If your business runs on Microsoft, two names keep coming up and they are easy to confuse: Active Directory and Entra ID, the service Microsoft used to call Azure AD. They sound like the same thing and they are related, but they solve different problems for different worlds - one for the office network you can walk around, one for the cloud apps you reach from anywhere. This guide explains what each one is, why most businesses end up using both, and what the move towards the cloud one means for you.
The same job in two different worlds
Both Active Directory and Entra ID are about identity: who someone is, what they are allowed to access, and proving it when they sign in. The difference is where they do that job. Active Directory was built for the traditional office network - the domain, the file servers, the company PCs all sitting on your own infrastructure. Entra ID was built for the cloud - Microsoft 365, web apps, and people signing in from anywhere on any device.
Think of Active Directory as the bouncer for your building and Entra ID as the bouncer for your online services. They check the same kind of credentials but guard different doors. That is why the comparison is not really about which is better; it is about which world a given resource lives in, and most businesses now live in both at once.
Active Directory: the on-premises classic
Active Directory, often shortened to AD, has run corporate networks for over two decades. It lives on servers in your own environment called domain controllers, and it manages the computers, users and shared resources on your local network. When a staff member logs into their office PC, joins it to the company domain, or opens a file share, AD is what authorises that behind the scenes.
Its great strengths are deep, fine-grained control over Windows devices and the ability to manage everything on your own network in detail. Its limitation is that it was designed for a world where work happened inside the office, on the office network. The moment people work from home, from phones, and in cloud apps that never touch your network, AD on its own cannot reach them. For the deeper technical picture of running it, see our note on speccing a domain controller.
- •Runs on your own servers (domain controllers) inside your network
- •Manages Windows PCs, users, file shares and on-premises resources
- •Strength: deep, detailed control over devices on the local network
- •Limit: built for the office; cannot reach cloud apps or off-network devices
Entra ID: identity for the cloud era
Entra ID is Microsoft's cloud identity service, and it is what sits behind your Microsoft 365 sign-in. It is run by Microsoft as a service, so there are no servers of your own to maintain. Its job is to manage who can access cloud applications - Microsoft 365, and increasingly hundreds of third-party web apps - from any device, anywhere, which is exactly the kind of work that has become normal.
Because it was built for the modern way of working, Entra ID is where the strongest modern security controls live: multi-factor authentication, conditional access rules that check the situation before granting access, and single sign-on across many apps. If your business uses Microsoft 365 at all, you already have Entra ID whether you have thought about it or not - the question is only how well you have configured it.
Why most businesses use both
The honest answer for the typical UK business is that this is not an either-or. If you have office PCs joined to a domain and file servers on site, you have Active Directory. If you use Microsoft 365, you have Entra ID. Most firms run both, and connect them so an account works seamlessly across the office network and the cloud, with one identity and one password covering both worlds.
That bridge is what makes the experience feel joined-up: staff sign in once, the same account opens their office PC and their cloud apps, and IT manages a single identity rather than two. Done well, people never think about which system is doing the work. Done badly, you get the frustration of separate logins and the security gaps of accounts that exist in one world but not the other.
The direction of travel - and what to do about it
The momentum is firmly towards the cloud. As businesses move file storage, apps and even device management into Microsoft 365 and the cloud, Entra ID becomes the centre of gravity for identity, and the role of on-premises Active Directory shrinks. Some newer businesses skip a traditional domain entirely and run cloud-first from day one; many established ones are gradually reducing what depends on AD.
You do not need to rush a migration, but you do need a direction. The practical move is to make sure Entra ID is configured properly - multi-factor authentication on, sensible access rules in place - because that is where most of your real-world risk now sits. Our identity and access management service covers getting both sides right, and our plain guides to single sign-on and multi-factor authentication explain the controls that ride on top.