What Is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction.

The line of business the company is in will generally determine which business structure it chooses such as a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company.

They can also be distinguished between private and public companies. Both have different ownership structures, regulations, and financial reporting requirements.

Key Takeaways

  • A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise in a commercial or industrial capacity.
  • A company's business line depends on its structure, which can range from a partnership to a proprietorship, or even a corporation.
  • Companies may be either public or private; the former issues equity to shareholders on an exchange, while the latter is privately-owned and not regulated.
  • A company is generally organized to earn a profit from business activities.
  • Companies are an important contributor to the health of an economy as they employ individuals and attract disposable income to spur growth.

How a Company Works

A company is essentially an artificial person—also known as corporate personhood—in that it is an entity separate from the individuals who own, manage, and support its operations. Companies are generally organized to earn a profit from business activities, though some may be structured as nonprofit charities. Each country has its own hierarchy of company and corporate structures, though with many similarities.

The first company in the world to issue stock was the Dutch East India Company. It was created in the Dutch Republic by the government to trade with India.

A company has many of the same legal rights and responsibilities as a person does, like the ability to enter into contracts, the right to sue (or be sued), borrow money, pay taxes, own assets, and hire employees.

Advantages and Disadvantages of a Company

The benefits of starting a company include income diversification, a strong correlation between effort and reward, creative freedom, and flexibility. Another advantage of companies is that they create jobs. If an individual starts a company and it grows, most often they have to hire employees. This increases the number of jobs available in a nation, employs people, reduces unemployment, and brings wealth into the economy.

There is often a tremendous amount of personal satisfaction garnered from starting your own company. This involves following your dreams and passions and leaving a legacy.

The disadvantages of starting a company include increased financial responsibility, increased legal liability, long hours, health risks due to stress, responsibility for employees and administrative staff, regulations, and tax issues.

There is a tremendous amount of risk in starting a company, from the time invested and, therefore, opportunity cost from not working a salaried job, to financial risk. Failure is of course one of the biggest disadvantages; however, many successful entrepreneurs attest that their first businesses failed and that the experience was an important learning tool.

Many of the world's largest personal fortunes have been amassed by people who have started their own companies.

Pros
  • Diversification

  • Creative Freedom

  • Flexibility

  • Following your dreams

  • Leaving a legacy

  • Job creation

Cons
  • Increased financial risk

  • Increased legal liability

  • Long hours

  • Health risks due to stress

  • Responsibility for employees and administrative staff

  • Tax issues

Types of Companies

In the United States, tax law as administered by the Internal Revenue Service (IRS) and individual states dictates how companies are classified. Examples of company types in the U.S. include the following:

  • Partnerships are formal arrangements in which two or more parties cooperate to manage and operate a business.
  • Corporations are legal entities that are separate and distinct from their owners and provide the same rights and responsibilities as a person
  • Associations are vague and often misunderstood legal entities based on any group of individuals who join together for business, social, or other purposes as a continuing entity. (This may or may not be taxable depending on structure and purpose.)
  • Funds are businesses engaged in the investing of pooled capital of investors.
  • Trusts are fiduciary arrangements in which a third party holds assets on behalf of beneficiaries.

A company may also be described as an organized group of persons—incorporated or unincorporated—engaged in an enterprise.

Company vs. Corporation

In the U.S., a company is not necessarily a corporation, though all corporations can be classified as companies via a variety of structures. For example, U.S. corporate structures include sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability corporations, S corporations, and C corporations.

A corporation is a type of business that is distinct from its owner. This means they require regular tax filings to be submitted separately from the personal taxes of their owners. Corporate ownership is determined by how much stock its shareholders hold. These shareholders may make decisions on how the company is managed, or they may choose a team of directors to do so.

The word "company" is synonymous with the word "firm."

Some of the most successful corporations in the United States include Amazon, Apple, McDonald's, Microsoft, and Walmart.

Public vs. Private Companies

Companies can be divided into two distinct categories for both legal and regulatory purposes: Public and private companies.

A public or publicly traded company allows shareholders to be equity owners when they purchase shares through a stock exchange. Someone who owns a large number of shares has a larger stake in the company compared to someone who has a small number of shares.

Shares are first issued through an initial public offering (IPO) before trading begins on a secondary exchange. Apple, Walmart, Coca-Cola, and Netflix are all examples of public companies.

Public companies are held to strict reporting and regulatory requirements by the U.S. Securities and Exchange Commission (SEC). Under these guidelines, companies must file financial statements and reports annually outlining the financial health of the company. This prevents fraudulent reports and activities.

Private companies, on the other hand, are held under private ownership. Although they may issue stock and have shareholders, equity in private companies is not traded on an exchange. They vary in shape and size and are not always bound by the strict regulations and reporting requirements to which public companies must adhere.

These companies do not have to disclose financial information or outlook to the public, giving them more opportunity to focus on long-term growth rather than quarterly earnings. Examples of private companies include Koch Industries, candy maker Mars, car rental company Enterprise Holdings, and accounting firm PriceWaterhouseCoopers.

What Is a Holding Company?

A holding company is a company that does not perform any actual business operations, such as creating a product or service and conducting any operational aspects related to that. Holding companies control other companies by owning the majority of shares outstanding. They do not necessarily run those companies but they do have oversight over major decisions as they are the primary owners of those companies. Holding companies are commonly known as umbrella companies or parent companies.

What Is a Fortune 500 Company?

A Fortune 500 company is a company that makes it onto the Fortune 500 list, which is created by Fortune magazine. The list consists of the 500 largest companies in the United States by revenue. The list consists of both private and public companies.

What Was the First Company Traded on the New York Stock Exchange?

The first company traded on the New York Stock Exchange was the Bank of New York, today known as BNY Mellon.

How Do You Start a Company?

To start a company you need an idea. From there, you should conduct market research to determine if there is demand for the product or service and if there are any competitive advantages that you can provide. From there, you should create a business plan, outlining the structure, foundation, mission, goals, and all aspects of your business.

The next step is to fund your business, whether from your own personal savings or money raised from friends and family. From there, it is best to decide what kind of business structure you would like to create (e.g., a sole proprietorship or a limited liability company [LLC]). Depending on the business structure, you will have to register the business with your local and state authorities and obtain an employee identification number (EIN) from the IRS.

What Is the Richest Company in the World?

Apple is the richest company in the world with a market capitalization of $2.48 trillion.

The Bottom Line

A company is a legal entity created by an individual or group of individuals to conduct a business enterprise, which is usually the sale of a business or product that is needed or desired by society. Companies have been around for hundreds of years and there are many different types, depending on the size, scope, and goals of each.

Starting a company is a risky endeavor as the chance of failure is high. Even the most successful companies do not last forever if they cannot evolve with the times. Companies are the primary source of employment in most nations and, therefore, an important contributor to the economic health of most countries.