Private Limited Company or Partnership firm?
Which one should you choose and go for?
It is best to decide the ideal business structure before starting a new business. This decision is taken based on many factors like how many people start it. If it is two or more, then registering a Private Limited Company or a Partnership firm serves a better option. Consider the aspects that can impact your business and also the problems you wish to avoid before locking down on any of the options.
Here is an overview for both the business entities:
For a new business, the partnership structure is the simplest and most basic structure. To register a partnership firm is advisable but not a compulsion. It will have a partnership agreement with the objectives, responsibilities, and duties of partners written in it. This will also have an exit strategy for partners with clarity on the allocation of shares for each partner.
On the other hand, Private Company is a little complex but has its own set of perks. Firstly, it creates a separate legal identity which limits the liability of involved members. But then, it is compulsory to register a Company to start a business.
Advantages a Partnership has over a Company:
- A simple agreement between two or more people is the only pre-requisite to start a partnership firm. For the Company, there are a few procedural formalities to be fulfilled.
- A company is managed by the directors and members with actions governed by organizations like RBI, MCA, SEBI etc. While it is only the partnership agreement that governs the partners. This is why the flexibility and freedom to take decisions is higher.
- Termination of a partnership firm is easier than the Company. It is so because of the agreement which is valid only between the partners regarding the closure is enough. Company closure will require everyone to follow a proper winding up procedure has to be followed.
- The company holds a greater amount of credibility compared to other business structure due to its high compliance requirement. Moreover, it is governed by statutory bodies like MCA and SEBI that keep a check upon the business from time to time it. Raising funds is easier internally and even from external sources.
This table will help you gauge and decide which structure is suitable for your business.
|Private limited Company||Partnership firm|
|1. Act||Companies Act, 2013||Indian Partnership Act, 1932|
|2. Registration Requirement||Mandatory to set up business as a Private Limited Company to comply with the Act.||Both registered and unregistered partnerships are legal, but the registered entity is preferred.|
|3. Number of members||Requires minimum two and max 200 shareholders||It is formed with minimum 2 partners, but not exceeding 50|
|4. Separate Legal Entity||Private Company is a separate entity with an ability to own assets in its name.||A partnership firm has no separate identity from its partners.|
|5. Liability Protection||Liability of members is limited to the extent of the unpaid value of shares subscribed.||Partners are jointly and severally liable to pay the debts of the Partnership Firm|
|6. Statutory Audit||An auditor must be appointed within 30 days of incorporation.||Statutory audit not applicable. Tax audit may be applicable based on turnover|
|7. Ownership Transferability||Ownership can be transferred through shares if shareholders give their consent||Ownership is not transferable easily, clause of partnership deed should be referred|
|8. Uninterrupted Existence||Any change in members or directors does not affect the company’s existence.|| Change in partner leads|
to dissolution or formation of another partnership firm.
|9. Foreign Participation||Foreign nationals can invest under the Automatic Route||Foreign nationals cannot be made partner with|
|10. Tax Benefits||A comparatively moderate Tax is levied as the tax rate for small companies is reduced to 25%||The tax levied is 30% of the business profit on which is on a higher side.|
|11. Statutory Compliances||High compliance that includes annual filings. Also, it must comply with plenty of other compliance requirements.||Compliance is much less except for filing a separate ITR there are no other mandatory compliances|
The above table and its preceding information can help you take the right decision regarding choosing the right business structure for your business. Prior to finalizing the structure, it is recommended to render business professional services to take stay sure.
One should always have a fair and transparent view of both – pre and post-compliance requirements. The information about annual compliance is given in our blogs: Annual Compliances for Companies – Important Due Dates
It is always better to have an overview of both the pre and post-compliance requirements. The information about annual compliance can be found here.
Kahini Jhaveri is an IP specialist at LegalWiz.in, with a keen interest in content creation. She holds a B.A. LLB honours from Institute of Law, Nirma University, Ahmedabad. Kahini specializes in Intellectual Properties, specifically Trademark Law.
Thank you Kahini, for such an informative article on business structures and ways to select a suitable one. These intricate details like how the change in partners could alter the existing company and the 30% tax levy for partnership firms came as a surprise for me.
I am heartily impressed by your blog and learned more from your article. Thank you so much for sharing with us.
How to leave the Directorship in a Pvt.Ltd.Company. How to resign and leave the company ?
Hello, Resigning director has to send a resignation letter to company. The company will send acknowledgment back to him. Then, Board resolution will have to be passed in board meeting and then DIR-12 has to be filed by company and DIR-11 has to be filed by resigning director. Hope this helps! Contact us at email@example.com for further assistance. Or give us a call at 1800 313 4151 / 8980685509. We’re here to help!