Starting a new entrepreneurial venture can sometimes feel daunting - and often, it’s hard to know, unless you’re a seasoned expert, what type of entity you need to set yourself up as. Therefore, we present you with a go-to guide to help you navigate the business start-up world, focusing on the difference between a company and a business. Reading this article should help demystify the start-up world and give you all the information you need to make the best decisions possible as you begin to take the next steps towards your new career.
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What is a company?
Definition of a company
At a basic level, a company is a separate legal entity formed from an association of people that engages in business. The members of a company share common goals and organise their skills and resources accordingly.
Companies can be structured in different ways; for instance a corporation, a partnership or a sole proprietorship. This then dictates what the company’s ownership structure is.
Different types of companies
Companies come in numerous forms, including business entities that aim to make a profit, voluntary associations like non-profit organisations and financial entities like banks.
The most common types of companies are:
- Public limited company (PLC) - A public company is a corporation where ownership is open to the public; therefore, anyone can purchase shares in the stocks. With a limited company, the individual’s financial liability is restricted to a fixed sum, which tends to be the value of their investment. PLCs are a combination of these concepts. They are public companies, where the shareholders are accountable for their financial liabilities based on their investment.
- Private company limited by shares (LTD) - A private company differs to a public company in that it can’t be owned by members of the public. Instead, it’s owned by a small group of shareholders or a non-government organisation (NGO). Like PLCs, these companies are limited, so, once again, an individual only bears responsibility for financial liabilities based on their investment.
- Company limited by guarantee - This type differs hugely to the previous two. With these companies, individuals aren’t responsible for a fixed sum to the extent of their investment. Instead of having shareholders, these have members who act as guarantors and contribute a sum to the company’s winding up (if it occurs).
- Unlimited company (Unltd) - There isn’t any limit on the amount of money shareholders need to pay if the company goes into formal liquidation.
- Limited liability partnership (LLP) – Some, if not all, partners have to have limited liabilities (only be accountable for their own misconduct/negligence, instead of the collective being responsible).
- Royal Charter (RC) - This sort of company has been granted power by the monarch. In the past, all companies had to seek approval from the Royal Charter, but that is no longer necessary. Two examples of RC organisations are the BBC and the Bank of England.
- Community interest company - These refer to companies that aren’t driven by maximising profits for shareholders. Instead, they use their assets and profits to help the communities they are in.
Another way of classifying companies is by who the goods/services are aimed at:
Generally, companies can be divided into two broad camps – business-to-business (B2B) companies and business-to-customer (B2C) customers. Business-to-business companies specialise in providing goods and services to other businesses. On the other hand, business-to-customer companies deal with products and services that are targeted at individual consumers.
In reality, there's often a great deal of cross-over between B2B and B2C operations. While some organisations deal exclusively with one or the other, many businesses offer both B2B and B2C goods and services. In large part, this is because a mixture of both allows for diverse revenue streams that can support a business through difficult times.
How do you set up a company?
All companies receive a Certificate of Incorporation from Companies House. They are set up as a separate legal entity that’s distinct from the individual who owns it. According to Gov.uk, you should follow these eight steps when setting up a limited company:
- Check if it’s right for you. For reasons of brevity, we won’t go into details of this here, but you can learn more on its website here.
- Choose a name.
- Choose directors and a company secretary.
- Choose who the shareholders or guarantors are.
- Identify people with significant control over your company.
- Prepare documents agreeing how to run the company.
- Check what records you need to keep.
- Register your company.
A company has to file a Corporation Tax Return at the end of the tax year.
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What is a business?
Definition of a business
A business is an individual or organisation that engages in commercial or industrial activities on a regular basis. These can be either for-profit or non-profit, but businesses typically operate as profit-seeking organisations that aim to meet a specific demand in the market. They’ll often trade under a single name and attempt to build a reputation based on that identity.
“Business” is a wide-reaching term that encompasses a large number of organisational structures and entities. It is often confused and used interchangeably with the term "company", though the two refer to different concepts. Businesses have become an integral part of modern political and economic systems and are the dominant force on national and international markets.
Different types of businesses
1. Sole Trader
A sole trader is a single individual who owns and runs a business without the help of any other owner. Though they may employ staff, they do so in their own name and not the name of their business. As a sole trader, the individual is entirely liable for any legal actions brought against the business or any debts accrued by the business.
A partnership occurs when two or more individuals collaborate in a business venture in an effort to turn a profit. Typically, the business will be operated in both/all of the partners' names, and all contracts will be made with all the partners.
As with a sole trader, partners are jointly liable for all legal actions taken against the business and any debts accrued. However, partnership agreements or contracts can be used to establish alternative terms that override these rules. It’s common for many partners to define the relationship in contractual form before they begin trading together.
- A franchise is a business that licenses the rights to its name, brand identity, operating procedures and trademarks to individuals who want to manage and run their own business. These individuals are known as franchisees. Franchisees must conduct their new business in line with the stipulations set out in the franchise agreement. This means meeting certain standards, utilising specific products and maintaining the reputation of the brand.
- Running a franchise is a popular means of expanding a business across a vast territory, as it allows businesses to open up numerous stores and delegate the day-to-day operations to franchisees.
- While franchisees take most of the profits, they also have to pay a one-off fee to set up a franchise and then a monthly royalty fee for the right to continue operating as a franchised business. The franchisor also benefits by capturing greater market share and increasing their brand’s reach.
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How do you set up a business?
Similar to setting up a company, it’s best to follow the guidelines on the Gov.uk website to check you haven’t missed anything and have followed all the legal processes. But as a rough guide, the process should look something like this:
- Write a business plan.
- Decide what type of business you will start.
- Choose a name and location for your business. There are different responsibilities when working from home or renting a premises.
- Register with HM Revenue and Customs.
- See if there are any additional rules/licences/permits/insurance for the type of business you are starting. There are extra regulations if you’re selling goods online or abroad, or storing and using personal information, for example. Also, if you decide to take on people to help, like agency workers or freelancers, you have responsibility for their health and safety. See more information here about employing staff for the first time.
A business is operated by self-employed individuals who need to register with HMRC and must file their tax return at the end of the tax year.
The difference between a company and a business
There you have it, that’s the difference between a company and a business. You’ve probably noticed that there is some overlap and, at times, the differences aren’t completely clear. However, this article should have highlighted the main ways that they do vary.
We advise utilising the Gov.uk website if in doubt, as it has lots of helpful information. Here at Point Franchise, we care about clearing up and furthering your understanding of business-related topics that sometimes you just can’t get your head around. To see a full list of our dictionary articles, click here. Some you may find particularly interesting after reading this article are the definitions of a business plan, limited company, limited liability company and PLC.
Becky Martin, Point Franchise ©