Know the difference between: A Company and a Firm

Firms in India are registered under the Partnership Act, 1932. Whereas companies are registered under the Companies Act 2013. There are few other parameters which create a distinction between a company and a firm on the basis of liability, creation, capital involved and organisational structure.

What is a Company?

A company is formed and governed by the provisions mentioned in the Companies Act 2013, which says that a:

'Company' means a Company Incorporated under this Act or any previous Company Law.

A company is a legal entity which is formed by different individuals to generate profits through their commercial activities.

There are different types of companies formed under the Act, regulated by The Ministry of Corporate Affairs. Few of them are –

  • Public Company
  • Private Company
  • One Person Company
  • Section 8 Company and many other

What is a Firm?

A firm is also like any other business set up in India, but it is typically registered under the Partnership Act, as opposed to the Companies Act. The key characteristic being bringing two individuals together for business and professional gain. Most often, firms in India are involved in rendering professional services. Most legal business and chartered businesses are all set up as firms. 

 In the Indian content a Firm is Registered under the Partnership Act, 1932.

There is no separate differentiating legal structure present for firms. Firms generally relate to businesses which are formed in a partnership model, but there are several examples of firms set up as a sole proprietorship. 

Key Features of a Firms

Unlike a Company registered under the Companies Act, a firm registered under the Partnership Act:

  • Is not seen as a separate legal entity,
  • Does not enjoy perpetual succession
  • Doesn't create a distinction between the liabilities of the owners and the firm.
  • Is not an artificial person 
  • Profits are divided amongst the equity partners and in the ratio mentioned in the Partnership Deed

More on: Difference between Partnership, LLP and Private Limited Company?

What is the Difference Between a Company and a Firm

 

Basis

Company

Firm

Registration

Compulsory

Voluntary

Audit

Mandatory

Not Mandatory

Management

Directors

Partners (in case of partnership or LLP)

Legal Entity

Separate

Considered as one

Dissolution

Only by law

May happen if one of the partners dies. (in case of a partnership)

Capital

1 lakh for a private company and 5 lakhs for a public company.

No minimum requirement.

Contractual Limitations

Can sue or be sued on its name.

Cannot enter into contracts in its name.

Members

Maximum 200 members in private company and unlimited in public company.

Maximum 100 partners or members.

Creation

Certificate of incorporation and commencement.

Partnership Deed in case of partnership firm or LLP.

Perpetual Succession

Yes

No

Summing Up

In India, the Companies Act allows several types of companies to be set up in India such as private companies, public limited companies, and one person companies to name a few.

While most firms are registered under the Partnership Act, a firm can also be registered under the Limited Liability Partnership Act 2008, to ensure the owners are not personally held accountable for the losses and debts of the firm.

Additionally, although sole proprietorship companies and firms are common in India, they are unregistered businesses. Their identity is usually fortified under the Shops and Establishment Act, or through the Goods and Service Tax registration. 

 

Click Here: Online Company Registration


Company