Understanding the difference: Business vs Company
A ‘business’ is an entrepreneurial endeavour which aims to make a profit; a company is a separate legal entity formed by one or more individuals to operate a business. The terms ‘business’ and ‘company’ are often used interchangeably, but in reality they have different meanings. However, a company may be a business, and a business may be a company. Are you confused? You won’t be at the end of this article. In this article, we will explain the key differences between a company and a business, including liability protection, taxation, legal status and capital.
Business
What is a business?
A business is any activity that has the specific intention of making a profit. According to the Oxford Dictionary, a business is “the activity of making, buying, selling or supplying goods or services for money”. As such, for a business to exist, we need the following ingredients:
- A person or people to run the business
- A service or product to make, buy, sell, or supply
- The intention to make money
Businesses do not have a separate legal personality from the owner/s of the business. This means that owners of businesses that are not incorporated are personally liable for the debts of the business. The benefit, however, is that businesses are not burdened with the same regulatory requirements as limited companies, which can make them easier and cheaper to run.
Who should run a business?
Unincorporated businesses (i.e. businesses that are not also companies) are ideal structures for a wide range of business people. Businesses are commonly established and operated by freelancers, self-employed professionals, and entry-level entrepreneurs. That does not necessarily mean that businesses are always small. They can vary enormously in terms of type, scale, legal structure, and operational and geographical complexity.
When deciding whether an unincorporated business is the right approach for you, you should consider the level of liability you will have and the risks of not having a separate legal personality. This approach is ideal for tradespeople (e.g. plumbers, electricians), café and shop owners and any business where the benefits of incorporation are not needed.
What are the types of business structures?
There are several types of business structure, each of which has its own pros and cons, including:
- Sole trader
- Partnership
- Limited liability partnership (LLP)
Sole trader
A sole trader is a self-employed person who owns and runs their own business, however, they can have employees. Sole traders have to register for self-assessment with HMRC and meet the legal requirements of this type of business structure, however, these are minimal compared to limited companies. Crucially, sole traders can keep any business profits after tax, but they are also personally liable for any business debts.
Partnership
A partnership is made up of two or more people who personally share responsibility for the business. Under this model, partners share the business profits, with each paying tax on their share. A partner is not required to be a real person, and it can be a legal entity that is also a ‘legal person’. When forming a partnership, partners enter into a partnership agreement document setting out how liabilities, ownership, and profits will be dealt with. Partners are required to register as self-employed and submit an individual tax return. Under a partnership, partners are wholly responsible for all debts owed by the business.
Limited liability partnership (LLP)
A limited liability partnership is a distinct legal entity that is separate from its members (partners), who are only liable for any amount of money they invest. As such, it is similar to a limited company, which we will discuss later in this article. The key differences between an LLP and a limited company are that the former has more organisational flexibility and is taxed as a partnership, not a corporation. As with ordinary partnerships, members share profits, and this is taxed as income.
Company
What is a company?
A company is a separate legal entity established by one or more people to engage in and operate a business that offers them protection from personal liability. In return for having limited liability, companies are governed by stricter laws and regulations compared to unincorporated businesses.
As a separate legal entity, a company can enter into its own contracts (i.e. not with the owner), purchase and own property and assets, and incur debts. Companies limited by shares are owned by shareholders and have a board of directors whose role is to manage the operation of the business.
Who should run a company?
Companies tend to be set up and run by businesspeople who want the reassurance of knowing that they are personally protected from any business liabilities. Companies can be of any scale, from a consultant running a business on their own to a multi-national enterprise. Companies are also suitable for business people who may want to raise capital in the future by selling shares to the public. They are also popular because, as a distinct legal entity, they have a ‘perpetual existence’, meaning they continue to exist even after the owner/members die.
What are the main types of companies?
There are several company types in the UK, including:
- Private company limited by shares (Ltd)
- Public limited company (PLC)
- Private company limited by guarantee
- Limited liability partnership (LLP)
Private company limited by shares (Ltd)
With a private company limited by shares, individuals own a share of the company. For example, an owner may own 100% of shares, two people may own 50% of shares each, etc. This structure is typically chosen by small to medium-sized businesses.
Public Limited Company (PLC)
A public limited company (PLC) can offer shares to the public, and these are typically more complex than limited companies. They are more suited to larger businesses with larger capital requirements (e.g. to fund growth), but they necessitate higher levels of transparency and legal compliance.
Private Company Limited by Guarantee
Private companies limited by guarantee differ from private companies limited by shares in that they do not have shares. Under this model of a company, members act as guarantors who will contribute a set amount towards the debts of the company if they are needed. This type of company is adopted by non-profit organisations, clubs, and societies in the UK.
Limited Liability Partnership (LLP)
LLPs provide limited liability to partners who work for and manage the company. This structure is commonly adopted by law firms, accountants, architects, and other professionals. Partners choose this model because it provides management flexibility while protecting the personal assets of partners.
What are the key differences between a company and a business?
Businesses and companies have a number of important differences, as follows:
| Business | Company | |
|---|---|---|
|
Ownership and Legal Structure |
A business operates under the ownership structure chosen by its owner, such as a sole proprietorship or partnership, and lacks a separate legal identity. |
A company is a distinct legal entity, separate from its owners, with its own rights, obligations, and responsibilities. |
|
Liability |
The owner is personally liable for all business debts and obligations. |
Shareholders’ liability is generally limited to the amount they invest in the company. |
|
Taxation |
The business’s income and expenses are reported on the owner’s personal tax return. |
A company has its own tax identity, filing a separate tax return distinct from its shareholders. |
|
Continuity (perpetual existence) |
The business’s existence is tied to the owner; it may cease if the owner dies or retires. |
A company enjoys perpetual existence, continuing to operate even if its shareholders change or the original owners depart. |
|
Capital acquisition |
Businesses typically rely on personal savings or loans to fund operations, particularly in sole proprietorships. |
Companies have greater opportunities to raise capital, such as issuing shares to attract investment. |
Final words
We hope you have found this guide to the differences between companies and businesses useful. It is common to use these terms interchangeably, but they have quite different meanings. As explained above, a company may also be a business, and a business can be a company if it is incorporated. Within each category, there are various subtypes which should be fully understood before making the decision as to which business structure to adopt. Each has its own features, pros and cons. By taking the time to understand these early on in your business journey, you can ensure that your business can scale and has a suitable legal structure for your immediate and long-term needs.
If you choose to establish a company, you must ensure this is undertaken correctly. You will need to register your new company entity with Companies House; this can be done online through the Companies House website or a company formation specialist such as Uniwide Formations. We offer a range of company formation packages tailored for different structures and requirements. We will take care of the company registration process on your behalf and will often have your company set up on the same day. Once your company is registered, we offer an online portal through which you can access a range of services to make running your company as quick and efficient as possible.
