Understanding the Differences: Is a Small Business a Corporation?

Starting and running a business is a daunting task, and it requires knowledge, skills, and patience. If you are planning to start a business, you must understand the differences between a small business and a corporation. While both business models share some characteristics, they differ in terms of size, structure, ownership, and legal status.

Size

The first and most obvious difference between a small business and a corporation is the size. Small businesses are usually independently owned and operated, with fewer than 500 employees. They are often family-owned or operated by a single person, which gives them a personal touch and a flexible nature. In contrast, corporations are often larger, with more than 500 employees. They have a clear and formal hierarchy of decision-making and are usually run by a board of directors, which makes them more stable and bureaucratic.

Structure

Another significant difference between a small business and a corporation is the structure. Small businesses are usually structured in a way that enables the owner to have control over the business. They are often organized as a sole proprietorship, partnership or a limited liability company (LLC). In contrast, corporations have a more complex structure. They are organized as a separate legal entity, often with shareholders, directors, and officers. Corporations can issue stocks, borrow money, and own property in their name, which gives them a separate legal identity from their owners.

Ownership

Small businesses are usually privately owned, which means that the owner has complete control over the business and assumes all financial risks. The owner can decide how to run the business, reinvest profits, and decide who to hire or fire. In contrast, corporations are owned by shareholders who own stock in the company. They have the right to vote at shareholder meetings and elect the board of directors. Shareholders have limited liability and risk only the amount of money they have invested in the company.

Legal Status

One of the most significant differences between a small business and a corporation is the legal status. Small businesses are often set up as sole proprietorships or partnerships, which means that the owner assumes all legal liability. This means that if the business is sued or owes money, the owner’s personal assets may be at risk. In contrast, corporations are separate legal entities, which means that the corporation itself is liable for any debts or legal issues, not the shareholders or officers.

Conclusion

In summary, while small businesses and corporations share some commonalities, they differ in terms of size, structure, ownership, and legal status. Small businesses are often owned and operated by an individual or family, have a more flexible structure, and assume all financial and legal risks. In contrast, corporations are often larger, have a more complex structure, and are owned by shareholders who assume limited liability. Before starting a business, it is important to consider the differences between these two models and choose the one that best fits your needs and goals.