Corporation have a different legal structure from other forms of private companies. For example, they are separate legal entities from their owners and are subject to different tax laws.Learn more about how to distinguish between a corporation and a company.
What Does a Company Stand For?
These days, even people with no commercial experience have probably heard the word “company” quite often. This is not surprising since today, all enterprises supplying goods or services are often referred to as companies. In addition, in broad terms, a company can be understood as any entity aimed at making a profit.
Whichever format you select, your business will be considered a company. Some of the most widespread ones are as follows:
- General partnership: It works best for those who consider launching a venture jointly with one or more partners. You don’t need to register it with state agencies, so you can start operating right away and save time and money on filing mandatory forms. Such a venture functions under the names of its proprietors, but the law allows you to use the DBA name for daily activities as well. Moreover, a partnership is a non-taxable unit;
- LLC: This model fits both sole proprietorships and joint organizations. As opposed to partnerships and sole proprietorships, LLCs are responsible for their debts and obligations, shielding the owners’ private property. This unites it with corporations, but the LLC’s activities are much less formalized;
- Sole proprietorship: This method of organizing a commercial activity has no legal boundary between an owner’s identity and an organization. This leads the owner to financial exposure, as the debts and obligations of the agency also apply to him. A sole proprietorship is the fastest way to start making money anyhow since no formal procedure should be followed.
In relation to corporations, they represent other well-known structures. Their popularity is somewhat lower than that of the mentioned above. Thus, although the words “company” and “corporation” are quite often used today as synonyms, there are multiple distinctions between them.
What Do Corporations Mean?
A corporation refers to a legal entity registered on the basis of shared ownership, the objective of which is to conduct business independently and turn a profit. In contrast to sole proprietorships or partnerships, corporations exist separately from their owners, commonly known as shareholders.
Novice entrepreneurs rarely choose a corporation as their business structure due to a large number of formal regulations and high start-up costs. Nevertheless, under some circumstances, it might be a good fit. Among other things, corporations are quite prevalent among large enterprises making significant profits.
One of the major strengths of a corporation over other entities is its ability to issue stock. It is a convenient, swift, and effective way to attract new investors, greatly expanding the financial capacity of an enterprise. Besides, shares can be sold or transferred easily.
The internal framework of a corporation is determined by law. It usually encompasses a board of directors running its operations, a board of shareholders, and managers, who ensure the smooth routine functioning of the venture.
Another hallmark that identifies a corporation is the special procedure for taxation. While sole proprietorships, partnerships, and most LLCs are treated by the IRS as disregarded units, corporations usually have their own tax obligations. Consequently, the owners of the corporation will face double taxation. How does it work? Initially, the proceeds of the enterprise are subject to corporate income tax. The remaining revenue is then distributed to funds and shareholders. The payout for each of them is calculated according to their ownership interests. The dividends the proprietors get are indicated in personal returns and are also subject to income tax.
To summarize, any corporation is a company. Meanwhile, not every company is a corporation because it is only one format of business model.
Main Difference Between S and C Corporations
When you found a corporation, by default, it gets C-corp status. Afterward, if specific requirements are met, it can file IRS Form 2553 to change to an S-corp. This imposes restrictions like there shouldn’t be more than 100 members, and they have to be residents of the USA. Corporations, LLCs, trusts, and partnerships cannot own an S-corporation. Moreover, this category of venture may only issue one type of stock.
Another significant distinction between C and S-corp lies in the way of paying federal and state taxes. An S-corp is recognized as a “flow-through” tax unit, which avoids double taxation of a C-corp.
Corporations vs. Companies
To finally clarify the point of distinction between them, let’s compare both structures using the most relevant criteria.
Depending on the section of the Internal Revenue Code that governs them, corporations are divided into several types. The primary ones are an S-corporation or a C-corporation, which differ in terms of taxation, the number of shares allowed, and the provisions the participants should meet. A relatively new type, which has appeared recently, is a B-corporation.
Companies, in turn, can be corporations, LLCs, partnerships, and sole proprietorships.
The terms offered by a corporation are usually more favorable to large enterprises that make significant profits. Hence, the chance to sell shares publicly may be fully realized by institutions with a good track record in the marketplace. For that reason, corporations aren’t particularly popular among small and medium-sized businesses. Most startup owners prefer simpler and more affordable solutions, opting for a sole proprietorship or an LLC.
More often than not, a corporation is a fairly large enterprise requiring an extensive management system. The main part is usually represented by board-appointed managers who deal with the day-to-day affairs of the enterprise. Additionally, corporations form a board of shareholders but they are not involved in maintaining their operations. Management is stand-alone from business ownership.
As for other enterprises, their internal arrangement and hierarchy are not regulated by legislation. The owner has the right to independently change the management framework in accordance with the current phase of business development and its needs. In small companies, the owner often combines the responsibilities of a leader and a manager.
The owners of such ventures as LLCs or partnerships are called members while the owners of a corporation are considered its shareholders. At the same time, there are some restrictions for the S-corporation shareholders that do not apply to the owners of other organizations.
Another non-binding but rather typical feature is the number of owners. While companies have a small number of participants, corporations may have dozens or even hundreds of shareholders.
Records and Accounting
The rules for reporting, bookkeeping, and internal documentation of corporations are much stricter than for other classes of entities. Corporations have to be transparent, therefore the IRS and public agencies require them to handle much more bureaucracy.
On the other hand, firms like LLCs or sole proprietorships have virtually no mandatory internal documentation requirements. The accounting regulations are mostly advisory in nature.
As the general rule, corporations are autonomous taxable units that file their own tax returns. The earnings they make are taxed at the corporate level as a whole and when distributed in the form of dividends. This is referred to as double taxation.
Other categories of enterprises are, by default, disregarded tax organizations. This means that the IRS treats them as “flow-through” tax units, exempting them from the need to file tax returns. Proceeds go “through” the venture directly to the proprietors who declare income and expenses on their personal tax returns.
Unlike sole proprietorships and partnerships, LLCs enjoy tax pliability. Participants may take advantage of this by applying to switch the entity to S-corp or C-corp taxation.
As for participants in sole proprietorships, partnerships, and “go-through” LLCs, they are considered self-employed, paying self-employment tax. However, the owners of corporations and LLC members who choose the corporate tax regime can be classified as employees if they take an active part in management. This entitles them to receive a fair wage.