The most common forms of business organisational structure in India are Proprietorship, Partnership and Company. Proprietorship form of organisation is used when there is a single owner of the business.
When the no. of owners is more than 1, Partnership and Company form of organisation are the most preferred. Before digging deep into which form of organisation is best for your business, let’s first analyse the differences between Partnership and Company.
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Differences between Partnership and Company
Although the differences between Partnership and Company are plenty, we have summarized the main differences between the two which may affect the decision of the owners on whether to opt for a Company or a Partnership.
1. Number of Members:
The new Companies Act 2013 has prescribed the maximum number of members in case of a partnership firm should not be more than 100 in case of partnerships. As per the previous Companies Act 1956, the maximum limit in case of partnerships was 10 and 20 for banking business and other businesses respectively.
In case of private companies, the maximum limit has been increased by the new Companies Act, 2013 from 50 to 200. There is however no maximum limit on the no. of members in a public company.
The minimum number of members in case of a public company is seven and in case of a private company is 2. In case of a partnership, the minimum number of partners is 2.
2. Separate Legal Entity
A Partnership Firm has no separate legal entity distinct from its partners. A Company, on the other hand, is a separate legal entity different from its members.
In partnership each partner has unlimited liability and is personally liable for all the debts of the firm. In a company, on the other hand, a shareholder has limited liability – limited to the extent of the share capital.
To facilitate the concept of limited liability in partnerships as well, a new form of partnership entity has been introduced under which the liability of the partners in a partnership firm is also limited and such form of organisation is called Limited Liability Partnership.
- Recommended Read: Benefits of forming a Limited Liability Partnership
All the partners in a partnership firm are entitled to take part in the management of a business (unless stated otherwise); but in the case of a company the right to control and manage the business is vested in the hands of the Board of Directors elected by the shareholders.
5. Transfer of Interest
A partner cannot transfer his interest in the firm without the consent of all the partners. He may, of course, assign his share in the partnership but the assignee merely becomes entitled to the financial benefits in respect of the share and does not become a partner unless the other members of the firm agree.
In case of a private company also the transfer of shares requires the prior permission of the Board of Directors. But, in case of a public company a shareholder can transfer his shares freely without restriction and the transferee succeeds to all rights of membership
6. Audit of Accounts
In case of companies, annual audits of accounts are a necessity. However, in case of Partnership Firms, audit of accounts is required to be conducted only if the turnover exceeds Rs. 25 Lakhs/ Rs. 1 Crore
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A Partnership Firm may or may not be registered. However, in case of a company – registration is essential.
8. Minimum Paid up capital
There is no minimum prescribed capital in case of a Partnership Firm. However, in case of a Private Company, the minimum paid up capital is Rs. 1 Lakh and in case of a Public Company, the minimum paid up capital is Rs. 5 Lakhs
9. Distribution of Profits
In a partnership firm, the profits are distributed among the partners as per the partnership deed. However in a company, the members get a share in profits only when dividend is declared by the Board of Directors and approved by all the members.
10. Winding up
A Partnership Firm can be wound up any time by any partner if it is ‘at will’ without legal formalities. In the case of company, no one member can require it to be wound up at will and winding up involves legal formalities.
When is Company form of organisation advisable?
A Company form of organisation is preferred wherein the business has grown big in size and the no. of members who have contributed capital in the business is also large. Moreover, in case the company intends to raise capital through an IPO or through any other means from the public, it will have to convert itself into a Company as Partnerships cannot raise money from the public.
However, it should be noted that the compliance requirements and cost of running a company are fairly high as compared to a Partnership Firm.
When is Partnership form of organisation advisable?
It is quite evident from the above mentioned points that setting up a partnership is an easy process and there are not many compliance requirements as well. Thus, for small business it is also advisable to opt for Partnership form of business structure as not only the cost of setting up is less but also because of the fact that there are statutory regulations to be complied with.
- Recommended Read: How register a Partnership Deed and set up a Partnership Firm in India
It is also pertinent to note that if a partnership business has grown in size, the partnership business can always be converted into Company at any time.