Private Limited Company versus Partnership Firm… which one I should go for?

November 12, 2008 at 2:45 am | Posted in Legal, Partnership firm, Private limited company | 69 Comments
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In my last post, I shared my experience on Incorporating a Private Limited Company in India. Here I am going to mention the difference between a private limited company and a partnership firm, their advantages and disadvantages and which one you should go for.

Here we start with the difference between the two:



A company has a legal entity, separate from its shareholders or also called  members. Members represent the company. Creditors and Debtors of the company are of the company alone and they can’t proceed against the members personally.

A partnership firm has no legal entity separate form the members. It dies upon the death of a partner or upon separation between them. Partners are responsible for each and every debt or credit directly.


In a company, the shareholders have a limited liability (That’s why it is called private limited or public limited). Individually, all the share-holders have the liability to the extent of the amount of the shares held by them for which they haven’t yet paid for. So once you have paid up the price for the shares to the company, your liability is over. You are not bound to pay anything towards the debts, which the company has incurred.

In a partnership form each partner has an unlimited liability and is personally liable for all the debts of the firm.

Registration and Legal Formalities:

It takes one day to register a partnership firm. While a company registration is a 2-4 week long process. See my previous post on the process and cost of company incorporation. Company incorporation is much more expensive too.

There are many legal formalities in case of a company which are on-going too. For example, The external auditing of the accounts of a company is a legal necessity, but in case of a firm until the annual turn-over doesn’t cross 40 lacs, audit is not necessary.

Management and Control:

All the partners of a firm are entitled to take part in the management. But in case of a company the board of directors, elected by shareholders, control and manage the business.

Every shareholder doesn’t have to worry about the management of the company. Only majority voting power (>50%) is needed to control the most operations of a company (in a few very important cases >75% is required).

While in case of a firm, consent of all partners is required to carry out any important decisions  etc.

Winding up:

A partnership firm can be wound up at any time by any partner if it is at will, without any legal formalities.

Winding up a company is a long and painful legal process. Remember that a company is a legal entity. So when law gives birth to a company, only law can kill it.


So, here are some of the advantages and disadvantages of incorporating a company versus a partnership firm.

Advantages of Incorporation:

1. Separate legal entity and Limited liability, as described above.

2. Ease of operations, because not every member is required to run the company.

3. Adds credibility to your existence.

Disadvantages of Incorporation:

1. Formality and expenses, throughout its life.

2. Painful to wind-up, if required.


Overall I would say,

When you are just starting your venture, go for a partnership firm. Once you see a certain level of stability/growth and you need credibility in the market, go for a company incorporation. In B2B deals especially, I have seen the customers being worried if you are not a registered company.

Note: No VC would invest in a partnership firm (No one wants to take unlimited liability). You will anyway have to form a company before your first investment.


Namit from Lifemojo has mentioned an interesting comment in my previous post.

Namit: “I hope the Limited Liability Partnership would be a better choice for Indian Startups once the bill gets passed.”

So there is something already proposed in Indian parliament called “Limited Liability partnership”, which will have the advantages of both. Cool 🙂



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  1. There are a lot of things to consider before incorporating or forming an LLC or LP. The tax and non-tax considerations can have a long lasting affect on your business, associates and family.

    There is a free 5-part email series entitled What You Must Know Before You Incorporate that is worth the read.

    All the best!

  2. Thanks Himanshu, a very good write up and most importantly very informative. I, in collaboration with 3 of my friends from College recently started a Partnership firm (named “17dnorth”- a design studio) and were given advice on the same lines that you have mentioned in your post above, to start a partnership firm. Since i am not very business oriented person, i must admit that i didn’t have (not anymore!!) much knowledge about the differences between the various types of companies and firm that one can start and type of businesses one can venture into. To clarify on the same I stumbled upon your article and i must mention that that little write up, has clarified a lot of my doubts.

    Unnati Pingle
    17dnorth- a design studio

  3. hi,
    we have registered a pvt. ltd. company in the month of july 2008, but due to some reason we could not start our business. What are the legal and audit formalities to be completed in this financial year.


  4. @netex If you have registered the company, the formalities are to be completed at the end of the financial year, even if you haven’t done any business.

    There has to be an external audit, an income tax filing and a filing of income returns with the ROC. Please consult a CA/CS for more details.

  5. It has been comprehended very well. Thanks.

  6. the procedures that you have mentioned above,is that the same for LLPs and the partnership kind of firms…..

