What is the difference between a business and a company, and why does it matter? While they sound interchangeable, there's a difference. A business is any entity set up to sell goods or services for profit. A company is just one type of business.
What is a business?
A business is when individuals or groups offer products or services to customers for money, aiming to make a profit. It involves planning, making decisions and managing resources to deliver for clients and succeed in the market. When you set up a business, you need to choose what kind of entity it is.
Types of business entities
The types of business entities to choose from when you set up your business will depend on your goals, risks and opportunities. To help you choose the right business structure, here are the most common types:
Company
A company is an official business structure that's legally separate from its owners. It can own assets, make money and be responsible for debt financing.
Sole trader
A sole trader is a business owned and run by one person, who's in charge of all its operations and is personally responsible for its debts and losses.
Partnership
A partnership is a business arrangement where two or more people share ownership. They work together and share the profits or losses of the business.
Trust
A trust is a business structure where a trustee (either an individual or a company) holds property or income for the benefit of others, known as beneficiaries.
Why is it important to understand the differences?
It's important to understand the differences between business entities because each type has its own legal and tax implications. These implications affect how much you pay in taxes, your ability to raise money, the paperwork you need to file and your personal liability.
Making the right choice can save you time, money and legal headaches in the long run. It's all about finding the balance that works best for your business goals and personal situation.
Types of business: company vs sole trader
Different business types come with different rules and responsibilities. Here are 10 ways a company differs from a sole-trader business:
1. A company is a separate legal entity
A company is a separate legal entity that can own property, enter into contracts and is liable for any debts. As a sole trader, you’re conducting business in your own name — so you'll be personally responsible for any debts.
2. A company is a more complex business structure
A company is a more complex business structure to set up and manage than being a sole trader. It often involves directors, shareholders and a set of formal rules known as a constitution. Operating as a sole trader is almost as simple as being an employee. The only difference is you'll need to arrange to pay your own tax – accounting software for sole traders will help make this seamless.
3. Company tax and legal obligations
Tax and legal obligations are created because companies have more complex tax requirements and legal regulations. For example, companies must be registered for GST, where as, sole traders only have to register for GST if they earn over a certain amount. You'll just need to send invoices and arrange to pay your own tax, including any tax deductions you can claim — otherwise your obligations will be similar to those of an employee.
4. A company has wider access to capital
A company has wider access to capital than a sole trader. This is because companies can issue shares to raise funds from investors, whereas sole traders may rely more on personal investments or business lending.
5. A company has higher setup and running costs
A company has higher setup and running costs than a sole trader due to the formalities and requirements associated with establishing a separate legal entity. These include registration fees, legal fees and ongoing compliance costs.
6. A company is required to perform annual reviews
A company is required to perform annual reviews and submit financial reports to regulatory authorities. These reviews give transparency and compliance with legal and financial obligations. A sole trader doesn't have to do this.
7. Company owners have limited liability
Company owners have limited liability in most cases, which means their personal assets are protected from the company's debts and liabilities. This gives owners an extra level of financial security. Sole traders are personally responsible for any liabilities.
8. Directors control and shareholders own
Directors control and shareholders own a company. In other words, directors are responsible for managing the day-to-day operations and decision-making, while shareholders own the company and have voting rights in major decisions. In smaller companies, shareholders and directors are often the same people. As a sole trader, you own your business, but there are no shareholders or directors.
9. Money earned belongs to the company
Money earned belongs to the company, rather than to individual owners. This is very different from a sole trader business where the money you earn belongs to you.
10. Companies are subject to more regulation
Companies are subject to more regulation than sole traders because they're separate legal entities and have a broader impact on the economy. This includes compliance with corporate governance standards, financial reporting requirements and industry-specific regulations.
Business vs company FAQs
Still not sure which company structure you need? Here are some more common questions about the differences between a business and a company.
What is the key difference between a business and a company?
The difference between a business and a company is that business is a general term that refers to any entity engaging in commercial activities to generate a profit. Company refers to a specific type of business entity.
What is considered a business?
A business is an organised effort by individuals to create profit from commercial activities involving goods, services or assets. This can range from solo enterprises like freelancing to large-scale corporations with many employees.
Can you transition another business type into a company?
Yes, you can transition another business into a company. You'll need to register with Companies Office and be ready to meet all the new regulations and reporting requirements.
It's business time
Understanding the differences between types of business setup isn't just semantics; it's about effectively navigating the legal, financial and operational landscape. Whether you're a sole trader, part of a partnership or considering incorporating a company, being informed will help you weigh your options, using MYOB to help you grasp the intricacies as you go.
Keen to start your own business? Sign up to MYOB today and have the business management platform you need to achieve your goals.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.