Most people use the terms "company" and "business" relatively interchangeably these days. Although this is fine for normal chitchat or for discussing company plans, the terms are actually legally distinct and serve different functions on legal documents.
For example, you can't start a company without first starting a business. Why? Because company and business mean different things in a legal context.
Let's break down the differences between companies and businesses so you can understand what you're founding when you meet up with your partners and start looking for small business loans to launch your new enterprise.
What is a Company?
At its core, a company is a distinct legal entity compared to a person or a business. Specifically, companies are created when a group of people engage in business together for common or shared purposes and goals. This distinction focuses on multiple people being involved.
There are many different types of companies that can be created, each with defined goals, legal requirements, and limitations. The type of company usually determines the ownership structure of the company and dictates who controls, to some extent, company assets and products.
Types of Companies
Most companies are intended to make a profit, but the actual structure of the company is dictated by its type:
PLC, or public limited companies. This type of public company is any corporation when ownership of the company is open to the public (meaning individuals can purchase shares on the stock market). As a limited company, any one individual's financial liability is restricted to a certain fixed sum determined during the company's transition to a PLC. This prevents individuals from going totally bankrupt if the company goes under.
LTD, or private companies limited by shares. This is a private as opposed to a public company, and it cannot be owned by anyone outside of the company. In contrast, LTDs are owned by smaller groups of shareholders or company founders, or other non-government organizations. Still, these types of companies are limited so any financial accountability is also limited to a certain fixed amount depending on their investment in the company
Unlimited companies. These companies don't have any limit on how much money shareholders need to pay if the company is liquidated or otherwise goes bankrupt. This is a much riskier type of company by its very nature.
Companies limited by guarantees. These companies are very different from the previous ones. Instead, individuals within the company are not responsible for any fixed sum dependent on their investment amount. Instead, certain company owners or officers are "guarantors" for the company's financial well-being and are responsible for contributing financially if the company is liquidated.
Royal charters. Royal charters are formal companies that have some power granted by a monarch. For example, the BBC (British Broadcasting Company) has a royal charter in Britain.
LLC/LLP, or limited liability company/partnership. With these companies, some or all of the partners involved in the company will have limited liabilities if the company ends up going under.
Community interest companies. These are any companies that are driven not by profits but for some other goal, usually nonprofit benefits or humanitarian efforts.
Looking at companies in a broader way, one can divide them into two types: B2B or business-to-business companies and B2C or business to customer companies.
As their names suggest, B2B companies focus on providing services and goods to other businesses. Manufacturers and shipping companies are great examples. In contrast, B2C companies provide products and services targeted to individual customers or end-users, such as many software companies, grocery stores, and so on.
What is a Business?
A business is, simply put, either an organization or individual that performs industrial or commercial activities on a regular basis.
This is distinct from a company, which is decidedly a collection of individuals, whereas a business can technically be one person.
In legal terms, commercial activities are any activities where the goal is to make a profit by providing a service or product
Any industrial activity involves creating products or goods for a profit from manufacturing those products oneself
Note that businesses can be both for-profit and nonprofit, though the majority are the former. While businesses are pretty similar to companies, they are distinct entities from legal and economic standpoints.
Types of Businesses
Businesses, like companies, come in many different types that can affect how they run, what they provide, and many other major factors.
A sole trader is any business run by a single individual. These businesses are not run with the help of any other owner. However, such businesses can employ staff, though the staff must do so in their own name as contractors rather than the name of the business.
A business partnership involves two or more individuals collaborating for a unified business venture. The business must be operated in both or all partners' names and any legally binding contracts have to be made with all partners present (unless previously established otherwise). As opposed to sole traders, partnership businesses mean that all partners are liable for legal actions taken by and against the business, plus any debts that are accrued.
A franchise is a more complex business model that involves licensing the rights to its name, products, brand identity, trademarks, operating procedures, and any other valuable assets to individuals that want to run and manage businesses as subsidiaries. For instance, many fast-food restaurant chains are franchises. McDonalds may own all McDonalds restaurants, but individual managers purchase the restaurants and run them in exchange for providing McDonald's a fee.
Ultimately, the different types of businesses dictate who works in the business, who gets credit in the business, and who is liable for when things go wrong in the business. These types also determine how big the businesses usually get.
In many cases, businesses eventually become companies through sheer necessity.
It’s tough to manage any growing business alone, and as your business scales you’ll eventually find it necessary to have assistance from other partners with a stake in the business. Thus, it’s smart to think about what kind of company you want to form ahead of time.
What Are the Differences Between Companies and Businesses?
As you can see from the above descriptions, companies and businesses are pretty similar overall. But there are some key differences.
For example, companies are types of businesses rather than the other way around. A business could be a sole trader, a partnership, or a franchise and be one of any of the types of companies described above.
The different types of companies determine things like:
Meanwhile, the different types of businesses affect things like:
You can certainly start both companies and businesses, but you won't ever start a company without having first started a business. Nonetheless, you will probably need to chose the best LLC formation service / best registered agent service, which is why we offer insight into top services such as BizFilings, SunDoc Filings, Inc Authority, or MyCorporation , each providing various legal assistance.
Which Do You Need First?
As mentioned, you can't have a company without first having a business.
That means you'll first need to come up with a business idea and have some inkling of how the business will be run before doing anything else.
For instance, ask yourself whether the business will be a company run solely by you, or if you'll invite partners. This will later affect what kind of company you form.
For example, certain companies, such as LTDs, are excellent companies to form if you have several trusted partners that you want to work with over the long-term. These are private companies where you and your partners share the financial burden (to a limited extent) if the company ever ends up going under.
In contrast, it may be smarter to form a PLC if you decide to start your business with just yourself and some hired staff. This way, you can make an IPO (initial public offering) and allow the public to invest in your company, sharing the financial burden and risk along the way.
As you can see, it's crucial to figure out what type of business you want to run before thinking about the type of company you'll create eventually.
In many cases, the correct type of company to form is revealed as your business takes off and different factors affect your risk tolerance levels or income.
In the end, the differences between companies and businesses are both minor and major depending on how you look at things. It's important to know what you're forming when you come up with a business plan. With a great plan, you can apply for small business funding and get your new idea off the ground.