Private Limited Company vs Partnership

Private Limited Company vs Partnership
21 August 2020

Private Limited Company vs Partnership

When an entrepreneur takes the initial step to enter into the society of trading, it shall begin with determining the concept of legal structure for its registration. One can select any legal structure amongst Private Company, LLP, Public Company, Proprietorship, OPC, Partnership, etc. The decision depends upon various factors such as the number of levels of control, partners involved, simplicity in formation, etc.

Private Limited Company

A Private Limited Company is a privately held small business entity that limits the owner’s liability to its shares. It also put restrictions on the number of shareholders to fifty and does not permit to trade the shares publically. It is a business entity held by a small group of people who has to go through a registration procedure under the Companies Act of 2013 in order to get itself recognized.

The element to define ownership in a Private Limited Company is the share capital, the ratio of ownership is decided by the shares held by the owners in the company. This structure attracts the investors more than anything else because this enables them to claim ownership in the company and at the same time their liability is restricted to the shares that they hold. Some of the important features of a Public Limited Company include Name, liability, number of directors and members, transferability, survivability, statutory compliances, and so on.

Partnership 

A Partnership is a business arrangement which consists of two or more members and they all come together to share the losses and the profits of the business equally among themselves, this is one of the key differentiating factors between a Private Limited Company, and a Partnership People who can form these sorts of partnerships can be from several sections and sectors of the society, they can be businesses, governments, private individuals, non-profit organizations, etc. and what they want to achieve from their partnership setup will also vary as per their objectives.

There are 3 major categories of partnership which include the following as under:

1. General Partnership: A general partnership is a business arrangement in which two or more individuals consent to share in all profits, assets and financial and legal liabilities of a jointly-owned business. In a General Partnership set up, all the financial and the legal liability, as well as the profits, are shared equally by all the parties.

2. Limited Partnership: In a Limited Partnership set up, there are two primary requirements, one that there has to be at least one partner who will bear the complete personal liability for the partnership’s debts and there has to be one partner who will only bear the liability of the amount invested. This partner is also called the silent partner. The silent partner will not be a part of the management or daily operation of the partnership.

Limited Liability Partnership: Limited Liability Partnerships are a very commonly practiced structure for the professionals, primarily for the likes of accountants and lawyers. In this structure, as the name suggests, the liabilities are limited to the partners for themselves, and that aids in saving one’s own assets in cases when one of the partners is being sued for a crime, such as- malpractice. Under no conditions will the assets of an innocent partner be at risk even if the other partners are being charged legally. This aids in retaining personal properties and thus is favored by the professionals.

Key Differences 

The major differences between Private Limited company and Partnership are the following as under:

  1. Registration: Registration is not mandatory in case of a partnership but registering a Private Limited Company is necessary requirement. The name should not be similar or identical to that of any other firm doing the same business. One other provision is that the name of the firm should not carry the tags such as a crown, emperor, empire, etc which shows approval of the government.
  2. Governing Act: The Partnerships are governed by the Indian Partnership Act, 1932, and the Limited Liability Partnerships are governed by the Limited Liability Partnership Act of 2008. The governing acts for the Private Limited Companies can be categorized into two parts, one where there are general laws that are applicable to all companies, and then there are industry-specific laws that are applicable to the companies based on their area of operations. General laws that apply to all the companies:
    1. Income Tax Act, 1961,
    2. Payment of Gratuity Act, 1972,
    3. Central Sales Tax Act, 1956,
    4. Employees State Insurance Act, 1948,
    5. The Maternity Benefit Act, 1961,
    6. The Finance Act, 2004,
    7. Wealth Tax Act, 1957,
    8. Employees Provident Fund and Miscellaneous Provisions Act, 1952,
    9. Environment Laws,
    10. Labour Laws and Provisions.
  3. Members: To become a member of a Partnership, anyone who is willing has to be of the age of majority, should be of sound mind, and should not be disqualified by law to enter into a contract. There are two ways to become a part of a company, by becoming a member or by becoming a shareholder. A member of a company is someone who has his name in the ‘Register of Members’, this means that the person has with consent become a member of the company and is someone who holds some share of the company.
  4. Regulation: A partnership firm is regulated by the Registrar of Firms of the State Government whereas the Registrar of Companies of Central Government regulates the Private Limited Companies.
  5. Capital Requirement: Rupees 1 Lakh is the minimum capital requirement for the Private Limited Company whereas there is no such minimum requirement clause in cases of Partnership Firm.
  6. Name: It is necessarily required for a Company to add Pvt. Ltd. at the end of its name but this does not apply to the Partnership Firm.
  7. Compliance: In the case of a private limited company, the cost of compliance is considerable. They are to maintain the balance sheet, P&l or profit and loss accounts, auditors reports, directors reports, take meetings regularly, appoint auditors, etc. The compliance in the case of LLP consists of accounts statements and solvency and annual reports.