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What is the difference between a company and a corporation?
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In this article, we will break down the differences between a Company vs Corporation so you know all there is to know about it!
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Difference Between Company vs Corporation
Did you ever wonder what is the difference between these two words?
The main difference between a company and corporation is that a company generally refers to a business operation whereas a corporation refers to a specific type of business entity.
Let’s look at the definition of these two terms individually.
What Is A Company
According to the Merriam-Webster dictionary, a company is defined as:
“Association of another” or “A group of persons or things”
As you can see from this definition, a company is a general term referring to individuals and business partners getting together to conduct a commercial activity (voluntary association).
A company can be any type of business entity such as a sole proprietorship, partnership, or corporation.
What Is A Corporation
According to Investopedia, a corporation is defined as follows:
A corporation is a legal entity that is separate and distinct from its owners.
As you can see, a corporation is a “legal entity” or a type of business legal structure established by individuals to operate a business.
A corporation provides various benefits to the business owner or entrepreneur, such as:
- Limited liability protection
- Flexible ownership structure
- Higher credibility
- Better chances to attract investors
Company vs Corporation Business Structure
We refer to a company when we are referring to a group of individuals or people taking entrepreneurial steps to sell goods or services in a coordinated and somewhat structured way.
A company, regardless of the industry it operates in, can be legally structured in different ways:
- Sole proprietorship
- Limited liability company
As you can see, a corporation is a type of business structure that may be referred to as a company as well.
Let’s look at each of the business entity structures.
A sole proprietorship is the most basic type of business structure and the easiest one to start.
Being a sole proprietor means that a company is being operated by one single person who is responsible for the entire business operations, financial benefits, and expenses.
There are no formalities to start a sole proprietorship.
The moment a person starts conducting a commercial enterprise, he or she will be considered a sole proprietor.
From a legal standpoint, the sole proprietorship business is not a separate legal entity from its sole owner.
Partnerships (general partnerships) is another simple business structure that is similar to a sole proprietorship with the main difference that the business (or company) is operated by more than one person (partners).
Each partner is responsible for the business operations.
In other words, the partners may be personally liable for the business debt and financial obligations.
A corporation is a business entity legally formed to provide business owners a separate legal entity to conduct business.
In other words, the business entity is distinct and separate from the business owners or shareholders.
This has an important consequence as the shareholders are generally protected or shielded from the debts and obligations of the company.
Also, a corporation can survive indefinitely and will not end with the death of its shareholders.
The company’s shares of stock can be transferred by one owner to another providing greater flexibility in the ownership structure than other types of business entities.
On the flip side, corporations must be maintained in good standing and have more compliance rules to respect and observe.
Otherwise, the corporation may fall out of good standing and no longer offer the legal protection needed by its shareholders.
Limited Liability Company
A limited liability company or LLC is a type of company that is sort of a hybrid between a partnership and a corporation.
Just like a corporation, the owners of the LLC own a percentage of the LLC (and by extension the business).
The limited liability company is also a separate legal entity providing the owners the limited liability protection as corporations do.
However, from a tax perspective, the LLCs have characteristics of a partnership as the owners can have the business revenues flow to them personally (also known as pass-through taxation).
Corporation Versus Company Management
For a company to be successful and profitable, it must be properly managed.
What are the differences in the management of a corporation versus a company?
This question is difficult to answer directly but we will try to answer it in a short and simple manner.
A corporation is a legal entity that is separate from its owners.
As a result, you have different stakeholders in a corporation such as:
- Board of directors
- Executives and employees
The board directors are individuals that get together from time to time (quarterly in many organizations) and decide on the major decisions affecting the company.
The board members are not necessarily company employees and can be independent of the business.
Once the board makes overall decisions steering the business in one direction or another, the company executives (like the CEO, President, VPs, C-suites, or other individuals with similar titles) will do what they can to implement the decisions of the board and run the business on the day-to-day.
Then you have the shareholders.
The shareholders can be employees or may sit on the board of the company but they do not have to.
A shareholder can be entirely independent of the company.
The shareholders are the ultimate beneficiaries of the business.
They are the ones that elect the members of the board.
If they are not happy with the board or any of its members, they can choose to elect another person at the next annual shareholder meeting.
What about the management of a company?
The answer to this question will be a little more general than with a corporation.
A company is a term used in business to refer to an organized set of activities intended to drive value or earn profits.
A company can be operated by one single person (sole proprietor), several people (partnership), or as a separate business entity (corporation, LLC or other).
If we are generally speaking about company management, we can say that a company must be well-managed to succeed.
For example, a sole proprietor can stand to gain and earn profits if he or she is well organized, is disciplined, works hard, and satisfies a market need.
The management of a partnership is similar to that of a sole proprietorship and, in addition, the partners must have the ability to work well with one another, communicate their thoughts, and pool their knowledge and resources to succeed.
The managers in a sole proprietorship and partnership are generally the business owners whereas the managers in a corporation are individuals hired specifically for that purpose and may not necessarily be the shareholders.
Key Differences Between Company And Corporate
Let’s look at a quick summary of the key differences between a corporate entity and a company.
A company is a general reference to a business whereas a corporation is a reference to a specific type of business entity.
A corporation is owned by its shareholders whereas a company can be owned either by the business owner in full (sole proprietorship), several individuals (partnership), or others (shareholders).
A corporation can have an unlimited number of owners whereas a sole proprietorship or partnership has a limited number of owners.
A corporation is a legal entity separate and apart from its shareholders whereas a company may either be separate or merely be the business owner.
A small company will generally be managed by its owner whereas a corporation may either be managed by its owners or have independent managers.
A corporation must hold annual meetings of its shareholders and the board whereas a sole proprietorship or partnership does not.
A company can have the name of its owner in the case of a sole proprietorship or have a trade name whereas a corporation must have its own unique name registered in accordance with the naming laws.
Corporations are taxed by default as a separate legal entity (C Corporation) whereas a company may be taxed on its business revenues or the business owners may need to report the business revenues on their personal income taxes.
Corporation vs Company Takeaways
So, what is the difference between a company and a corporation?
Let’s look at a summary of our findings.
Company vs Corporation
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