There are currently more than 32 million small businesses in the United States. While all those businesses are companies, they are not necessarily all corporations.
What is the difference between a company and a corporation? Let’s take a look at corporate structures in greater detail.
What Is the Difference Between a Company and a Corporation?
A company is any type of business, no matter the size. It could be a single-person company or it could employ hundreds of people.
A corporation, on the other hand, is a particular type of company. Fundamentally, a corporation is a legal entity.
Types of Companies There are three primary types of companies:
• Sole Proprietorship
• Partnership
• Corporation
Each type of company has its own unique structure. Here are 3 primary types of business setups and the different types of corporations as well.
1. Sole Proprietorship
A sole proprietorship is comprised of a single person and isn’t a formal organization. From a legal perspective, the business and the owner are the same.
Any income earned by the company has to get reported on the owner’s tax return as income. If there is a lawsuit or other legal proceeding, the owner is responsible for the outcome.
2. Partnership
A partnership operates much the same as a sole proprietorship but instead of a single owner, two people (or more) share ownership of the company.
Once again, the company’s earnings have to get reported on each partner’s tax return as personal income. And the partners are personally liable for any lawsuits or other legal issues.
3. Corporation
The big difference for a corporation compared to the previous two structures is it is a separate legal entity from its owners. The owners are shareholders of the company — they own stocks or shares in the business.
A corporation files a separate tax return and any earnings get taxed at the corporate rate through the company itself. The owners can pay themselves a salary or dividends on the earnings but those are considered an expense to the company.
Corporations can also shield their owners from lawsuits and other legal risks in many cases. If someone sues the company, any fines or settlements come from the company’s assets. If the company doesn’t have the money to pay for it, in most cases the owners aren’t responsible on a personal level.
S-Corp vs. C-Corp
There are two choices when forming a corporation — S-Corp and C-Corp. There are a few significant differences between the two in the formation process, how they get taxed, and their restrictions on ownership.
C-Corps are the most common type of corporation and offer the best advantages for most business owners.
Do You Need to Register a Corporation?
While corporations offer several advantages, they are also more complicated to set up and manage. The extra overhead required may not be worth the time and cost for all small businesses.
Read more on business registration and talk to an accountant to find out what the best structure is for your company and how to create a corporation.
Look at Your Options Before Setting Up Shop
Now that you know what is the difference between a company and a corporation, you should have a better idea of which is right for you. Just make sure you do your research before settling on a choice — it is harder to change the structure once it’s operating.