  7. @ravi
    This post is only for explaning the difference between the two, so that you can decide which one you should go for.

    To know the process for incorporating a limited liability company in India see the post:

    I do not know the exact process for registering a partnership firm.

  8. I have a Partnership firm in which my wife and I are partners. I have been told by a friend that we can take salaries only as per limits prescribed by the income taw law. So, we are forced to pay in the hands of the firm. We prefer paying tax in our hands separately to enjoy the exemptions granted by the law. My friend says this is only possible if I have a private limited company. He gave the following calculation.

    Say, the firm has a profit of Rs.10 lakhs. The max permissible salary to the partners is Rs.4,52,500. The firm pays tax at 33.66% on the remaining amount. So, the tax for the firm is Rs.1,84,289. If my wife and I can use the exemption limits judiciously, we need not pay tax.

    If we have a private limited company, we can take all of Rs.10 lakhs as salary @ Rs.5 lakhs each. Then our total tax liability works out to Rs.64,000 only. Hence, we end up saving Rs.1,20,289.

    Please advise if this is right. Based on your advise, I want to convert my partnership firm to a private limited company.

  9. @Bala
    Hi Mr Krishnan,
    I didn’t know that there is such kind of restriction in a partership firm on drawing salary. You need to confirm that with a CA or CS.

    But if that is the case, then it totally makes sense for you to go for a private limited company. But there are lots of overheads of starting a company as compared to a firm. But with the kind of saving you are talking about it would be worth it.
    See this post on the process of incorporating a company:

  10. we are 3 friends and plan to have small setup in mumbai. now we are in lil confusion weather to register company as partnership firm or Private limited.
    can you help me what is advisable to go with ??

  11. dear Mr.khurana
    i am starting a firm with a few of my friends, this post has been most helpful in clearing my head of a lot of doubts.

    being a firm can i use the ‘pvt ltd’ tag with my company’s name ? solutions pvt ltd ?

  12. hi,
    thanks for your reply.
    As i mentioned in my last question that i have registered a company in July 2008, but could not start business. for the registration purpose form 1, form 18, and form 32 were submitted to ROC. After then no activity was done. So i want to close this company. But my partner who have a fifty percent share in the company, neither wants to run nor wants to close it. Simply, he wants to create some problems for me. As if company is not wind up. I have to bear expences for auditing every year, wihtout doing any work. plz suggest options before me….how can i close it or how can i resign it.


  13. @Nitin
    I have mentioned the differences in my post. Still if you want to discuss it further you can give me a call. I have emailed you my number.

  14. @netex
    Your partner is equally responsible for completing annual formalities. Please consult a CS to know what action you can take against him.

    Closing a company is more difficult than creating it. However, since you have decided to close the business, you can start the wind-up process with the help of a CS. However, your partner has to agree and he should be available for certain formalities and signatures.

  15. i am doing some work and i am stuck on a question, i have tried to sum it up into something small for you to read.
    Lucy has won £1000000 and wants to set up a business and matt and john want to join her but they have very little capital to invest, i need to advice Lucy on the legal implications and differences of running her business either as a partnership, with herself and matt and john as partners, or as a private limited company

    Thank you

  16. Hi
    Its a simple and good writing . I have a request that please include one more point that is : The capital structre of partnership firm and pvt company and the share holding , the number of members of shares, share holders etc
    i think you will do needful

  17. Hi,

    I gone through your site and somany usefull inforamtiona how to start company and also to learn more and more gainfull diferent conversation. It will be very usefull to younger enterperunar.I thank to your service to needy persons.

    with regards,

    No-5,krishnarajapuram colony,Manamadurai-630606,Sivagangai-Dist,Tamilnadu,India.

  18. @L.Pandi Thanks!
    @Shameer Sure! Will do that.
    @jasche being a firm you can’t use ‘pvt ltd’ tag. It has to be a private limited company to use this tag.

  19. Hi,

    Very informative post. It has cleared some of my doubts regarding the Partnership firm.

    I am working as a freelancer to a US company and I get paid in dollars on the agreed contract between me and the US company.

    Now, my question is that I don’t have a firm or a company to raise an invoice to the US counterpart, and have asked them to directly transfer my amount to my bank account in India.

    Now, if the person transfer then what are the tax implications and how i can save the tax.

    Please advice.

