Starting a business requires a lot of thought, understanding, and research on various aspects of it. However, once you are clear on the basics, as an aspiring entrepreneur, it is very important to decide the structure of your organisation as well, especially if your business is founded by multiple stakeholders.
Two of the most popular structures to accommodate multiple owners are Partnership and Company.
Each of these business structures comes with its own set of advantages and disadvantages. Hence, it is important for you to deduce which one would work the best for you and the other co-owners of the organisation.
What Is a Company?
A company is an association of a group of people who have come together for the purpose of running a business or any other shared objective.
It essentially has shareholders as owners and directors as decision-makers. Companies can also be public giving the public a chance to invest in them by buying their shares.
In the event that there are not multiple owners involved, you can also opt for a one-person company structure with a sole director. However, given the plethora of benefits of sole proprietorship and the complexity and demanding nature of a company, this type of setup is not very popular.
What Is a Partnership?
In the trading world, the word “partnership” usually refers to an arrangement between a group of individuals who have registered their business as a “firm” and have agreed to share its profits (and losses) in a pre-determined ratio as its “partners.”
However, in the case of a partnership firm, it is necessary to have two or more co-owners of the business.
A partnership firm is simple to establish and manage, but it is riskier in terms of bearing the organization’s liabilities. All the liabilities are borne by the partners since the business firm doesnt have its own identity.
What Is the Difference Between a Partnership and a Company?
Let us now understand the difference between a company and a partnership firm in detail with the help of a comparison chart.
| Feature | Partnership | Company |
| Members | The founding members are called Partners. | The owners are called Shareholders. |
| Governing Act | Governed by the Indian Partnership Act, 1932 | Governed by the Companies Act, 2013 |
| Creation | Created by a mutual agreement between all the partners. | Created by incorporation of the company under the Companies Act. |
| Registration | Not mandatory | Mandatory |
| Documentation | Partnership Deed is required | Memorandum of Association and Article of Association are required |
| Identity | No separate legal entity | Has a separate legal entity |
| Liability | Unlimited liability to partners | Limited liability to shareholders |
| Minimum Members | Two | For Private Company the minimum requirement is two, whereas for a Public Company, the minimum requirement is seven |
| Capital | No minimum capital criteria | A minimum capital of INR 1 lakh is required for a private company, and a minimum of INR 5 lakh capital is required for a public company. |
| Dissolution | Less complicated and negligeable legal formalities for dissolution | Quite complicated and requires fulfilling certain legal formalities. |
| Digital Signature | Not required | Required by at least one of the directors |
| Voting Rights | As per the Partnership Agreement. | As per the number of shares held by the shareholders. |
As you can see from the chart above, even with a simpler structure and fewer legalities to get into, a Partnership firm doesnt enjoy being a popular choice for entrepreneurs. Its benefits cant make up for the financial liabilities it puts on the partners. But its up to you to choose the best organisational structure for your business.
FAQs on The Difference Between a Partnership and a Company
Which is better, a partnership or a company?
Each comes with its own challenges and benefits. While a partnership’s ease of formation and fewer formalities during its establishment and operations might sound good to some, a companys limited liability shield to the shareholders can make its intricacies just worth all the hassle to others. You need to carefully understand and figure out which one of these major features is important to you.
What are the three major differences between a partnership and a corporation?
The major differences lie between the following:
- While a company has its own independent identity and books, the identity of a partnership firm is not separate from its partners and their personal taxes.
- The formation of a company is a complicated process and requires registration under the Company Act. A partnership doesnt require any registration and is based on a partnership deed.
- A private company should have between two to fifty members, and a public company should have a minimum of seven members with no limit on the maximum number of members. In the case of a partnership firm, the minimum requirement is that of two members, but there can be up to twenty partners.
What is the difference between a private company and a partnership firm?
A private company is a separate artificial legal entity with its own assets and liabilities. However, a partnership firm doesnt have its own individual existence beyond the partners who formed it.
What are the similarities between a partnership and a company?
A partnership and a company are similar in terms of their core objective: a group of people coming together to attain a common goal. Both of these are owned by multiple legal entities, not just one.
Can you form a partnership or company?
A company, having a legal independent existence, can be a partner in a partnership firm as per the Companies Act. However, a partnership firm cannot act like a partner or a shareholder in a company because neither the Partnership Act nor any other law recognises it as having a separate identity.
What are the 4 types of partnerships?
The four types of Partnerships are General partnership, Limited Partnership, Limited Liability Partnership, and Limited Liability Limited Partnership.
General Partnership: This is the most basic form of partnership, where the whole liability of debts and losses is completely borne by all the partners.
Limited Partnership (LP): Here one is a general partner responsible for all the operations and liabilities even via his personal funds, and another partner acts just like an investor and doesnt actively manage the business.
Limited Liability Partnership (LLP): In this set-up, the business is managed by all partners equally. However, the partners are not liable for each other’s actions.
Limited Liability Limited Partnership (LLLP): This partnership is an amalgamation of LP and LLP. The general partners liability is also limited here, giving liability protection to all the partners.
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