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Private Company Vs Partnership Firm : Difference

partnership vs limited company
Admin 2023-01-31

In a competitive marketplace where people come out to start a new business venture to boost their chances of survival, they find new ways to invest and make their fortune out of it. Being part of a Partnership Firm or private limited company are just two of the many options available in the market. It is the different types of business ventures that we will be discussing in this article and whose needs they suit better is what we will find out. In addition, in this article, we shall go through the definitions of the two names mentioned above, the difference between the two, the laws they are governed under, and their features.

Private Limited Company Registration

A Private Limited Company is a privately held small business structure which limits the owner’s liability to the shares held by them, it also restricts the number of shareholders up to 50 and does not allow to trade the shares publicly on the stock exchange. It is a business entity held by a small group of people or entities that has to go through a registration process under the Companies Act of 2013 with the Ministry of Corporate Affairs (MCA) to get itself recognized.

The parameter to define ownership in a Private Limited Company is the share capital, the ratio of ownership is determined by the shares held by the owners or shareholders in the company. This business structure attracts the investors more than anything else because this allows them to claim ownership in the company and at the same time their liability is limited up to the shares held by them.

Salient features of a Private Limited company Registration

  • A Private Limited Company is an artificial person formed under the Companies Act, 2013.
  • A Private Limited Company has a separate legal entity and is different from the members and directors of the company.
  • Private Limited Company has limited liability and members' or shareholders’ liability is limited up to the share held by them.
  • A Private Limited Company has perpetual succession and the continuation of a company's existence despite death, bankruptcy, change in membership, etc.
  • Private Limited Company has a common seal.
  • A Private Limited Company can acquire property or assets in its name.
  • A Private Limited Company can sue and be sued in its name. 
  • A Private Limited Company is run by its representatives known as the board of directors, which are appointed by the members of the company at the AGM.

Partnership Firm

A Partnership is a business arrangement consisting of two or more individuals or entities and they all come together for a common goal and share the profits or losses of the business among themselves.

People who can form these partnership firms can be from various sectors or sections of society, they can be government entities, private individuals, non-profit organizations, etc., and what they want to achieve from their partnership firm setup will also vary according to their objectives.

Types of Partnership Company Registration

  1. General Partnership:

A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, financial liabilities, and legal liabilities as co-owners. In a General Partnership set up, all the legal and financial liability as well as the profits are shared by all the parties in the ratio defined in the Partnership Agreement.

  1. Limited Partnership:

In a Limited Partnership setup, there are two basic requirements, there has to be at least one partner who will be responsible for managing the overall business operation of the partnership firm and there has to be one partner who gives the fund to run the business but are not actively engaged in managing the day-to-day business activity of the firm. This partner is also termed the silent partner. The silent partner will not be a part of the management or day-to-day business operation of the partnership.

  1. Limited Liability Partnership (LLP)

A limited liability partnership (LLP) can be explained as a hybrid version of a General Partnership and a Limited Partnership. In this form of partnership firm, all the partners can actively manage the business. Still, they can be protected from taking responsibility and liability for the actions of other partners. They are only liable to take responsibility for their actions.  It is a very commonly practiced structure for the professionals, such as lawyers and accountants, and doctors who put together their expertise and resources to run a partnership firm business.

Salient features of a Partnership Firm

  • A partnership Firm can be formed by a Partnership agreement which can be oral or written.
  • The profit & loss of the partnership must be distributed among the partners in the ratio specified in the partnership agreement.
  • Each partner is an agent of the partnership firm as well as of the other partners who carry on the business of the firm.
  • Partnership firms have no separate legal identity and therefore the partners are held personally liable for the same.
  • The partners cannot transfer their shares in the firm without the consent of the other partners.

How to choose which business model best suits your business, a Private Limited company or a Partnership?

 

 Private Limited Company Partnership Firm
1. The Private Limited Company regulates by the Companies Act, of 2013. The partnership firm regulates by the Indian Partnership Act, of 1932
2. The Private Limited Company must be registered with the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013. Registration of Partnership firms is not mandatory, both registered and unregistered partnership firms are legal, but the registered entity is advisable.  
3. It requires a minimum of 2 members and a maximum of 200 members or shareholders. It is formed with a minimum of 2 partners, but not exceeding 50 partners.
4. The Internal affairs of the company can be managed by an Article of Association (AOA). The Internal affairs of the partnership can be managed by a partnership deed.
5. A Private Company is a separate entity with the ability to acquire assets in its name. A partnership firm has no separate identity from its partners.
6. Liability of members or shareholders is limited to the extent of the amount unpaid on the value of shares subscribed.      Partners of the firm are jointly and severally liable to pay the debts of the Partnership Firm.
7. The statutory auditor must be appointed within 30 days of the registration of the company. Statutory audit is not applicable for partnership and tax audit may be applicable based on the turnover of the firm.
8. Ownership or share can be transferred as per the provision contained in the Article of Association of the company. Ownership or share in partnership is not transferable easily; the clause of the partnership agreement should be referred
9. Any change in members or directors of the company does not affect the existence of the company Change in the partner of the firm leads to the dissolution or formation of another partnership firm.
10.  Document required for incorporating company:Proof of Identity of all directors and shareholders: Voter ID / Passport/ Driving LicenseResidential Proof of all directors and shareholders:  Saving Bank Statement/ Electricity Bill/ Telephone Bill/ Mobile Bill (Not Older Than 2 Months)Passport Sized photographs of all the directors.PAN Card and Aadhar Card of all directors and shareholdersConsent of the Director to act as Director of the proposed company (In form of DIR-2)Proof Of Address of Registered Office: Sale Deed/ Rent Deed/ Lease Deed of propertycopies of Utility Bills Gas Bills/ Electricity Bill/ Mobile Bill (not older than two months)NOC from the owner of the property Document required for forming partnership firm:Application for registration of partnership firmCertified original copy of Partnership DeedPAN Card and address proof of all the partnersProof of principal place of business of the firm ownership documentsRental agreementLease agreement
11. Name of the CompanyThe name of the proposed company should not bear any resemblance to the names of the existing companies or LLPs Name of the partnership firmThe name of the firm should not be identical to that of any other firm doing the same business and the name of the firm should not carry the tags such as emperor, crown, empire, etc which shows the approval of the government.
12 Private Limited Company Registration ProcessMake an application for name reservation through the web-based form SPICE+ Part-A on the MCA portal.Obtain DSC of the all director and shareholders of the proposed companyPrepare the incorporation documentApply for incorporation through the web-based form SPICEs Part-B.If ROC is satisfied with the registration application, issue a Certificate of Incorporation. Partnership Company Registration ProcessSelect the name of the partnership firmFile the application form with the Registrar of Firms of the State in which the firm is proposed to be situated.The application can be sent to the Registrar of Firms through post or by physical delivery.If the Registrar is satisfied with the registration application, he will register the firm in the Register of Firms and issue the Registration Certificate.