Difference Between Partnership Firm and Company
Learn the key differences between Partnership Firm and Company structures. Understand their types, advantages, legal implications, and choose the right structure for your business success.
Muskan Verma25 Oct, 2024
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Understanding the Difference Between Partnership Firm and Company is vital for anyone looking to start a business or manage one effectively. Both are common business structures, but they differ significantly in terms of formation, ownership, liability, and legal obligations. This blog will help you grasp the difference between partnership firm and company in simple terms.
When choosing a business structure, it is essential to evaluate the difference between partnership firm and company as each has unique features, advantages, and limitations. Whether you are a commerce student, an entrepreneur, or a business professional, this knowledge is crucial for making informed decisions. Let's dive into the key Differences Between Partnership Firm and Company to help you choose the right structure for your business.What is a Partnership Firm?
A partnership firm is a business entity formed by two or more individuals who agree to share profits and losses in a predetermined ratio. Partnerships are governed by the Indian Partnership Act of 1932. It is relatively simple to form and requires a partnership deed, which outlines the terms of the partnership. In a partnership firm, each partner is jointly and severally liable for the debts of the firm. This means that if the business incurs a debt, all partners are personally responsible for paying it off. The ownership and management of the firm are closely tied, as all partners have an active role in running the business.Types of Partnership Firms
There are six types of partnership firms, below are mentioned the following:General Partnership
All partners share equal responsibility in managing the business and are personally liable for debts. Profits and losses are shared as per the partnership agreement.Limited Partnership
Comprises at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their investment. Limited partners do not participate in the day-to-day management of the business.Limited Liability Partnership (LLP)
Combines features of partnerships and companies. Partners have limited liability, protecting personal assets from business debts. Allows for flexible internal management.Joint Venture
A temporary partnership formed for a specific project or goal. Partners contribute resources and share risks and profits.Partnership at Will
A partnership that continues until any partner decides to dissolve it. No fixed duration, can be terminated by any partner with notice.Fixed Partnership
A partnership that exists for a specific period or until a certain task is completed. Partners cannot withdraw without consent until the term ends.What is a Company?
A company, on the other hand, is a legal entity that is separate from its owners (called shareholders). Companies are governed by the Companies Act of 2013 and require formal registration. Unlike a partnership firm, a company offers limited liability to its shareholders, which means they are only liable for the amount they have invested in the company, not their personal assets. Companies have a more complex structure compared to partnership firms, with a board of directors overseeing operations. The company continues to exist even if shareholders change or pass away, providing a sense of continuity that is not present in a partnership.Types of Companies
There are five types companies, lets learn about them:Private Limited Company (Pvt Ltd)
Limited to a specific number of members (usually up to 200). Shares cannot be publicly traded. Offers limited liability to its shareholders.Public Limited Company (PLC)
Can issue shares to the public and has no limit on the number of shareholders. Shares are traded on the stock exchange. Must meet strict regulatory requirements.One Person Company (OPC)
A company that has only one shareholder. Combines the benefits of a sole proprietorship with limited liability. Must have a minimum paid-up capital as prescribed.Non-Governmental Organization (NGO)
A company formed to promote social welfare, not for profit. Can be registered as a trust, society, or a company under Section 8 of the Companies Act.Section 8 Company
Not for profit and aims to promote commerce, art, science, or social welfare. Profits are used for furthering the company’s objectives and not distributed as dividends.Key Difference Between Partnership Firm and Company
Here's a table showing the D ifference Between Partnership Firm and Company :| Difference Between Partnership Firm and Company |
| Aspect | Partnership Firm | Company |
| Meaning | A business entity formed by two or more individuals who agree to share profits and losses. | A legal entity separate from its owners (shareholders), governed by the Companies Act. |
| Legal Status | No separate legal entity; partners and the firm are the same. | Separate legal entity; distinct from its shareholders. |
| Formation | Simple, requires a partnership deed; registration is optional. | Complex, requires registration with the Registrar of Companies. |
| Liability | Unlimited liability; partners are personally liable for debts. | Limited liability; shareholders' personal assets are protected. |
| Ownership and Management | Owned and managed by partners, all of whom have decision-making authority. | Owned by shareholders; managed by a board of directors. |
| Continuity | Ends with the death, insolvency, or withdrawal of a partner, unless stated otherwise. | Perpetual existence, not affected by changes in shareholders or directors. |
| Transfer of Ownership | Requires the consent of all partners. | Shares can be freely transferred in a public limited company. |
| Compliance and Regulation | Fewer legal formalities and regulatory requirements. | Subject to strict compliance with regulatory requirements, including audits. |
| Capital Raising | Limited to partner contributions. | Can raise capital by issuing shares or debt instruments. |
| Dissolution | Easily dissolved by mutual consent of the partners. | Requires legal procedures and regulatory approval. |
Difference Between Partnership Firm and Company FAQs
What is the primary difference between a partnership firm and a company?
The main difference lies in their legal structure: a partnership firm is formed by two or more individuals with shared responsibility, while a company is a separate legal entity owned by shareholders.
How is liability different in a partnership firm compared to a company?
In a partnership firm, partners have unlimited liability, meaning they can be personally liable for business debts. In contrast, companies offer limited liability, protecting shareholders' personal assets.
Can a partnership firm be converted into a company?
Yes, a partnership firm can be converted into a company by following legal procedures, including registering with the relevant government authorities and obtaining necessary approvals.
What are the tax implications for partnership firms and companies?
Partnership firms are taxed based on the individual partners’ income tax rates, while companies are subject to corporate tax rates, which can differ significantly.
How are profits distributed in a partnership firm versus a company?
In a partnership firm, profits are typically distributed according to the partnership agreement. In a company, profits are distributed as dividends to shareholders based on the number of shares owned.
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