Difference Between Partnership and Company

When it comes to setting up a business, one of the critical decisions an entrepreneur must make is choosing the right business structure. Two common forms of business organisations are partnerships and companies. While both serve as a means to run a business, they differ significantly in terms of their legal status, formation, liability and management. This article aims to provide differences between a partnership and a company.

What is a Partnership?

A partnership is a business arrangement where two or more individuals agree to share the profits and losses of a business venture. The Indian Partnership Act, 1932 governs partnerships. In a partnership, the partners collectively own the business and are personally responsible for its debts and obligations.

What is a Company?

A company is a legal entity separate from its owners, created under the Indian Companies Act, 2013. It has a distinct legal identity, meaning it can own property, sue and be sued in its name. The ownership of a company is divided into shares and the individuals or entities that own these shares are called shareholders.

Similarities Between a Company and a Partnership Firm

While a company and a partnership firm are distinct types of business entities with their own unique characteristics, they share several similarities:

• Legal Entities: Both a company and a partnership firm are recognised as separate legal entities from their owners. This means they can enter into contracts, own property and be subject to legal actions independently of their shareholders or partners.
• Registration and Compliance: Both entities are required to register with the appropriate government authorities. Companies register with the Registrar of Companies, while partnership firms register with the Registrar of Firms. They both must comply with regulatory requirements, including filing annual returns and maintaining proper records.
• Capital Raising: Companies and partnership firms can raise capital to fund their operations. Companies can issue shares or bonds, while partnership firms can bring in new partners or secure loans from financial institutions.
• Taxation: Both companies and partnership firms are subject to taxation on their profits. However, the specific tax treatment and rates may differ between the two.
• Financial Records: Both entities are required to maintain accurate and up-to-date financial records, including balance sheets, income statements and cash flow statements.
• Meetings and Decision-Making: Companies are required to hold annual general meetings (AGMs), where shareholders vote on key decisions. Similarly, partnership firms often hold meetings where partners make decisions about the business.
• Size Limitations: Both companies and partnership firms have limitations on the number of owners. For example, private companies have a maximum limit on the number of shareholders, while partnership firms have a limit on the number of partners.
• Governance: Both types of entities must adhere to a set of rules and regulations governing their operations. Companies follow their Articles of Association, while partnership firms follow their partnership deed.
• Dissolution: Both companies and partnership firms can be dissolved, though the processes and implications may differ. Dissolution may be voluntary or forced by external factors.
• Liability for Debts and Obligations: Both entities can be held liable for their debts and obligations. However, the nature and extent of liability differ, with shareholders in a company generally having limited liability, while partners in a partnership firm typically have unlimited liability.

Despite these similarities, it’s important to recognise the significant differences between a company and a partnership firm, particularly regarding liability, management control and ownership transferability. These differences can greatly impact the choice of business structure for entrepreneurs and business owners.

Key Differences Between Partnership and Company

The differences between a partnership and a company include their legal status, liability and governance.

A partnership is an agreement between individuals to share profits and responsibilities, governed by the Partnership Act, 1932, with unlimited liability for partners.

In contrast, a company is a separate legal entity formed under the Companies Act, 2013, with limited liability for shareholders. Partnerships are managed by the partners themselves, while companies are managed by directors elected by shareholders.

Partnerships have fewer regulatory requirements and no minimum capital, whereas companies must comply with stricter regulations and have a minimum capital requirement. The difference between partnership and company are:

Meaning and Nature

Partnership: A partnership is formed through a contract between two or more individuals who agree to share profits, losses, ownership, responsibilities and duties of a business venture.

Company: A company is a legal entity where a group of individuals agrees to share ownership but not necessarily the management. It is created for a specific purpose and has a separate legal identity from its members.

Legal Framework

Partnership: Partnerships are governed by the Partnership Act, 1932, which outlines the rules and regulations for their formation and operation.

Company: Companies operate under the Companies Act, 2013, which provides a comprehensive legal framework for their incorporation, management and dissolution.

Registration

Partnership: Registration of a partnership firm is not mandatory, although it is advisable for legal recognition and benefits.

Company: The registration of a company with the Registrar of Companies is compulsory, ensuring its legal existence.

Members

Partnership: The individuals in a partnership are known as partners.

Company: The members of a company are referred to as shareholders.

Number of Members

Partnership: A partnership requires a minimum of two partners, with a maximum limit of 50 members.

Company: A public company requires at least seven members with no maximum limit, while a private company needs a minimum of two members, with a cap of 200 members.

Liability

Partnership: Partners have unlimited liability, meaning their personal assets can be used to settle the firm’s debts.

Company: Shareholders enjoy limited liability, restricted to the value of shares they hold. However, in companies with unlimited liability, shareholders have unlimited liability.

Profit Distribution

Partnership: Profits are distributed according to the partnership deed or equally in its absence.

Company: Profit distribution is governed by the Articles of Association or directors’ decisions.

Regulatory Authority

Partnership: Partnerships are regulated by the registrar of firms under the State Government.

Company: Companies are regulated by the registrar of companies under the Central Government.

Essential Documents

Partnership: The main document required is the partnership deed.

Company: The Memorandum of Association and Articles of Association are crucial documents for company formation.

Separate Legal Entity

Partnership: A partnership is not considered a separate entity; the partners collectively represent the firm.

Company: A company has a separate legal identity from its members and directors.

Audit Requirements

Partnership: Auditing the books of accounts is not mandatory for a partnership firm.

Company: Companies must audit their books of accounts mandatorily.

Management

Partnership: Partners manage the operations themselves or delegate to one acting on behalf of all.

Company: The business is managed by directors elected by the shareholders.

Transfer of Shares

Partnership: A partner cannot transfer their profit share without the consent of other partners.

Company: Share transfer is generally unrestricted, except in private companies.

Business Scope

Partnership: Partnerships can engage in any type of business with the consent of all partners.

Company: A company is limited to conducting business activities permitted by the Objects Clause of the Memorandum of Association.

Winding Up

Partnership: A partnership can be dissolved by mutual agreement or through a court order under the Insolvency Act if unable to pay debts.

Company: The winding-up process is governed by the Companies Act, 2013.

Continuity

Partnership: The continuity of a partnership is affected by the death, retirement or insolvency of any partner.

Company: The continuity of a company is not impacted by the death, insolvency or share transfer of shareholders.

Common Seal

Partnership: No common seal is required for a partnership firm.

Company: A company requires a common seal for legal and functional purposes.

Change in Name

Partnership: Changing the name of a partnership firm is relatively easy with the consent of all partners.

Company: Changing a company’s name requires prior approval from the Central Government.

Minimum Capital Requirement

Partnership: There is no minimum capital requirement for a partnership.

Company: A private company requires a minimum capital of 1 lakh, while a public company requires 5 lakhs.

Here’s a table summarising the differences between a partnership and a company based on the key aspects discussed: