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Difference between Company and Partnership

Difference Between Company and Partnership

Difference Between Company and Partnership

There are many ways to set up an entity in the business world. Two popular choices are partnerships and companies. A block is like a team-up, where a few people come together, agree on how to run a business, and share the profits. On the other hand, a company is like a bigger team where members, known as shareholders, join forces under specific rules. Both have their way of working and benefits. This article will explain the differences between  Company and Partnership. This will help anyone looking to start or learn about businesses make clear choices.

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Understanding a Company

A company stands as an independent legal structure, differentiated from its stakeholders. It possesses the authority to form contracts, litigate or face litigation, and hold assets under its designated name. Companies can emerge for many reasons, from profit-driven ventures and charitable organizations to governmental agencies.

Definition of Company

A company represents a distinct legal entity comprising an assembly of people united to conduct business. This assembly is a deliberate, self-regulating coalition.

The Indian Companies Act of 2013, Section 2(20), delineates “company” as “an entity instituted under the Companies Act 2013 or any prior analogous legislation.”

For private limited companies, the constitution mandates a membership ranging from a minimum of 2 up to a maximum of 200 individuals. Conversely, public limited companies must have at least seven members, with no upper cap on membership.

Types of Company

Companies can be categorized into various types, namely:

  • Corporations: These are typically established to oversee commercial or industrial ventures.
  • Public Limited Company (PLC): Such companies are open to public investments, and their shares are traded openly on stock exchanges.
  • Private Limited Company: Distinct from PLCs, these companies aren’t open to public investments and have their shares retained by a limited group.

Characteristics of a Company

A company is a distinct legal structure with features that set it apart from other business models. Here are the primary characteristics of a company:

  • Distinct Legal Identity: A company functions as an entity separate from its owners, enabling it to engage in contracts, own assets, and face legal responsibilities.
  • Limited Liability: The financial obligation of shareholders is confined to their investment, safeguarding their assets from company debts.
  • Continuous Existence: Regardless of changes in ownership or shareholders, a company has an enduring existence until its official dissolution.
  • Ownership and Management Dichotomy: While shareholders are the owners, a company’s operations are typically overseen by a board of directors.
  • Share Transferability: A company’s shares can be traded, facilitating easy individual transfer.
  • Capital Accumulation: Companies can amass capital by releasing shares or bonds to potential investors.
  • Regulatory Adherence: Companies must comply with many laws, spanning corporate governance, securities regulations, and tax stipulations.
  • Structured Organization: Companies operate with a defined structure, including a board of directors and executive officers. They must conduct annual general meetings (AGMs) and preserve meticulous financial documentation.
  • Asset Independence: A company’s resources are distinct from its shareholders. This distinction ensures that in scenarios where a company faces insolvency, shareholders’ assets remain untouched.
  • Tax Implications: Companies are generally taxed on their profits. Moreover, dividends received by shareholders and their capital gains are also subject to taxation.

Understanding a Partnership Firm

A partnership firm is a business structure wherein multiple individuals, termed as partners, collaboratively embark on a business venture. Within this arrangement, the partners collectively partake in the profits and bear the losses stemming from the business. They actively participate in the managerial and operational aspects of the firm.

Definition of Partnership Firm

A partnership firm refers to a business structure formed by the collaboration of two or more individuals who have mutually agreed to distribute the business profits. This association may entail all partners actively participating in the operations or a single partner representing the entire firm.

As per the Indian Partnership Act of 1932, Section 4, a Partnership is “A mutual agreement among individuals who have consented to distribute the earnings from a business managed by either all involved or any single representative.

Individual members of a partnership are termed ‘partners.’ Collectively, they are addressed as a ‘firm’. The formal document detailing the agreed terms of their association is known as the Partnership Deed.

Partnership firms can primarily be categorized into:

  • General Partnership: Here, every partner is subject to unlimited liability. This implies that they are individually accountable for the entirety of the firm’s debts and obligations.
  • Limited Liability Partnership: This structure comprises two types of partners – general and limited. The general partners bear unlimited liability, whereas the limited partners enjoy little liability protection, making them responsible only for their invested capital.

Characteristics of a Partnership Firm

A partnership firm is a prevalent business structure wherein several individuals, known as partners, unite to run a business. Here are the primary features of a partnership firm:

  • Number of Partners: A partnership requires a minimum of two members and can have up to 20. The exact count should be specified in the partnership agreement.
  • Partnership Agreement: An essential partnership element, this written document spells out the relationship specifics among partners. It typically includes profit-loss distribution, roles and responsibilities, and other terms of engagement.
  • Unlimited Liability: Partners face total liability, meaning they are personally answerable for all business-related debts. If the firm lacks sufficient funds, the partners’ assets can be utilized for settlement.
  • Profit and Loss Sharing: Profits and losses are distributed among partners according to the stipulations of the partnership agreement.
  • Management: All partners typically actively participate in business management, allowing for collective decision-making.
  • Registration: While advisable, registering a partnership firm with the Registrar of Firms isn’t always mandatory. Yet, registration facilitates certain legal benefits.
  • Operational Flexibility: Establishing and managing a partnership is straightforward, and the structure offers substantial flexibility in business decisions.
  • Capital Injection: Every partner introduces capital into the business, the amount of which is detailed in the partnership agreement.
  • Dissolution: Partnerships can end by mutual consent or due to events like a partner’s death, incapacity, or exit.
  • Continuity Concern: If any partner departs, dies, or becomes legally incapacitated, the partnership typically needs reconstitution.
  • Tax Implications: Each partner pays taxes on their respective share of profits instead of the firm being taxed.
  • Partnership Deed: A foundational legal document for the partnership, it captures the conditions, rights, and duties of the partners, ensuring clarity and transparency in operations.

Similarities Between Company and Partnership Firm

Both companies and partnership firms are integral structures in the business world. Despite their differences, they share several similarities:

  • Separate Legal Entities: Both companies and partnership firms are distinct from their owners regarding legal identity. They can independently enter contracts, possess property, and initiate or defend lawsuits.
  • Registration: Both entities must register with relevant governmental bodies and adhere to statutory requirements, such as periodic filings.
  • Capital Raising: Both can secure funds by issuing shares (in the case of companies) or through partner contributions and external borrowings.
  • Tax Obligations: Profits earned by both structures are subject to taxation, albeit in different ways. Companies pay corporate taxes, while partnership firm earnings are taxed as the partners’ personal income.
  • Financial Documentation: Accurate record-keeping is imperative for both. They must maintain up-to-date financial records reflecting their business transactions.
  • Annual Gatherings: Companies have Annual General Meetings (AGMs), while partnership firms also hold meetings, allowing stakeholders to discuss and decide on critical business matters.
  • Ownership Structure: Both can have multiple owners — shareholders in companies and partners in partnership firms.
  • Governance Norms: Each entity operates based on specific established rules and protocols. Companies follow Articles of Association and Memorandums of Association, while partnership firms adhere to partnership deeds.
  • Dissolution: Both companies and partnership firms can cease operations and dissolve. The methods and implications might vary, but the potential for dissolution exists.
  • Liability: While the nature of liability differs — limited for companies and unlimited for general partnerships — both structures can be held accountable for their financial obligations.
  • Operational Limitations: Both entities have constraints, such as the maximum number of partners in a partnership firm or the maximum number of shareholders in certain companies.

Difference Between Company and Partnership Firm

Aspect Company Partnership Firm
Legal Structure Incorporated under the Companies Act Governed by the Indian Partnership Act
Number of Members Shareholders or members Partners
Liability Limited liability of shareholders/members Unlimited liability of partners
Formation More complex and formal process Simpler formation process
Ownership Transfer Shares can be easily transferred Transfer of partnership interest may be restricted
Management Managed by directors and officers Managed by partners or designated managing partners
Regulatory Compliance More extensive regulatory requirements Less extensive regulatory requirements
Name Includes “Limited” or “Private Limited” in name Partners’ names are usually included in the firm name
Perpetual Succession Continuity beyond the death of shareholders Dissolution or reconstitution on partner’s death
Public Listing Can be listed on stock exchanges Cannot be listed on stock exchanges
Ownership Concentration Ownership can be concentrated among a few shareholders Typically distributed ownership among partners
Capital Raise capital through share issuance Money raised through partners’ contributions
Profit Sharing Dividends distributed among shareholders Profits shared among partners based on agreement
Legal Formalities More legal formalities for incorporation and operation There are fewer legal formalities, but a partnership deed is needed
Taxation Corporate tax rates applicable Partners are taxed individually on their share of income
Statutory Meetings Mandatory holding of AGMs and EGMs Not required unless specified in the partnership deed
Decision-making The board of directors makes vital decisions Decisions made collectively by partners
Borrowing Capacity Higher borrowing capacity Limited borrowing capacity
Risk Sharing Shared among shareholders Shared among partners
Regulatory Reporting Need to submit financial reports to regulatory bodies Fewer reporting requirements
Ownership Transition Ownership can be easily transferred through shares The transition may require partnership agreement changes
Investor Attraction Attracts various investors due to stock market access Generally preferred for small businesses
Flexibility Less flexibility in terms of management and decision More flexibility in decision-making and operations
Audit Requirements Statutory audit mandatory No mandatory statutory audit
Legal Entity Separate legal entity distinct from shareholders No separate legal entity; partners are the entity
Capital Contribution Shareholders contribute capital through shares Partners contribute money as per the agreement
Dispute Resolution Resolved as per company law and shareholder agreements Determined based on partnership agreement
Exit Strategy Claims can be sold to exit The exiting partner’s interest was transferred or dissolved
Public Perception Perceived as more stable and credible Perception can vary based on the nature of the partnership
Conversion Can convert to LLP or other entities Can convert to company or other business structures
Legal Compliance Complexity Generally more complex due to legal requirements Less complex due to fewer legal formalities

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