corporations by law, as their income becomes too large to manage or assign as the income of a single or several individuals. 

C Corporations

As mentioned above, C corporations are double-taxed: once on corporate earnings and once on owners' individual earnings. C corporations are usually larger and more complex than S organizations. They usually have much more diverse and expansive business operations, along with bigger boards of directors or more shareholders.

Is an LLC a corporation or Company?

There’s one other type of company you should be aware of: the LLC or limited liability company. A limited liability company is neither a corporation nor a partnership, although it has some elements from both company structures. With an LLC, two or more owners can join together and create a small to medium-sized company that allows them to manage or direct the company according to their wishes. As a partnership, owners of an LLC can participate in business decisions. But a big benefit of an LLC is that it protects the owners from liability (hence the company type name).  As a result, LLC owners are not necessarily liable for things like business debts, accusations of tax fraud, and so on. LLCs are super flexible and are popular business choices for growing enterprises that do not necessarily want the burden or complexity of a corporation. To form an LLC , business owners have to register it with their state’s Secretary of State office, file forms that outline the structure of the company, and so on. Keep in mind that state requirements for LLC formation can vary, including their fees.  Also, an LLC does not have to begin with a partnership. You can also start a company as a single-member LLC . However, this type of business has a different status in the eyes of the IRS.

Summary

All in all, there’s a type of company or business that will be perfect for your needs. In general, it’s a good idea to avoid forming a corporation (and the double taxation that may likely result) until your business literally becomes too unwieldy to handle or you acquire so many managers or shareholders that it becomes impossible to manage otherwise. If you are running a business by yourself, a sole proprietorship is an obvious choice. If you have one or more partners, consider a general partnership or an LLC: both of these company types are flexible and will give you the room to grow into your profits while limiting your liability in certain areas. Still have more questions about which type of company to form, or do you need help getting enough funding to get your business venture off the ground? You should contact Seek Capital in either case – we can assist with loans, business guides, and more. Sources: Limited Liability Company (LLC) Definition | Investopedia Choose a business structure | SBA (IRS) Sole Proprietorships | IRS General Partnership Definition - Business | Investopedia