  20. Hi Dharamveer! I am not sure the tax implications in this case. You can contact a CA to get an answer!

  21. Hi
    I have joined with 2 others and started a private company. My stake was 25%. One of them has invested in the company around 50 lacs.
    He is Managing Director and holds 50% of the share and his friend like me holds the balance 25%. Every bank transaction the signature power is jointly by MD and one of the directors. Now the company is under heavy loss. This MD is not active participant in the day to day business. We are developing a software. Now This MD is threatining me to repay 50 lacs which he claims that believing us he has invested.
    Can u tell me where i stand legally. This 50 lacs has been treated as loans from Managing Director. Am i responsible to pay back such loans.

  22. @Vijay.
    The MD has given a loan to the company, not you. You are separate from the company. Your liability is limited to you capital investment in purchasing the 25% shares. You must have paid that money to the company initially. If you have not paid, you should pay and thats all your liability is.

    Legally you are safe.

    If the board of the company decides to repay the loan to the MD, the company’s assets should be sold to repay the loan.

  23. Thanks Himanshu. This reply gave me a good relief. But there is only one hitch, now they are trying to press a charge on me with such comments.
    Negligence of Duty by a director which created the loss.

    Is there any such clause legally. can they use such a clause.

  24. @Vijay

    Now this one is purely a matter of what you can prove. You will have to fight against it.

  25. hi sir,
    i am gonna start a partnership firm. right now i m deciding firm’s name but m confuse that what word should i use after name like xyz……..? is it corp/inc, or what?
    and is it compulsory to register my firm or firm’s name right now after deciding the name.

    humble request pls reply as soon as possible

  26. pls also let me know, if my partnership firm name is xyz(suppose)and another co. having same name but having word (obvious)and engaged in different product or bussiness(say software) than mine(say dvd player manufacturing).
    in this case, can i register my firm name as xyz…?

    pls clarify my doubt.

    thank you

  27. I have a computer education institute since 1996
    now i want to registeration it. plz tell me about it
    partnership firm/private limited company

  28. @ pankaj,

    You cant use the words inc./ corp as these are american terms for referring to Incorporated entities.
    For Indian entities, the words are Ltd./ Pvt. Ltd. etc. which can be used only if you form a Company.

    You cant form a Company with existing name.

    Best regards

    CA. Bhavesh Savla

  29. Also the liability of the shareholders becomes unlimited from limited if the number of Directors remain below the minimum limit for more than 6 months.

    For all your queries related to incorporation of Pvt. Ltd/ Public Ltd Company or LLP, you can contact at

    Questions will be answered sooner or later but grant some time, please.

    Best regards

    CA. Bhavesh Savla

  30. Dear sir

    I have started a pvt ltd company recently.after all consult with senior and ca they have supported to open a firm in pvtltd.

    In my mind there is lots of confusion please clear it.
    1.In partner ship company and pvt ltd company wheather the taxes are same.
    2.can we run the business in our own capital without any support from the shares holders.
    3.Incase if we need more funds.By what method should we colect the funds from the share holders.
    4.can we take as a salary in a month or we shall take the whole profit.
    5.if we open 2 to 3 branches,then how we have maintain the accounts.
    6.what is the minimum turnover to colect the funds from the share holders.
    7.procedure of goods transfer from one branch to another branch in other state or districts.
    8.what is the benefits in taxes by having a women directors.


  31. How can i register our computer institute?

  32. Hi Himanshu
    Very Useful info. Actually we are planning to build a hotel, there will be 6 partners in the hotel. My cousin has a pvt ltd company lying idle and he will also be a partner in the hotel. However we would like to change the name of the company and also the existing directors will resign and new directors will be incorporated. I would like to know the expenses we would incur for the same. Also if is it advisable to go ahead with a pvt ltd company or a partnership firm. I have a little about Limited liabilty partnership. If LLP wud be a better option??

  33. Hi Himanshu
    Very Useful info. Actually we are planning to build a hotel, there will be 6 partners in the hotel. My cousin has a pvt ltd company lying idle and he will also be a partner in the hotel. However we would like to change the name of the company and also the existing directors will resign and new directors will be incorporated. I would like to know the expenses we would incur for the same. Also if is it advisable to go ahead with a pvt ltd company or a partnership firm. I have heard a little about Limited liabilty partnership. If LLP wud be a better option??

  34. @Pulkit

    A LLP has certain distinct tax advantages as compared to a private limited Company.Never go with a normal partnership firm.

    However, you already have a pvt. ltd company. So just changing the name and appointing the Directors and also the older Directors resigning would achieve the same.
    However you also need to look at the Memorandum of Association to see if any changes are required in the object clause. and this is more important than anything else.

    you can drop in a mail at for a free brochure on LLP.

