This article is written by Shobhit Verma, 4th-year BCom LLB student at Khalsa College of Law, Amritsar, during his internship at LeDroit India.
Keywords: Company, Partnership, Legal Entity, Profit Sharing, Registration, Perpetual Succession, Common Seal, Management, Transferability of Shares, Dissolution, The Indian Partnership Act, 1932, Companies Act, 2013, Initial Public Offering (IPO), Registrar of Companies (RoC), Memorandum of Association (MoA), Articles of Association (AoA), Public Company, Private Company.
Abstract: This article explores the fundamental differences between two of the most common business structures: partnerships and companies. A company, as defined under the Companies Act, 2013, is a separate legal entity that enjoys benefits like limited liability, perpetual succession, and the ability to raise capital. On the other hand, a partnership, governed by The Indian Partnership Act, 1932, is a relationship between individuals aimed at profit-sharing with fewer formalities and regulatory requirements.
Difference Between Partnership and Company
Introduction
When launching a business, one of the key decisions an entrepreneur faces is selecting the appropriate business structure. Among the most popular choices are partnerships and companies. But how do these structures differ, and what are the implications of choosing one over the other?
In India, businesses can take many forms, but for simplicity, we’ll focus on two key structures: companies and partnerships.
Meaning of Company: According to section 2(20) of the companies Act, 2013, company means a company incorporated under companies act, 2013 or under any previous law. It is a legal entity formed, to carry out business activities with the aim of earning profit. It is recognized as a separate legal entity from its owners (shareholders). This means it can own property, enter into contracts, sue or be sued in its own name.
Types of Companies:
• Private Company: As defined in section 2(68), a private company is a type of company where the number of members is limited, with a minimum of 2 and a maximum of 200, and it restricts the transfer of shares.
• Public Company: According to section 2(71), public company is company that can offer its shares to the public. A minimum of seven members is required, and there is no upper limit. Can raise capital by issuing shares to the public through an Initial Public Offering (IPO) and can list its shares on stock exchanges. Subject to stringent regulatory requirements, including regular disclosures, audits, and adherence to corporate governance norms.
• One person company: According to section 2(62), One Person Company is a type of private company that has only one member. It encourages individual entrepreneurs to start their own businesses. It comprises a single member and must have at least one director. The sole member enjoys limited liability, protection of personal assets from business debts. While it has fewer compliance requirements than a public company, it must still adhere to certain regulations, such as maintaining proper books of accounts.
Meaning Partnership: In India, the formation and regulation of partnerships are governed by The Indian Partnership Act, 1932. According to Section 4 of the Act, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
In simple terms, partnership is a legal relationship between two or more individuals or entities who come together to conduct business with the intention of sharing profits. A partnership is formed through an agreement, which can be either written or oral. Each partner acts as an agent for the others, meaning that the actions of one partner can legally bind the other partners in business dealings. It is a relationship where individuals agree to share the profits of a business, which can be operated by all or any of them on behalf of the partnership.
Types of partners and partnerships
In a partnership, there are various types of partners based on their roles, responsibilities, and liabilities. The following are the primary types of partners acknowledged in a partnership:
1. Active Partner: A general partner is a person or organization that takes part in managing the partnership and holds unlimited responsibility for the partnership’s debts and liabilities. They are directly engaged in the daily operations and decision-making of the business.
2. Dormant Partner: A sleeping partner is a partner who contributes capital to the partnership but does not take part in its management or operations. Although sleeping partners share in the profits and losses, they do not participate in the daily operations of the business.
Additionally, there are two main types of partnerships, such as
• General partnership- In a general partnership, all partners share equal responsibility and are jointly and severally liable for the business’s financial obligations.
• Limited Liability Partnership- A Limited Liability Partnership (LLP) is a distinct form of business organization that combines the features of a traditional partnership and a corporation, providing its partners with limited liability protection while allowing for flexible management structures. In an LLP, partners are not personally liable, meaning their personal assets are protected from business liabilities, similar to shareholders in a corporation. In India, limited liability partnership is governed by The Limited Liability Partnership Act, 2008.
Key Differences Between Partnership and Company
1. Legal Framework: companies are governed by the Companies Act of 2013, which offers an extensive legal framework covering their formation, management, and closure. In contrast, partnerships are regulated by the The Partnership Act of 1932, which specifies the procedures and rules for their establishment and operation.
2. Registration:
A company must be registered with the Registrar of Companies (RoC) under the Companies Act. This involves submitting various documents, including the Memorandum of Association (MoA) and Articles of Association (AoA), along with the required fees. Registration is mandatory for a company to operate legally. In contrast, a partnership does not require mandatory registration under The Indian Partnership Act, 1932. However, it is advisable to register the partnership to gain legal recognition and protection. Registration involves submitting a partnership deed, which outlines the terms of the partnership.
3. Number of Members:
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.
In contrast, a partnership requires a minimum of two partners, with a maximum limit of 50 members.
4. Legal Formalities:
A company is subject to extensive legal formalities, including registration with the Registrar of Companies, compliance with the Companies Act, and adherence to corporate governance norms. The process involves more documentation and regulatory scrutiny.
In contrast, a partnership it is relatively easier to form with fewer legal formalities. While a partnership agreement is advisable, it is not mandatory to register the partnership, although registration can provide legal benefits.
5. Profit Sharing:
In a company, profits are distributed to shareholders in the form of dividends. The distribution is determined by the board of directors and is subject to the company’s profitability and policies.
In contrast, within a partnership, profits are shared among partners according to the terms specified in the partnership agreement. This can be based on equal sharing or any other agreed-upon ratio.
6. Documents Required:
In a company, the crucial documents for company formation are the Memorandum of Association and Articles of Association.
