Partnership Firm

Difference Between Partnership firm and Private Limited Company

calendar16 Nov, 2022
timeReading Time: 5 Minutes
Difference Between Partnership firm and Private Limited Company

A partnership is a relationship between two/more individuals who have mutually agreed to conduct business run by all or any one of them and share the profits and loss arising therefrom. The individuals who enter into a partnership are called partners individually and collectively, known as the Partnership Firm. The Indian Partnership Act, 1932 lays down the regulations of the rights and duties of partners amongst themselves and with respect to the partners and third parties pertaining to legal and contractual relations arising in the course of the business of the partnership. A Private Limited Company is an entity owned by a group of members called shareholders and ownership and liability in a Company is defined by the no. of shares held by the shareholders. An entity is recognized as a Company once it gets registered according to the Companies Act 2013 and is governed by the Ministry of Corporate Affairs (MCA). In this write-up, we will discuss the difference between Partnership Firm and Private Limited Company.

Partnership Firm and Private Limited Company – Differences

Partnerships firms are different from private limited companies in many ways. The only similarity between the two is that both are owned by a group of legal persons rather than an individual. Some of the major differences between the Partnership Firm and Private Limited Company are laid down below.

  • Creation

A partnership firm can be created by executing a partnership deed which delineates, inter alia, the underlying objects, terms, conditions, capital, profit and loss sharing arrangement. Once the deed is signed by the partners, a partnership deed comes into existence. There ought to be at least two partners.

The formation of a private limited company is a more elaborate process. The major steps involved are:

  • Promotion of a company: Promotion is the process where the company comes into existence. Documents like Memorandum of Association (contains, inter alia, the objects behind the formation of company, Name Clause, Registered Office Clause), Articles of Association (contains rules & regulations for the internal management of the company). Consent of the Directors with respect to the buying or paying of shares. An agreement is entered between the company and any individual to be appointed as director. A minimum of two directors are required to form a company.
  • Incorporation of company: After paying the requisite fee, the promoters are required to apply to the Registrar of Companies of the requisite state for the Certificate of Incorporation.
  • Registration

Partnership firm Registration is not compulsory unless it is a Limited Liability Partnership[1] (LLP), although registration of a partnership is advised. The registration of partnership firms is regulated by the Registrar of Firms (RoFs)of the State Government.

However, a private limited company is required to registered as per the Companies Act,2013. The registration of companies is regulated by the Registrar of Companies (RoCs) of the Central Government.

  • Distribution of Profits

The profits of the firm are distributed between the partners as per the terms stated in this partnership deed.

With respect to a private limited company, there is no compulsion to distribute profits among its members. Profits are shared among the shareholders when dividends are declared.

  • Liability

This is one of the foremost differences between Partnership Firm and Private Limited Company. The partners’s liability  in a partnership firm is unlimited and they are jointly and severally liable for individual actions and also for actions of all the partners done in pursuance of the business of the partnership firm. The private estate of the partners can incur liability if the partnership property is found insufficient for the same.

In contrast, in a private limited company, the shareholders are only liable to the extent of the unpaid value of shares subscribed in the company

  • Capital requirement

There is no minimum capital requirement for commencing a partnership firm.

However, the Companies Act. 2013 lays down that the authorized capital of a Pvt. Limited Company should be at least Rs. 100000/- (Rupees One Lakh only)

  • Dissolution/Winding Up

A partnership firm can be dissolved in many different ways, namely, by mutual consent of partners or by entering into an agreement to that effect. A firm may be compulsorily dissolved if all or all but one partner are declared insolvent or the firm is carrying out unlawful activities. It may also be dissolved on the happening of certain contingent events like expiry of a fixed term or task for which the partnership was formed, death of partner when there are only two partners or when there were more than two partners, the partnership would dissolve and other remaining partners will enter into a new agreement.

The winding-up of a company can be done voluntarily by selling its majority shareholding of the company. Here the stakes are transferred to another person or entity and the majority shareholders are discharged of their responsibilities. A Compulsory Winding-Up of a company is conducted by a Tribunal when such company is found to have indulged in an unlawful or fraudulent act. A petition is in this regard is filed to the tribunal to commence the winding-up process.

  • Legal Status 

A Partnership Firm in India has no separate legal status separate from its partners.

However, a private limited company is an artificial separate legal entity and can hold assets and incur liability in its names.

  • Succession

As a partnership firm is not a separate legal entity, there is no perpetual succession of a partnership firm. On the demise of its partners, the firm also ceases to exist. Change in partners leads to dissolution or formation of another partnership firm.

On the other side, a Private Limited Company, is a separate legal entity separate from its members and a company, once registered, continues to exist regardless of the death of its members. Change of member or directors does not affect the existence of a company.

  • Agency

In a partnership firm, all partners are agents of one another and the firm and can bind the firm and its partners with respect to actions conducted in pursuance in business of the firm.

In a company, a member is not an agent of other members of the company or the company itself. They are liable for their actions personally and do not bind the other members and company.

  • Transfer of Shares

This is also one of the main differences between Partnership Firm and Private Limited Company. In a partnership firm, shares cannot be transferred to another partner or any their party without the consent of all the partners.

In a private company, a shareholder can be transferred according to the provisions of

  • Management

If there is no express agreement to the contrary, all partners are entitled to the management and control of the running of the firm.

However, in a company, members are not entitled to participate unless they are appointed as directors. Although they do have the right to sit in on general meetings, voting rights for, inter alia, the election of auditors, appointment of directors.

  • Property

The firm’s property, which is referred to as “Joint Estate” belongs to all the partners involved. It does not belong to anyone individually distinct from its partners. The property of a company is separated from that of its shareholders who can get it back only in the form of dividend or return of capital.

Conclusion

After discussing the differences between Partnership Firm and Private Limited Company[1], it concluded that, the Partnership firms provide more autonomy to its partners with the management and control of the firm as compared to shareholders of the company although the risk to the partners involved is graver as their personal assets can incur liability. Whereas in a private limited company, although the shareholders have limited rights, their liability only extends to the extent of the unpaid shares held by them in the company. However, private limited companies require adhering to many compliances to function smoothly as compared to a partnership firm. Partnership firms and private limited companies have their own set of advantages and disadvantages and choosing either of the two largely depends on the object of the business and stakeholders involved.

Read Our Article:Annual Compliance Checklist for Private Limited Company

Sherin Jose

Sherin has degrees in Law and English Literature from the University of Delhi. She is adept at legal research and writing and enjoys discussing and analysing important legal developments. Her primary interests lie in Corporate, FinTech and IPR Law and she is always on the lookout for exploring new developments in the area. She is an avid reader who loves classics and contemporary fiction. She likes to travel, bake and obsess over cat videos in her free time.

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