    CA. Bhavesh Savla

  35. HI Bhavesh,

    I and my friend are running a training institute and planning to register it now. The reason we are planning to register it is that we are getting corporate clients who wil only issue cheques. We want to open a bank account for our training institute. When approached a bank for account opening they have asked us to submit two statitory documents pertaining to company.
    1. Registration Certificate
    2. Service tax registration

    Please advice how we can go further.
    Thank you in advance

  36. Dear Ram,

    Please drop me a mail at with your query. Pending time, I shall be more than helpful to solve your queries.

  37. Hi All!!!

    Very good interactive discussion on Partnership Firm, i have a registered a partnership firm with 2 partners (A temprovary registeration from a State recognized Pvt Small scale industries registering body,with which i can open a CURRENT ACCOUNT in a Bank, both have invested equally, we fixed a very low salary for each other than what we were getting paid while we both were employed.

    My question is should i go and register for a permanent registration of my partnership firm.

    What all should do to make it more legal Like
    1. Should i apply for VAT
    2. ” ” ” FOR TIN
    3. ” ” ” for CST
    4.Should i pay tax for all the money generated thru my service or should i file my returns Quarterly.
    5. Shd an external auditor see all my account activities?
    6.Can i increase my salary and get the tax exemption as per law
    7.any suggestion on this in detail would be appreciated.


  38. can a public company can be created without issuing shares in public

  39. Hi,

    I wish to start a company with 2 people. My question is what will be the liabilty incase of any claims from the insurance company or client incase of any accidents in transportation ? If an PVT LTD company is incorporated what will be the liabilty in the above accident case ? Will the personal property also will be liable or is it limited upto paid up capital of say Rs. 1,00,000.00. Pls clarify.

    Thanks in advance.

  40. @Menon
    It would be limited to the paid up capital from your personal side.

  41. @Manish
    Yes, a public limited company does not need to issue shares to be public. It “can” issue shares to public. Manny public companies have not gone IPO yet.

  42. Hi

    I wish to start a Multy Level Marketing business so can i register it like a Partnership firm or i should register as a pvtlimited company .

    Please help me out

  43. @vineet Do a properitership or partnership firm.
    Actually my advice is to not do any “multilevel marketing”. Whether it is Amway or herbalife or something else. Its a scam.

  44. Hi,Himanshu,

    Few questions,I am part of a partnership firm with majority stake of 35% and rest is divided as 25%,20%,20% amongst other 3.

    1. As a majority stake holder what rights do i have on the firm?
    2.Can the other come together and throw me out of the firm?
    3.Does anyone with 51% plus share become the owner of the firm or does he have any special rights?


  45. Hey Vijay,

    Nobody can throw you out even if you have 1% shares.

    About the special rights and all you would need to check with some CA/CS guy as I am not an expert on this.

  46. Agree with Himanshu abt the multi-level marketing stuff.I get a lot of queries abt formation of multi-marketing companies which I have to decline. Even banks are wary of opening accounts of such Companies.

  47. Hi, Its very sad for that you guys are opposing multi-level marketing business. First of all you should understand that it is only a good plan to sale their products.. Fraud’s are there, but plz don’t blame all the cmpany’s.. Even some of India’s top company’s are following this stuff’s!!

  48. @Jithu
    Its my honest opinion to stay away from these kind of caopanies. I have seen so many people burning their hands in these scams of multi-level companies including Amway and Herbalife. If you do not agree it is totally up to you.

  49. Hi, hw u duin? I and a friend of mine are doing freelancing from mumbai .We provide IT Solutions. i have some doubts that are mentioned below :
    1) If i register a partnership firm will i get a registration number for it?
    2) If i approach a company a known one will we be entertained by them? By this i mean is a partnership firm equally official as a company?
    3) Can any other to be formed company or firm use the same name as the name of our partnership firm?
    4) What is the procedure for registering a firm?
    5) what is the exact time when tax will be applicable on us and is service tax license required in the start ?
    I’l be more than happy if the above mentioned questions be answered .

  50. I have a sole proprietor business which involves selling products through my website, outside India. I collect payments through my PayPal account and transfer it to my personal account in India to run my business. Now a year back I established a pvt. ltd. company to support my business and then I started transferring money to my new company current account to run my business. I wished earlier while forming the pvt. ltd. company that this would bring credibility to my business but it did not add much, as most of Internet Users see the credibility of website rather then company who is operating it. So now I find this company as a overhead as it involves annual audit, higher tax, increased financial accountancy, tds return etc. Only thing useful about this company is that it had contract with a courier company where courier company provides a good discount to companies doing good business.