In contrast, within a partnership, the main document required is the partnership deed.
7. Legal Status:
A company is recognized as a separate legal entity distinct from its owners (shareholders). It can own property, enter into contracts, and sue or be sued in its own name, which provides a clear legal framework for its operations.
In contrast, a partnership does not have a separate legal status. It is considered an extension of the partners themselves, meaning the partners collectively own the assets and are personally liable for the partnership’s debts.
8. Liability:
In a company, shareholder liability is confined to the amount they have invested in shares.
In contrast, within a partnership, partners are subject to unlimited liability, which puts their personal finances on the line to settle business obligations.
9. Raising Capital:
A company has greater flexibility in raising capital. It can issue shares to the public (for public companies) or to private investors, enabling it to attract significant investment for growth and expansion. It can also raise funds through debt instruments like bonds.
In contrast, a partnership may face limitations in raising capital. It cannot issue shares to the public, and capital is typically raised through the contributions of partners or loans. This can restrict the amount of capital available for business operations and growth.
10. Management:
A company is managed by the board of directors elected by the shareholders. The board is responsible for making strategic decisions and overseeing the company’s operations. The management structure is formal and regulated, with specific roles and responsibilities defined.
In contrast, a partnership management is typically more informal and collaborative. All partners can participate in management unless specified otherwise in the partnership agreement. Decision-making can be based on consensus, majority vote, or designated authority, allowing for flexibility in governance.
11. Risk Sharing:
In a company, the risk is shared among shareholders, and their liability is limited to their shareholding. This means that personal assets are generally protected from business risks, allowing shareholders to invest without the fear of losing personal assets.
In contrast, within a partnership, partners have unlimited liability, meaning they are personally liable for the partnership’s debts. This can expose personal assets to business risks, making it riskier compared to a company.
12. Decision Making:
In a company, decision-making is typically carried out by a board of directors elected by shareholders. Major decisions require board approval and may involve voting by shareholders during meetings.
In contrast, within a partnership, decision-making is usually more informal and collaborative. Partners can decide how decisions will be made, whether by consensus, or by majority vote, offering flexibility in governance.
13. Public Listing:
A company, especially a public company, can be listed on stock exchanges, allowing it to offer shares to the public. This facilitates raising capital from a wide range of investors.
In contrast, a partnership cannot be publicly listed. It is a private arrangement between partners, and shares cannot be offered to the public.
14. Transfer of shares:
Public companies generally allow free transfer of shares, while private company do have some restrictions on the transfer of shares.
In contrast, a partner cannot transfer their profit share without the consent of all other partners.
15. Perpetual Succession:
A company enjoys perpetual succession, meaning it continues to exist independently of changes in ownership or the death of shareholders. The company remains in existence until it is formally dissolved.
In contrast, a partnership does not have perpetual succession. It can be dissolved upon the death, withdrawal, or insolvency of a partner, or by mutual agreement among partners.
16. Conversion:
A company can be converted from one type to another (e.g., from a private company to a public company) by following the legal procedures outlined in the Companies Act.
In contrast, a partnership can be converted into a company (e.g., a private limited company) by following the legal process for incorporation. This often involves drafting a new memorandum and articles of association.
17. Taxation:
In a company, profits are taxed at the corporate tax rate. When these profits are distributed to shareholders as dividends, they may be subject to an additional dividend distribution tax. This can result in double taxation—first at the corporate level and then again at the shareholder level.
In contrast, within a partnership, profits and losses flow directly through to the individual partners, meaning they are reported on the partners’ personal tax returns. This pass-through taxation system helps avoid double taxation, as the partnership itself does not pay taxes. Instead, each partner is taxed based on their specific share of the partnership’s profits.
18. Statutory Meetings:
In a company, especially public companies, it is required to hold statutory meetings, such as the Annual General Meeting (AGM), where shareholders discuss company affairs, approve financial statements, and make key decisions.
In contrast, within a partnership, it is not required to hold statutory meetings. However, partners may choose to meet regularly to discuss business matters and make decisions.
19. Audit Requirements:
In a company, it is generally required to have its financial statements audited by a qualified auditor. This is a statutory requirement to ensure transparency and accountability.
In contrast, within a partnership, it is not legally required to undergo audits unless specified in the partnership agreement or if they exceed certain thresholds. However, maintaining proper accounts is advisable for internal management.
20. Dissolution:
A company can be dissolved through a formal process, which may include voluntary winding up by shareholders, or through compulsory winding up by the court. The company continues to exist until the dissolution process is completed, and its assets are liquidated.
In contrast, a partnership can be dissolved more informally, often occurring upon the death, withdrawal, or insolvency of a partner, or by mutual agreement among partners. The dissolution process is typically simpler, but it may result in the winding up of the business and distribution of assets among the partners.
Conclusion
In summary, both companies and partnerships are popular business structures, each with unique features, advantages, and disadvantages, and their suitability varies. Companies offer limited liability, perpetual succession, and the ability to raise capital through public listings, making them suitable for larger enterprises seeking growth and investment. However, they are subject to complex legal formalities and regulatory compliance. Partnerships, on the other hand, provide a more flexible and informal structure, allowing for direct control and shared responsibilities among partners, and are easier and less expensive to establish. However, partnerships expose partners to unlimited liability and may face challenges in raising capital and ensuring continuity.
References
1. https://bizfoc.com/blog/difference-between-partnership-company
2. https://www.indiafilings.com/learn/difference-between-company-and-partnership/
3. https://razorpay.com/rize/blogs/difference-between-partnership-and-company
4. https://askanydifference.com/difference-between-partnership-and-company/
5. https://testbook.com/key-differences/difference-between-company-and-partnership-firm
