In terms of formation and structure, legal identity, governance, liability, and taxation, the partnership firm differs from the company. Both forms of business entities exist for certain purposes that are selected based on scale, nature, and objectives of the business. A partnership firm is an informal, flexible structure owned by two or more people, who are bound together by a partnership deed. A company, by contrast, is a body of persons established under the company law with an existence separate from its shareholders. More than that, it has a perpetuity of existence. Distinguishing between these two will give one the right guide for selecting an appropriate business structure.
What is Partnership Firm?
A partnership firm is any business entity created when two or more persons have agreed to share a business venture with the profits, losses, and liabilities divided among the partners. The partnership firm is governed by the Indian Partnership Act of 1932 and mainly operates based on mutual consent and agreement among the partners.
Key Features of a Partnership Firm
- Formation and Partnership Deed: A partnership firm is created through a partnership deed, which can be oral or written. The deed provides terms such as a profit-sharing ratio, role played by the partners, and procedures for any disputes or dissolution.
- Ownership and Control: Ownership and control are vested in all partners either equally or as may be provided in the partnership agreement.
- Legal Identity: A partnership firm lacks a distinct legal identity; the partners are liable collectively for the firm’s liabilities.
- Liability: Partners have unlimited liability, such that the personal assets of the partner could be confiscated to pay business debts.
- Flexibility: This structure allows easy decision-making because all partners are involved in management directly.
What is Company?
A company in India is a corporate body established through the Companies Act, of 2013. It is distinct from its owners or shareholders who are its owners. It enjoys perpetual succession and can enter into contracts; it can have assets of its own and incur liabilities in its name.
Key Features of a Company
- Separate Legal Identity: The Company lives a life of its own, independent of its shareholders and directors.
- Formation Process: Organizations should register with the Registrar of Companies (ROC) and comply with the requirements of the regulatory authority. The Memorandum of Association (MOA) and Articles of Association (AOA) govern a company’s objectives and operational rules.
- Limited Liability: Shareholders are only liable for the unpaid value of their shares, hence the protection of personal assets.
- Perpetual Existence: For a company, existence is not affected by a change in ownership, death of shareholders, or the replacement of directors.
- Ownership and Management: The company has ownership through the shares held by shareholders, while the management is left to a board of directors.
Difference Between Partnership Firm & Company
The difference between partnership firm and company is vast and lies in their legal framework, ownership, liability, and operational structure. Here is an in-depth comparison:
Legal Status
- Partnership Firm: In a partnership firm, the partners are not a legal entity. They hold the firm collectively, and all liabilities of the firm are responsible on a personal level.
- Company: The company is a separate legal entity, recognized to be distinct and separate from its shareholders and directors. It can hold property, enter into contracts, sue, or be sued in its name.
Formation Process
- Partnership Firm: The formation process is simple, requiring a partnership deed that outlines the terms of the partnership. Registration is optional but recommended for legal benefits.
- Company: Companies undergo a formal registration process with the Registrar of Companies, requiring the submission of MOA and AOA, obtaining a certificate of incorporation, and complying with the Companies Act, 2013.
Ownership & Governance
- Partnership Firm: Ownership is shared among the partners. The partners collectively do Decision making, and each partner has equal authority unless otherwise specified in the deed.
- Company: The shareholders are the owners. Governance by the board of directors elected by the shareholders is the common practice.
Liability
- Partnership Firm: Partners have unlimited liability. In case of business debts, their assets may be at risk.
- Company: Shareholders have limited liability, restricted to the unpaid value of their shares. Personal assets are protected.
Continuity
- Partnership Firm: The partnership dissolution occurs when a partner retires, withdraws, or dies in the absence of an agreement regarding continuance.
- Company: A company enjoys perpetual existence, continuing despite changes in ownership or management.
Taxation
- Partnership Firm: Partnership firms are taxed at a flat rate under the Income Tax Act, with no distinction between personal and business income for partners.
- Company: Companies are subject to corporate tax rates, which may be higher but offer more tax planning opportunities.
Transparency & Regulation
- Partnership Firm: Financial information and decisions remain private, with minimal regulatory oversight.
- Company: Companies, especially public ones, are required to maintain detailed records and fully disclose financial and operational data, ensuring transparency.
| Aspect | Partnership Firm | Company |
| Legal Status | Partners are not a legal entity; they are a personal liability. | Separate legal entity; liability limited to shares. |
| Formation | Simple, deed required; registration optional. | Formal, requires MOA, AOA, and registration. |
| Ownership | Owned and managed by partners collectively. | Owned by shareholders; governed by directors. |
| Liability | Unlimited; partners’ assets at risk. | Limited to unpaid share value. |
| Continuity | It ends with the partnerās withdrawal or death. | Perpetual existence despite changes. |
| Taxation | Taxed at a flat rate; no separation of personal income. | Corporate tax rates; allow tax planning. |
| Fundraising | Limited to partners and loans. | Can raise capital via equity, debt, or markets. |
| Transparency | Private, minimal regulations. | Detailed disclosures and regulatory oversight. |
Conclusion
The primary differences between a partnership firm and a company lie in the structure, liability, and complexity of how they operate. A partnership would be useful for small businesses that want simplicity and flexibility. Companies, on the other hand, differ in their distinct legal identity, limited liability, and fundraising capabilities. Therefore, the choice between the two of them depends on the type of objective of business, tolerance towards risk, and availability of resources. The differences help entrepreneurs make the right decisions and lay the proper foundation for success.
Partnership Firm vs Company FAQs
What is the basic difference between a partnership firm and a company?
A partnership firm is an unregistered concern owned by partners, while a company is a registered legal entity whose liability is limited to its shareholders.
In what way is the liability of a partnership firm different from that of a company?
In a partnership firm, partners have unlimited liability, risking personal assets. In a company, liability is limited to the unpaid value of shares.
Is it possible for a company to survive if its owner dies?
Yes, a company enjoys perpetual succession and will exist irrespective of change in ownership and management.
What is more transparent? Partnership firm or company?
A company, more so a public one, is more transparent owing to the mandatory disclosures, whereas a partnership firm has scant reporting.
What are the differences between a partnership firm and a joint stock company?
A partnership firm is privately owned with few partners, but a joint stock company can issue shares to the public and have unlimited shareholders.
