Surely you’ve heard the words corporation and company countless times before. We all have. From a technical aspect though, what do they really mean? How are they similar and how are they different? Read on to find out.
If you’re planning to start a business of any kind, the first step is to consult with a lawyer and an accountant. While there are many online resources available, having professionals weigh in on the legalities and taxations ahead is crucial. Also, while a certain website may not have been recently updated to provide the most accurate information, your lawyer and your CPA can always find out what are the latest requirements. TRUiC CEO Nagabhushanam “Bobby” Peddi says that they already helped more than 250 000 people to start a business in the U.S. and that their information resources are aimed at making it quick and simple to start a new business.
It should also be noted that incorporation is a term that refers to the legal process used to establish a company, entity, or firm.
What is a corporation?
A corporation is an independent business entity that is legally separate from the management. That includes the founders, owners, directors, etc. All corporations in the United States are registered with the Secretary of State and have their own independent tax number.
When it comes to U.S. incorporation, the owners usually have Limited Liability. This means that the shareholders are legally responsible for the company debts – but only for the same value as their shares.
The individuals that own shares or stocks of a corporation are considered to be the owners. The number of stocks owned determines the percentage of ownership. For instance, if a corporation had a total of 1,000 shares and you personally owned 500 of them, that would mean you own 50% of the entire company.
Most corporations elect a board of directors that is meant to act in the interest of the shareholders. The board is responsible for making critical business decisions as well as hiring management personnel.
What are the various corporation types?
- C-Corporation. This type is very common because it allows for unlimited growth and unlimited shareholders. There is no restriction on ownership and you’ve got the ability to sell stocks.
- S-Corporation. This type is typically better for smaller platforms. It has a 100 shareholder limit, and pass-through taxation (taxation passes to owners who must file individually). There are some ownership restrictions as well. For instance, it can’t be owned by a c-corp, another s-corp, or an LLC/Partnership.
Both corporation types have a board of directors and shareholders. Also, in most situations, both types have Limited Liability protection. As Handel “Del” Henri a top business advisor in Florida says: “When we audit clients for payment processing requirements the one thing that stands out from those who took good advice, is that they structured their companies well for tax savings and the reduction of liability. That is where resources like TRUiC come in handy”.
What is a company?
A company can be defined as a business entity that provides goods and/or services in exchange for money. The most important goal when creating a company is to generate a profit. All companies must have at least one registered office in its name.
When it comes to deciding which business structure to pursue, don’t jump into anything too quickly. It’s especially important to choose the option that will benefit you, your team, and your business goals the most. Again, discussing this with a knowledgeable lawyer and accountant is highly recommended.
What are the various company types?
- Sole Proprietorship. In this case, the entity and the owner aren’t legally separate from one another. Although the owner(s) will be able to write off any and all business expenses when they file their tax returns. This is a very common company type.
- General Partnership. This business structure consists of two or more people that go into business together. Just like with sole proprietorship, the owners can write off any expenses that the business has accrued when filing their taxes.
- Limited Liability Company. This is a type of company that provides the owners of a business with the same tax benefits of both of the company types above. In addition, though, it also provides the same kind of liability protection that is offered to a corporation.
What are the biggest differences between the two entities?
All corporations are considered to be companies. However, not all companies can be classified as corporations. For example, when you decide to go into business with a friend, you have created a company. Eventually, your company might become a corporation in the future as it expands and grows. But initially, when first starting out it’s simply classified as a company.
The main difference between corporations and companies is the size of the entity. A corporation is always a large business, while a company can be very small.
Due to the size differences, when it comes to forming a corporation or company there are also different capital requirements. There is a certain minimum amount of capital required to classify as a corporation, whereas anyone can start a company.
While both entities are paying taxes, corporations are typically taxed twice on their profits. Instead, many companies can pass-through their earnings or losses onto their individual tax return.
Furthermore, corporations are usually owned by multiple people. The owners of a corporation are the stakeholders whereas, in the case of a company, the owner is one of its members.
Because of the ability to sell stocks, exchanging ownership for a corporation is easy. However, for companies, which can be owned by one individual, ease of transferring ownership completely depends on the business structure you have chosen.