Written by : Rajiv Singh
A Chartered Accountant in UK with 15+ years of experience in FinTech Consulting, Accounting & International Taxation. I enjoy being a Social, Foodie and Father of two young children, reachable at linktr.ee/RajivSingh.
The significant milestones in business are usually not attained by a single individual. They get accomplished with the efforts of a team of determined persons. One of the most fundamental considerations to make for an entrepreneur is deciding on the organizational structure of their business venture. The type of business entity provides a systematic structure to the organization to engage in commercial operations. It also impacts the kind of compliances and regulations that shall govern the business as per the relevant laws.
Partnership and company are the most commonly used terminologies in the realm of business and law. Many of us cannot distinguish between these two types of business entities. Even if we may differentiate between the two forms, the hardest decision is to choose between forming a partnership and forming a company. To make a wise selection, one needs to understand the distinction between a partnership firm and a Ltd company. This article will identify the contrasts between Partnership Firms and Pvt Ltd Company in India.
A partnership means "a relationship between two or more persons who agree to share the profits earned in a business carried on by all partners or anyone partner acting for all."
This definition is in line with the Indian Partnership Act, 1932. The people that have allied to manage the firm are referred to as "Partners."
Several types of partners can operate in a partnership firm. They include active partners, sleeping partners, nominal partners, and minor partners. They also assist one another in all operational tasks of the firm, such as decision making, forecasting, and expansion of the business.
In partnerships, the new partner's share of ownership gets divided based on the current market worth of the firm. The market value considers a variety of elements, such as the product's market share, customer loyalty, and many more.
A company, as per the Indian Companies Act, 2013, is an organization of two or more individuals created to do business together and registered with the Registrar of Companies. There are several types of companies, including One Person Company, Private Company, and Public Company. A company is seen as a fictitious person formed by law that is distinct from its owners / shareholders / members. A company is not governed by all members but rather by representatives known as directors elected by the members. Members of a company share a common undertaking and have limited responsibility in this case.
Promoters must submit copies of their Articles of Association and Memorandum of Association to the Registrar of Companies to get registered. It contains information about the company's internal and external management.
At the time of discussing the key elements of a partnership firm and a Ltd company, it is possible to observe the differences between the two forms of business in terms of control and management. Let's begin by outlining the differences.
A Partnership is under control under the Indian Partnership Act of 1932. In contrast, the provisions of the Companies Act, 2013 regulates a Pvt Ltd company in India. There is no mandatory registration requirement for a Partnership under the Partnership Act, it is completely optional and can be accomplished by drafting a simple partnership deed. In comparison, a Pvt Ltd Company must register with the Registrar of Companies as per the Companies Act, 2013.
In a partnership, all of the partners run the firm. Still, in a company, all of the shareholders designate representatives, identified as directors, to operate the company and perform its daily operations.
A partnership requires at least 2 members and can have at most 10 members in case of a firm in the banking business and 20 members for a non-banking enterprise. A private company must have at least two members, with a maximum of 200 members.
All the partners in a partnership have unlimited liability. In reality, the partners of the partnership firm's are jointly and severally responsible for all debts. In a company, shareholders' liabilities get restricted to the amount unpaid on their shares. However, in companies with unlimited liability, the shareholders may also be personally liable for unpaid debts.
Quick choices are feasible in a partnership business, but taking significant decisions in a company takes a lengthy time.
Without the permission of the other partners, a partner may not transfer his right to avail of profit share in the firm to anyone. In the case of a Pvt Limited Company, there are lesser complexities for the transfer of shares.
Generally, it is not feasible for a partnership to allow a person with limited financial resources to participate in its capital formation and become a partner. However, even individuals with minimal tools and resources can become shareholders of a Pvt Limited Company.
As the partners are recognized together as a Partnership firm, the partnership is not a separate entity. The company is a legal entity distinct from its shareholders and directors.
After the death of a partner in a partnership, the other partners and the legal heir of the deceased partner take over the partnership. It takes place with the permission of the other partners.
In a company, there is perpetual succession. The death or resignation of the members does not affect the continuity of the company.
In a partnership, the firm can get dissolved with all the partners' permission. Still, in a company, various formal processes are necessary for winding up the same or proceeding with liquidation, depending on the situation.
The Registrar of Firms, which reports to the State Government, regulates partnerships. On the other hand, companies get governed by the Registrar of Companies (ROC). The ROC falls under the purview of the Central Government.
Registration of a Partnership firm is not required. But the registration of a company with the Registrar of Companies is required.
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