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.
- 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.
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.
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.
The benefits of starting a company include income diversification, a strong correlation between effort and reward, creative freedom and flexibility. The disadvantages of starting a company include increased financial responsibility, increased legal liability, long hours, responsibility for employees and administrative staff, regulations, and tax issues. Many of the world's largest personal fortunes have been amassed by people who have started their own company.
Companies can be either public or private, both of which have different ownership structures, rules, and regulations.
In the United States, tax law as administered by the Internal Revenue Service (IRS) dictates how companies are classified. Examples of company types in the U.S. include the following:
- Partnerships: A formal arrangement in which two or more parties cooperate to manage and operate a business
- Corporation: A legal entity that is separate and distinct from its owners and provides the same rights and responsibilities as a person
- Association: A vague and often misunderstood legal entity 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.)
- Fund: A business engaged in the investing of pooled capital of investors
- Trust: A fiduciary arrangement 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.
Some of the most successful corporations in the United States include Amazon, Apple, McDonald's, Microsoft, and Walmart.
The word "company" is synonymous with the word "firm."
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.