Partnership Firm vs Private Limited – Which One is Better?
When an entrepreneur takes the initial step to enter into the world of trading, it shall start with deciding the ideal legal structure for its registration. One can pick any legal structure amongst Private Company, Public Company, OPC, Proprietorship, Partnership, LLP, etc. The decision depends upon several factors such as the number of partners involved, level of control, simplicity in formation, etc. Consider several aspects along with their pros and cons that impacts the decision of business structure. However, if you are planning to start your business and find difficulty in selecting a legal structure; this blog will be highly beneficial as we have shortlisted the suitable legal structures. Also, it will showcase a contrast between Partnership Firm vs Private Limited.
A brief overview of both the Legal Structures
For a better understanding of the Private Limited and Partnership, let us discuss in detail the features of both as follows:
- In, Partnership Firm, there must be an agreement amongst the partners which can be either written or oral.
- Profit & Loss are shared amongst the partners in a prescribed ratio.
- Each person involved in the partnership is individually known as partners; however, collectively they are referred to as a firm.
- The agreement is formed which contains the terms, liability, and conditions that regulate the operation of the partnership
- A partnership firm may or may not be registered that depends upon the discretion of partners; while, it is advisable to get it registered.
Partners are not allowed to transfer their shares without having the consent of other partners.
Private Limited Company:
- A Private Limited Company is said to be an artificial person formed under the Companies Act 2013.
- A Private Company is a legal entity separate from its partners.
- The liability of the company is limited to its shareholding.
- Private Limited has perpetual succession that is its existence remains ineffective of the death of its members.
- Private Limited can sue and can be sued in its name.
- A Private Limited company can own and hold the property in its name.
Partnership Firm vs Private Limited – Pros & Cons
Since every legal entity comes with its pros and cons, we have discussed both the merit & de-merit of forming each entity to make it feasible for deciding the most suitable structure as per the needs of an entrepreneur:
Advantages of Partnership Firm:
- A partnership can be formed by a simple form of a partnership agreement. Thus, it is easy to form with lesser complex formalities.
- Since a partnership firm can be established with mere 2 partners, it has the opportunity to pool more resources and funds for the firm.
- Partner is the owner of the firm thus they get complete control over the firm and its management.
- Since the decision of the firm are mutually taken by all partners, the partnership firm ensures every partner participate in decision making thus it leads to better and informed decision making
- The partnership has a flexible structure, thus its partners can anytime change the size and nature of its business
- Business risk and profit are equally shared by every partner that helps in the distribution of shared responsibilities
Disadvantages of Partnership Firm:
The liability of partners is unlimited and they are jointly liable for the debt and loss incurred by the firm.
A partnership firm has no separate legal entity that is firm cannot exist without its partners and it comes into the end with death, insolvency or retirement of all its partners.
- Since every partner has equal right to participate in management, sometimes it leads to possible conflicts amongst the partners leading to the end of the partnership
- A partnership can raise a limited amount of capital since it cannot have more than 20 partners at any time
- Partnership firm restricts the transfer of shares to any outsider without the consent of partner.
Advantages of Private Limited:
- The company has a separate legal existence and is a legal and juristic person registered under the act. An artificial person is someone who is not a natural person however it has the legal capacity to act.
- Company’s existence is ineffective from its partners and thus it has perpetual succession
- The liability of each member is limited to its shareholding in case the company goes bankrupt or insolvent.
- Private company limited by shares allow its shareholder to freely transfer its shareholding to any person
- The company being an artificial person can acquire, own, possess, and hold property in its name. and no shareholder has any right to claim upon it till the company is going concern
Disadvantages of Private Limited:
- Since the private limited company is a registered legal structure under Companies Act, MCA requires several post-registration mandatory compliances leading to a time-consuming and money-consuming affair
A private company shall necessarily maintain so many registers and get them audited yearly
- The registration process of Private Limited is a lengthy and complex procedure that involves a huge cost that involves, government fees, stamp duty, and professional fee
- Private limited requires at least 2 directors and subscriber thus it cannot be formed by any person who has no other trusted partner and willing to start the business himself
Partnership Firm Vs Private Limited Company Comparison
For making a suitable decision, following table of comparison between a partnership and private limited will help you to gauge about the business suitable as per your need:
Basis of Differences
The Partnership firm is regulated by the Indian Partnership Act 1932
Private Limited is regulated under the Companies Act 2013
Provisions of registration
A Partnership can or cannot be registered. Both are considered to hold legality
It is compulsory to register a private company through MCA and shall get Certificate of Incorporation as the proof of its legal existence
The Partnership shall be formed with a minimum of 2 partners
Private limited requires a minimum of 2 directors and minimum 2 shareholders who are allowed to be a common person
A Partnership cannot have more than 20 partners
Private limited can have up to 200 members at max and for directors, the limit is 15 (Special Resolution required for exceeding 15)
A Partnership firm is not considered separate from its partners
Private limited has a feature of separate legal entity
The statutory audit doesn’t apply on partnership
The auditor must be appointed within 30 days of its incorporation
Partnership stand dissolve in case it’s all partners are deceased or are retired
The company continue to exist irrespective of the change in its members and directors
As per the above discussion, we can conclude that every legal structure has its benefits and depending upon its need and criteria, one shall pick the legal structure for its business. In case, the entrepreneur wants to commence the business with an easy and quick registration, it can opt for a partnership firm over the private limited company. Besides, if the business requires a heavy amount of capital to be raised, it shall go for a private company since it can have members up to 200 compared to a maximum of 20 members in the partnership firm. For getting assistance and advice to choose a suitable legal structure for your start-up, contact us.