Most people use ‘business’ and ‘company’ interchangeably, as though their definitions are identical. But there is technically a difference.
In the UK, a company is a type of structure registered with Companies House through which a business can operate.
Let’s explore their definitions, how the two terms differ, and explain when it might be time to turn a business into a company.
Defining a business
A business is any organisation that provides goods or services to customers in exchange for revenue.
‘Business’ is a broad term that applies to any organisation engaged in commercial activity, meaning any organisation that generates revenue by selling products or services.
So, both casual side hustles and large multinational corporations are businesses.
Defining a company
A company, on the other hand, is a business that the owner has formally registered with a designated body. In the UK, companies are registered with Companies House under the Companies Act 2006.
Companies have a separate legal identity from their owners, who are the members. They are then run on a day-to-day basis by the directors (who can also be the same people as the members), who manage and oversee the company’s operations and ensure it meets its statutory obligations.
By registering a company, the members are afforded a level of protection for their personal assets should the company ever run into financial difficulties. In addition, the companies are able to enter into their own contracts, own their own assets, and take on their own debts, all thanks to their separate legal identity from their owners.
Here’s a brief overview of the most common forms of companies in the UK.
Private companies limited by shares
This is the most common form of company registered in the UK.
The members of the company are the shareholders who take up one or more shares in the company (which represents their stake in the company). The number of shares and the amount they pay or agree to pay for them determines the limit of the liability the shareholders will have for the company, should it ever run into financial problems.
Private company limited by guarantee
Private companies limited by guarantee are somewhat similar to companies limited by shares. The big difference, however, is that private companies limited by guarantee do not have any shares. Instead, its members agree to guarantee a certain amount of the company’s debt should it ever face financial issues.
Setting up a company limited by guarantee is the choice of non-profit organisations— such as clubs, sporting associations and community projects—that need limited liability status to protect their members.
Public limited companies (PLC)
These companies are similar to private companies limited by shares, except that the shares can be traded publicly on a stock exchange (meaning ordinary members of the public can buy them).
Like private limited companies, public companies benefit from limited liability, although they are required to have a minimum share capital (totalling at least £50,000) and generally have more stringent financial reporting obligations.
Unlimited companies
Although very uncommon, it is possible to register a private unlimited company that either has shares or guarantors. While it enjoys a separate legal personality like its private counterparts (see above), unlimited companies do not afford limited liability to their members.
Instead, the liability the members take on is “unlimited,” so their personal assets are always at risk if the company gets into trouble.
Given their relative lack of usage, this blog excludes unlimited companies when assessing features of companies.
Limited Liability Partnership (LLP)
Although not considered “companies” in the strictest sense, Limited Liability Partnerships are “corporate bodies” registered at Companies House. They share a number of features with companies (in particular limited liability), but instead of having a share capital or guarantors, they are owned by their members (who are also called partners).
Industry professionals like accountants and solicitors often favour LLPs as their preferred vehicle to trade under.
What types of businesses aren’t companies?
With these definitions, you might have noticed that although all companies are businesses, not all businesses are companies. Here are some examples of businesses (meaning they trade goods and services) that are not legally defined as companies.
Sole proprietorship / sole traders / self-employed individuals
This type of business is owned and operated by one person without any legal distinction between the owner and the business. The owner is personally responsible for all debts and liabilities.
Partnerships
A business owned by two or more individuals who share profits, responsibilities, and liabilities. Partnerships can be informal or formalised with legal agreements.
Freelancers
People who offer distinct services independently without forming a company. Examples include graphic designers, writers, consultants, and tradespeople.
What are the main differences between a business and a company?
1. Legal status and liabilities
Businesses like sole traders and partnerships lack legal separation from their owners—they are, essentially, one and the same. This means owners are personally responsible for debts, legal issues, and other liabilities incurred by the business.
It also means their personal assets—homes, savings, and other property—can be seized to pay off business debts, if necessary.
In contrast, companies offer limited liability to its members (the owners). If the company encounters financial difficulties or legal problems, the members are only liable for the amount they have paid or agreed to pay to the company.
2. Ownership structure
A business’s ownership structure can range from one individual to multiple persons. A company can also be registered with one or multiple persons owning it, although this structure tends to be far more formalised it provides greater options for flexibility (for example, choosing to differ the rights of particular members versus others).
3. Bureaucracy
Setting up and managing a company involves more time and effort than setting up a business due to the additional legal, financial, and administrative obligations.
Not registering a company is certainly simpler in this regard. To become a sole trader, all the owner must do is register with HMRC as self-employed and complete an annual self-assessment tax return.
Forming a company requires more steps, such as registering the company with Companies House, submitting articles of association, paying a registration fee, and filing annual financial statements and a confirmation statement. Understanding these requirements takes time, so it can be beneficial to get support from a trusted company formation agent.
4. Tax obligations
HMRC, the UK’s tax authority, treats sole traders’ income as personal income, regardless of whether that income is used for personal reasons or reinvested into the business. Therefore, this income is subject to income tax and National Insurance Contributions.
Meanwhile, HMRC treats a company’s income as separate from the owner’s income and subjects it to Corporation Tax.
Income tax rates are typically less favourable than Corporation Tax rates, especially if the business makes over £50,000 annually.
Put into context, individuals pay 40% Income Tax on income between £50,271 and £125,140 and 45% on income over £125,140. Meanwhile, companies currently pay between 19-25% corporation tax, depending on their level of profit.
Furthermore, companies enjoy greater flexibility on what to do with the money and when. It is possible to keep the money within the company, perhaps re-investing it or holding it there for the future (this is called “retained earnings”).
Alternatively, the company could choose to pay out money from its post-tax profits to its owners in the form of dividends. The individuals’ dividends are subject to dividend tax, but again, these rates compare favourably with regular income tax.
5. Continuity and succession
Businesses, such as sole traders, are tied directly to their owners. When the owner decides to retire or passes away, the business may cease to exist unless the owner previously arranged to pass it over to someone else.
On the other hand, a company’s existence is not tied to its owners or directors. If an owner or director passes away or leaves the company, the company continues to exist in its own right.
When should a business become a company?
There is no legal requirement to register a business as a company at any point. Businesses can operate as sole proprietorships or partnerships, which may be the most straightforward option for some.
However, setting up a company comes with numerous benefits that are worth considering.
If a business is growing and dealing with large amounts of capital, customers, or employees, it may be time to incorporate. A company structure and a board of directors can support managing staff and operations. It also offers the owners significant legal protections—as the risk a company poses to its owners grows, the benefits of incorporating may become compelling.
If a business hopes to attract investors, becoming a legally structured company allows potential investors to purchase shares and have a say in its decision-making.
There are also tax benefits. As we saw earlier, incorporating a company can help provide more favourable tax conditions for the company and its owners.
Incorporate your business with Quality Company formations
Benefit from the formal structure, legal protections, and potential tax benefits of incorporating your business with help from the UK’s leading company formation agent, Quality Company Formations.
Whether you want to create a limited company, a company limited by guarantee, or any other type of company mentioned in this article, we offer a range of affordable packages to get you started. Following our simple 4-step online company formation process, your new company could be up and running in just a few hours.
If you have any questions about our services or need help registering a company, please call our London-based team of experts on 020 3908 0044.
