Corporation vs Company: Critical Legal Differences
A corporation is a corporate structure that legally separates its owners (called shareholders) from the business. The term “company” is a generic term for any type of business entity. The main differences are that a corporation provides legal protections for the owners, has different taxation options, and must follow more formal filing requirements.
What Is a Company?
A company is a term for any organization engaged in a commercial enterprise. A company may be a legal entity, such as a corporation, limited liability company (LLC), or limited partnership (LP) if it registers with the Secretary of State in the state where it conducts day-to-day operations.
What Is a Corporation?
A corporation is an advantageous business structure because the corporation has its own legal status. A corporation can sign its own contracts and is responsible for its own business obligations. This protects individual stockholders’ personal assets from the debts, tax liabilities, and lawsuits of the corporation.
An entrepreneur may want to change their sole proprietorship into a corporation, especially if their business activity might subject them to lawsuits.
How Are Corporations Taxed?
The corporate tax depends on the corporation’s legal status as a C corporation, which is a corporation’s default status or an S corporation, which is a special election made with the IRS.
An S corporation (or S corp) is treated as a pass-through entity by the IRS. With an S corp, the corporation is not taxed; the shareholders report any profits or losses on their individual returns.
One of the biggest problems with structuring a business as a C corporation is that a C corp is subject to double taxation. This means the corporation pays a corporate tax, and then the corporation pays the stockholders. The stockholders then pay personal income taxes on the same source of income.
Company v. Corporation: Chart of Key Legal Differences
| Feature | Company | Corporation |
| Definition | A general term for any business entity engaged in commercial, industrial, or professional activities. | A specific legal entity formed under state law that is separate from its owners. |
| Legal Status | None for sole proprietorships. Corporations, LLCs, and LPs are separate entities. | Always a distinct legal person with its own rights and responsibilities. |
| Ownership | Owned by individuals unless formed as a corporation, LLC, or LP. | Owned by shareholders who hold stock in the company. |
| Liability Protection | No limited liability protection, unless corporation, LLC, or LP. | Provides limited liability protection to shareholders. |
| Management | Depends on type of business structure | Managed by a board of directors and corporate officers. |
| Formation Requirement | May not require formal registration unless corporation, LLC, or LP. | Requires filing Articles of Incorporation and adhering to corporate formalities. |
| Tax Treatment | Depends on the business structure; may use pass-through taxation. | Can be taxed as a C corporation or elect S corporation status for pass-through taxation. |
What Is the Process for Incorporation?
To form a corporation, business owners must do the following:
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The business owners must name the corporation
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The business owners must choose the state of incorporation
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The incorporators must create the corporation’s articles of incorporation
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The articles of incorporation must be filed with the secretary of state
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A board of directors must be appointed
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The corporation must choose its tax structure (i.e., an S corporation or C corporation)
What Are Other Types of Corporations?
For-profit
For-profit corporations can issue stock to raise capital. Often you may hear corporations that “go public” offering shares of stock to generate money for their type of company.
Nonprofit
Nonprofit corporations carry on a purpose that is noncommercial (like for religious or educational purposes). Nonprofit corporations differ from S corps, C corps, or LLCs because nonprofit corporations are not taxed at the state or federal level if they qualify for tax-exempt status.
What Are Other Business Entities That May Be Called “Companies”?
There are other business structures that may be called companies, however each one differs in terms of personal liability protection, taxation, and legal requirements.
Sole Proprietor
A sole proprietor is an individual business that has not registered legal documents in the state. Many startups or freelancers begin as a sole proprietorship and then move their business to a more formal legal structure. The advantage of a sole proprietor is that it is easy to set up and avoids double taxation. The business owner includes the profits or losses on their personal income tax return. The disadvantage is that there is no personal liability protection from the business debts or lawsuits.
Limited Liability Company (LLC)
An LLC is a great business structure for small businesses. Small business owners who decide to structure their business as a separate legal entity usually choose to form an LLC by filing articles of organization with the Secretary of State.
An LLC is similar to a corporation in that each is considered a legal “person” in the eyes of the law. Business owners and the LLC are treated as separate business entities. This is helpful because it gives the owners some liability protection from the debts accumulated and actions taken by the LLC.
Additionally, LLCs offer pass through taxation similar to an S corp. The IRS treats a limited liability company as a “pass-through” entity. In a pass-through entity the tax obligations of the LLC filter through the company and land with the individual members.
Because the profits of the business pass-through to the members, the LLC itself does not pay taxes. The LLC members report the business’s income or losses on their personal tax returns.
LLCs also require fewer formal requirements such as bylaws for their business operations.
Limited Partnerships
A limited partnership has at least one general partner and at least one limited partner. The general partner manages the company and has unlimited liability for business debts and lawsuits. The limited partners are not as active in the management structure and are only liable for debts equal to the amount of their investment. To form a limited partnership, you file a certificate of limited partnership with the Secretary of State.
Comparison of Sole Proprietors, LLCs, and LPs
| Feature | Sole Proprietor | LLC | LP |
| Liability Protection | Owner has no personal liability protection for debts or lawsuits. | Members have limited liability for business debts and actions. | General partners have unlimited liability while limited partners are liable only up to their investment. |
| Tax Treatment | Profits and losses are reported on the owner’s personal tax return. | Pass-through taxation with profits and losses reported on members’ personal returns. | Pass-through taxation with income and losses reported by partners on personal returns. |
| Filing Requirements | No state filing required, operates under owner’s name unless registering a trade name. | File Articles of Organization with the Secretary of State. | File a Certificate of Limited Partnership with the Secretary of State. |
Each business structure offers advantages and disadvantages. It may be best to consult with a business attorney near you to determine which ownership structure is best for your form of business.
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