Private Limited Company vs Partnership Firm

Q

Private Limited Company vs Partnership Firm

The major difference between the two is that Private Limited is governed under the Companies Act, 2013 while; Partnership Firm is managed under the Partnership Act 1932. There is no need for compliance in case of a partnership firm while it is mandatory for a Private Limited Company.

What is a Private Limited Company?

It is a separate legal entity run by the Board of Directors. These Companies are owned by its shareholders and can have a maximum of 200 members. A Private Limited Company is registered under the Companies Act, 2013 and has limited liability for its members.  

The members of the Company need not pay anything beyond the amount of shares held by them which makes the company and its members different from each other.

The Annual General Meeting is an important part of a Private Limited Company where all the major decisions like appointment of directors, auditors, change of capital and future business plans are discussed and agreed upon.

For example – Google India Private Limited

What is a Partnership Firm?

A minimum of 2 partners are required to incorporate a Partnership Firm which are responsible for all the losses the firm might face in case of unforeseen events like bankruptcy or failure of the business.

The firm can only come into existence with a written Partnership Deed which clearly mentions the name of all the partners in the firm. Both the firm and the partners are connected with each other.

In a Partnership Firm, share transfer cannot be initiated without the consent of all the partners involved in the business operations. The profits earned by the firm are divided among the partners in the ratio mentioned in the Partnership Deed.

For example – GoPro and Red Bull

Difference between Private Limited Company & Partnership Firm

Comparison

Private Limited Company

Partnership Firm

Members 

A private limited company can have a maximum of 200 members.  A partnership firm can have maximum 100 members. 

Management

Directors of the company  Partenrs of the firm

Liability 

The liability of the members is limited up to the amount unpaid on the shares held by them. Liability of the Members in the case of Partnership Firm is unlimited. 

Annual Filing

Annual Compliance is mandatory in the case of Private Limited Company which includes  There is no such mandatory compliance. Compliance which is required by the Partnership firm is
  • Tax returns 
  • Income Return 

Incorporation

Certificate of Incorporation is mandatory.  Partnership Deed is mandatory. 

Which One to go for?  

As an Entreprenuer, it can be confusing to decide the type of business registratuion to go for. Considering the above differences between both forms of business, it is always beneficial to go for a Company Registration if you are planning for a business on a large scale in future. 

Also, the benefit of limited liability in case of a Private Limited Company reduces the risk of involving personal assets and belongings into the business. If the need be it can be easily converted into Partnership Firm through a legal procedure. 

Bonus Points 

  • In Private Limited Company it is mandatory to conduct an annual audit by the appointed company auditor however; it is not mandatory for Partnership Firms. 
  • The Private Limited Company is considered as a separate legal entity under Law but a Partnership Firm and its members are considered as one. 
  • The winding up of Private Limited Company is possible only through a legal procedure but partnership firms might get affected if any one of its partners dies or is declared as bankrupt. 
  • Private Limited Company have the right to sue any other entity in case of legal matters which is not possible in case of a Partnership Firms. 
  • Partnership Firms donot have the option of perpetual succession which is applicable in case of a Private Limited Company. 


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