Difference Between Partnership Firm and Company

Students studying business or commerce are likely acquainted with the concepts of partnership firms and companies. Yet, distinguishing between these terms can pose challenges. This article seeks to assist students in delineating the disparities between a partnership firm and a company.

Meaning of Partnership Firm

A partnership firm constitutes a business structure established through the collaboration of two or more individuals who mutually decide to distribute the profits generated by the business. This collaboration involves all partners collectively participating in the operation of the business or designating one partner to act on behalf of all.

The Indian Partnership Act of 1932, Section 4, precisely defines a partnership as "an agreement between individuals who have consented to share the business's profits, whether conducted by all or any one of them acting on behalf of all."

Individually, the participants in the partnership are referred to as partners, while collectively, they form the firm. The foundational document outlining the terms and conditions governing the partnership arrangement is commonly referred to as the Partnership Deed.

Types of Partnership Firms

Partnership firms are mainly classified into two categories:

• General Partnership: In this type, each partner is personally liable for all the debts & obligations of the firm, which means they are individually responsible for the entirety of its liabilities.
• Limited Liability Partnership (LLP): This structure consists of two kinds of partners - general and limited. General partners carry unlimited liability, while limited partners have limited liability protection, being accountable only for the capital they have invested.

Characteristics of Partnership Firm

Here are the key characteristics of a partnership firm, a common business structure where multiple individuals, referred to as partners, come together to operate a business:

1. Number of Partners: As specified in the partnership agreement, a partnership requires a minimum of two members and can have up to 20.
2. Partnership Agreement: This written document outlines the specifics of the partnership, including profit-sharing, roles, responsibilities, and other terms.
3. Unlimited Liability: Partners bear total liability, personally responsible for all business debts, with their assets at risk if the firm lacks funds.
4. Profit and Loss Sharing: Profits and losses are distributed among partners based on the terms of the partnership agreement.
5. Management: All partners typically engage in business management, allowing for collective decision-making.
6. Registration: While advisable, registration with the Registrar of Firms is not always mandatory, though it offers legal benefits.
7. Operational Flexibility: Establishing and managing a partnership is straightforward, offering flexibility in business decisions.
8. Capital Injection: Each partner contributes capital to the business as detailed in the partnership agreement.
9. Dissolution: Partnerships can end by mutual consent or due to events like a partner's death, incapacity, or departure.
10. Continuity Concern: Changes in partner status may require reconstitution of the partnership for continuity.
11. Tax Implications: Partners pay taxes on their share of profits rather than the firm being taxed.
12. Partnership Deed: This foundational legal document outlines the conditions, rights, and duties of the partners, ensuring transparency in operations.

Meaning of Company

A company is legally recognized as an entity formed by a collective of individuals involved in conducting business operations. This entity operates autonomously and by choice.

As per the Indian Companies Act of 2013, Section 2(20) stipulates that a "company" is defined as "a company incorporated under the Companies Act 2013 or any preceding company legislation."

A private limited company can be established with a minimum of 2 members and a maximum of 200 members, while a public limited company requires 7 members minimum, with no upper limit on the number of members allowed.

Types of Company

Different types of companies can be classified as follows:

• Corporations: These entities are usually formed to manage commercial or industrial endeavors.
• Public Limited Company (PLC): These companies allow public investment, and their shares are traded publicly on stock exchanges.
• Private Limited Company: Unlike PLCs, these companies do not accept public investments and have their shares held by a restricted group of individuals.

Characteristics of Company

Here are the key characteristics that distinguish a company as a unique legal entity:

1. Legal Identity: A company exists as a separate legal entity apart from its owners, enabling it to enter contracts, own assets, and bear legal responsibilities independently.
2. Limited Liability: Shareholders' financial liability is restricted to their investment, shielding their assets from company debts.
3. Continuity: A company maintains its existence despite changes in ownership or shareholders until it undergoes official dissolution.
4. Separation of Ownership and Management: While shareholders own the company, its operations are typically overseen by a board of directors.
5. Share Transferability: Shares of a company can be easily traded, allowing for individual ownership changes.
6. Capital Accumulation: Companies can raise capital by issuing shares or bonds to potential investors.
7. Regulatory Compliance: Companies must adhere to various laws covering corporate governance, securities regulations, and taxation.
8. Organizational Structure: Companies operate with a defined hierarchy, including a board of directors and executive officers, and are required to hold annual general meetings (AGMs) while maintaining detailed financial records.
9. Asset Independence: Company assets are separate from those of its shareholders, ensuring that shareholders' assets remain protected in the event of the company's insolvency.
10. Taxation: Companies are typically taxed on their profits, and shareholders are subject to taxation on dividends and capital gains received from their investments.

Below, we present a comparative table outlining the fundamental distinctions between a partnership firm and a company, aiming to provide students with a comprehensive understanding of these distinct business entities.

Similarities Between Partnership Firm and Company

Despite their differences, companies and partnership firms share several similarities that are integral to their roles in the business world:

1. Legal Entity Status: Both entities are recognized as separate legal entities from their owners, allowing them to engage in contracts, own assets, and litigate independently.
2. Registration Requirement: Both structures must register with appropriate governmental authorities and comply with regulatory obligations, including periodic filings.
3. Capital Procurement: They can both raise capital through various means, such as issuing shares (for companies) or partner contributions and borrowing (for partnership firms).
4. Taxation: Both are subject to taxation on their profits, although the tax treatment differs-companies are subject to corporate taxes, while partnership firm earnings are taxed as the partners' personal income.
5. Financial Record-Keeping: Accurate financial record-keeping is crucial for both entities to track business transactions and comply with regulatory standards.
6. Annual Meetings: Companies hold Annual General Meetings (AGMs), while partnership firms also convene meetings to discuss and decide on important business matters.
7. Ownership Structure: Both can have multiple owners - shareholders in companies and partners in partnership firms.
8. Governance Norms: Each operates according to established rules and protocols, with companies following Articles of Association and Memorandums of Association and partnership firms adhering to partnership deeds.
9. Dissolution: Both entities have the potential to cease operations and dissolve, although the processes and consequences may differ.
10. Liability: While the nature of liability varies-limited for companies and unlimited for general partnerships-both can be held accountable for their financial commitments.
11. Operational Restrictions: Both face limitations, such as the maximum number of partners in a partnership firm or the maximum number of shareholders in certain companies.

Conclusion

The concept of businesses emerged due to various shortcomings observed in partnership firms, leading to a decline in the prevalence of such firms in modern times. In response to these limitations, a new form of business organization known as a Limited Liability Partnership (LLP) has emerged. Both partnership firms and corporations have their own sets of advantages and disadvantages. However, as businesses evolve, the corporate structure is often favored due to its ability to facilitate expansion through mechanisms such as issuing additional stocks to a wider range of members, allowing public participation in equity, and providing access to various incentives and schemes designated specifically for companies.