Corporation vs. Company: What’s the Difference?

Introduction:

Have you ever wondered why some business entities are called ‘corporations’ while others call themselves ‘companies’? People generally use the terms interchangeably, especially outside the business world, and that has led to this confusion.

In this blog, we will try to figure out what companies are and how they differ from corporations. Apart from ‘corporation vs. company’, we will also look at their types and how they function. By the end of it, you will stop blurring the lines between the two, and see each for what it is.

What is a Corporation?

A corporation is a business entity that has an identity independent of its owners, who are also known as shareholders. Since it exists as a separate legal and financial entity, it has certain rights and liabilities distinct from its shareholders. The shareholders are generally not responsible for the debts and obligations of a corporation. This characteristic of a corporation is known as ‘limited liability’. In legal terms, a corporation has much the same rights and responsibilities as an individual person, allowing it to enter into contracts, sue or be sued, and conduct business in its own name.

Corporations can be classified into two broad types:

• C-corporation:

It is the most traditional and common type of corporation. C-corporations are subject to double taxation, which means that the profits of the corporation are taxed at the corporate level, and any dividends to shareholders are also taxed at an individual level.

• S-corporation:

An S-corporation elects to pass its income, losses and credits through to its shareholders for federal tax purposes. Therefore, the corporation is not taxed at the federal level. Instead, shareholders report their share of the corporation’s income on their individual tax returns.

Also Read: Important Company Laws and Policies

What is a Company?

Technically speaking, a company is an organization formed with the purpose of conducting commercial activities like manufacturing and trading or to offer services and innovations. To put it very simply, a company is a collective endeavor, an amalgamation of human ideas, resources and efforts to reach a common goal. This goal could be as simple as a commitment to deliver quality products to consumers or as ambitious as a desire to revolutionize an entire industry through innovations.

Companies can be classified into various types:

• Sole Proprietorship:

As the name suggests, this is a type of company which is owned and operated by a single individual. The owner assumes all responsibilities and enjoys all the profits but also carries unlimited personal liability for the company’s debts and legal obligations. 

• General Partnership:

It involves two or more individuals coming together to run a business. In this type of company all partners share equal liability and management responsibilities. All partners are also responsible for each other’s conduct or misconduct in the context of the company. 

• Limited Liability Partnership:

A company where the partners only have a limited liability according to their investment amount is known as a Limited Liability Partnership. In this type of company, partners are not involved in management and are not responsible for each other’s misconduct. 

• Limited Liability Company (LLC):

An LLC is a popular business structure where the liability protection of a corporation is combined with the tax benefits and management flexibility of a partnership. An LLC can be a single member entity or have multiple members.

• Corporation:

A corporation is a legal entity separate from its owners (shareholders), granting limited liability to its shareholders. They are subject to corporate taxation, and any dividends paid to shareholders are also taxed as individual income.

Also Read: First Time Manager – 6 Essential Skills For You to Succeed

Corporation Vs. Company:

• Formation and Structure in Corporation vs. Company:

Establishing a company is a relatively easier process as it involves only a coming together of like-minded individuals to pool resources and expertise or a single individual pursuing a business idea. The structure of a company depends on the kind of company it is.

Corporations on the other hand require a more formal process. They operate under a hierarchical structure, with a board of directors overseeing high-level decisions and regular officers managing day-to-day affairs. This approach provides a foundation to long-term sustainability.

• Taxation and Reporting in Corporation vs. Company:

For companies, taxation is generally more straightforward, especially in the case of sole proprietors, general partnerships and LLPs. The owners are responsible for filing the tax returns on the profits and losses of the company.

In the case of corporations, C-corporations face ‘double taxation’ where both the corporation as well as the shareholders are taxed separately. However, S-corporations are free from this. Their shareholders just have to report their share of the corporation’s income on their individual tax returns. 

• Management and Decision-making in Corporation vs. Company:

Companies have a more flexible and agile structure, and the decision-making within a company can be swift, with owners or partners closely involved in the day-to-day affairs.

On the other hand, corporations have hierarchical structures and formal procedures that govern decision-making. This ensures clear lines of authority and accountability, making it an ideal choice for larger enterprises.

• Liability and Legal Status in Corporation vs. Company:

Sole proprietors and partners in a company generally face unlimited liability, making them responsible for the company’s debts. Companies as entities don’t have legal rights or separate regulations.

In the world of corporations, a cloak of ‘limited liability’ shields the stakeholders from personal financial risks. Legally, a corporation has the same rights and responsibilities as an individual person.

• Compliance and Regulation in Corporation vs. Company:

The regulatory requirements of companies, especially sole proprietorships and partnerships, are generally fewer. This allows them more freedom to focus on their ventures without much administrative burden.

Corporations, meanwhile, work under greater chains of regulation and scrutiny. Since they are legally recognized entities, they must adhere to reporting standards, disclosure requirements and corporate governance principles.   

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Conclusion:

In this blog, we ventured into the business terrains of corporations and companies, figuring out what they are and how they function. We discussed briefly about the various types of companies and corporations that usually make up the market. Lastly, and crucially, we delved into the section ‘corporation vs. company’ and tried to elucidate the main differences between the two.