Partnership / Proprietorship vs. Company

When it comes to Partnerships/Proprietorship vs. A company they are fundamentally different when it comes to the process of registration, naming of the entity, liabilities, legal standing, number of members, taxation, foreign investment/ownership and filing of annual returns. This article will help you understand what makes them so different and aid you in coming to a decision as to the type of company you should register for your business.

Sole Proprietorships: It is a type of business entity which is owned by one natural person. There is no legal distinction between the owner and the business. The owner has direct control of all key aspects and can be held legally accountable for the finances of such a business.   

Partnerships: Form of a business entity where the ownership is shared by two or more people. The partners share profits and losses equally.

Company: These are separate legal entities that are owned by the shareholders. Corporations are much more complex and are typically used by larger businesses.

A few fundamental differences between a partnership, proprietorship, and company:

Process of registration

Private Limited Company: These entities are registered with the Ministry of Corporate Affairs under the Companies Act, 2013

Sole proprietorship: In the case of sole proprietorship, no legal formalities are required for the registration of such an entity.

Partnership: Registration is the prerogative of the partners as it is optional. If registered, it can be done under the Partnership Act of 1932.

 

Naming the entity

Private limited company: It is mandatory that the name provided by the promoters must be approved by the registrar of a company. The words "private limited company" should be attached to the name of the company. The promoters should make sure the names are not expensive or illegal in nature and should not be identical or similar to an existing company.

Sole proprietorship: The promoters’ choice of name is acceptable as no legal approval is required for its use.

Partnership: No legal approval is required for the use of the name decided upon by the promoters.

 

Liability clause:

Private Limited Company: The liability of the shareholder is limited to the extent of their share capital.

Sole proprietorship: The proprietor he will be accountable for all the liabilities and therefore has an unlimited liability

Partnership: The partners of the firm are responsible for all the liabilities incurred.
 

Legal Standing

Private Limited companies: It is a separate legal entity and possesses its own common seal. Its existence is separate from that of its members.

Sole proprietorship: It is not recognized as a separate entity.  The founder is personally liable for all the liabilities of the entity.

Partnership: The promoters or the partners I personally liable for all the liabilities. A partnership is not his separate legal entity from its partners.

Members

Private limited company: It requires a minimum of two members for the Incorporation of a private limited company.

Sole proprietorship: Only one person/ member can form a sole proprietorship.

Partnership: A minimum of two members is required for the incorporation of a partnership.

Legal Existence

Private limited company: Such business entities enjoy perpetual legal existence.

Sole proprietorship: The existence of a proprietorship is dependent on the existence of the proprietor.

Partnership: The survivability of a partnership is dependent on the existence of its partners.

Taxation

Private Limited Company: The profits of a private limited company are taxed at 30% plus surcharge and cess as applicable.

Sole proprietorship: This business entity is taxed as an individual, based on the income of the proprietor.

Partnership: The profits of a partnership are taxed at 30% plus surcharge and cess as applicable.

Foreign investment/ ownership

Private limited company: Under the automatic approval road route, foreign direct investment is allowed in a private limited company.

Sole proprietorship: No foreign investment for ownership is allowed.

Partnership: No foreign investment or partnership with foreigners is allowed.

Filing returns

Private limited company: These business entities must annually file accounts and returns with the registrar of Companies. Private limited companies must also file its income tax returns.

Sole proprietorship: The Registrar of Companies does not require an annual report, although filing of tax returns is a must.

Partnership: There is no requirement for filing of an annual report with the Registrar of Companies, however, income tax return must be filed regularly.

Conclusion:

If you are considering creating a legal entity for your business, your best bet is to contact a lawyer. A lawyer will be able to steer you in the right direction and help you avoid complications in the future. It is important to identify the goals of your business and how you would want it to be set up. A proper understanding of the composition and operational technicalities of different business entities will help you choose the best available option. 


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