    So what I plan is that I should run my business as a sole proprietor
    as it used to be BUT only use the pvt. ltd. company I formed to support the shipping operations as it earns discount from the courier company. So the company would act as a service provider to my sole proprietary business, the advantage I get is their would be less accountancy as courier company raise the consolidated bill monthly so it means only 12 transactions a year, and I would only transfer the sum of money to companies account which is required to pay the shipping company bill and rest I would manage from my personal sole proprietor business account.

    Do you think it will be alright and there is not any legal issue in above? where I am a sole proprietor of one business but also director in another company which provides services to my sole proprietor business.

  51. Hi Your Work very Good . I Like And Appreciate Keep it up .

    Thanks & Ragard
    Neha Varma

  52. hi i am a designer with a proprietorship, n thank god our work is increasing n we were thinking of registering our co. as . n dint know which way to go.these concepts were very vague in my mind. this is the reply i was looking for. all my questions got answered.
    thanks a ton. its beautifully explained in laymen terms.

  53. hi, i m planning to run a business with a investment of 10 million(land building plant machinery working capitol) and expected turnover will be 40-50 million.should i go for pvt firm or pvt limited company

  54. hi,
    me and my friends were planning to start a soccer academy… everything is already thought of … were just confused about whether to go in for a private limited or partnership…

  55. I’m running a partnership service firm with 50% partnership. Can i form a private limited company with exactly equal powers vested between two top level dirrectors. And how can we do this.

  56. @Vidur

    Rather than going for a pvt ltd company or partnership, go in for a Limited Liability Partnership, which offer the advantages of both and tries to reduce their disadvantages.
    For a start-up, a LLP is the best corporate form.

  57. Hi Mr himanshu
    we in our family we have 6 companies of propriter ship this is very hard to handel this 6 firms among this 6 firms there are two ladies and two HUF firm tell me in which of company i should transfer either in partnership of in pvt ltd company which wil benifit me to run my busienss better.? thanks Have a good day

  58. Hi Himanshu,
    My fried and i started a firm in logistics, few years ago. In order to increase our biz, we roped in a sales person on a commission basis. We assured him that he would be made a partner after few years. He has done reasonably well!. Based on our commitment, he wishes to enter our business, but insist that we go for a pvt ltd company. We are okay with him joining us, but not sure which is the best way forward. Personally, i feel its too early to go for pvt ltd.

    1. If we take him as an equal partner. Must we close the books and split the profits among the current partners or can we continue as it is, and ask him to bring in capital. In which case, how much should he bring in and what should be the basis of calculation. If he brings in the required capital. Do we need to share the profits what we earned over the past few years with him.

    2. Alternatively, is it better to change over to a Pvt Ltd company. In which case, how should we do the calculation for capital.

    While we welcome the inclusion of the new partner. We also, do not want to lose out on the contribution and effort we took to set up our business.

    Pls provide me with your valuable advice and suggestions.


  59. Dear Sirs
    I want to form a partnership company and in case of any eventuality is there any option of ousting the minority stakeholder without much hassles.

  60. Hello Mr. Himanshu,
    I am in a Salon & Spa business with two branches. Me and my sister are proprietors for each of them. With expansion plans in mind and to take our business to the next level we have decided to opt for a partnership firm which would simplify things to the extent of single entity dealing on various issues. I have gone through your posts and also visited the mca website and believe that LLP arrangement would be the best. (Please advise if this is correct).

    Both the premises are on rent. One of the owners is a tenant of that premises and not the actual owner. So there is a special agreement made called the ‘Business Conducting Agreement’ wherein the Landlord has given consent with the tenant agreeing to share the 1/3 of rent received since its not his business. My question is that apart from me and my sister as partners to the LLP can we include the tenant as LL Partner to avoid him paying 1/3 of rent to landlord saying that it his own business in partnership? Can we have his partnership limited only to the rent that we were paying him which could possibly change year after year?

  61. Dear sir

    I have started a pvt ltd company recently.after all consult with senior and ca they have supported to open a firm in pvtltd.

    In my mind there is lots of confusion please clear it.
    1.In partner ship company and pvt ltd company wheather the taxes are same.
    2.can we run the business in our own capital without any support from the shares holders.
    3.Incase if we need more funds.By what method should we colect the funds from the share holders.
    4.can we take as a salary in a month or we shall take the whole profit.
    5.if we open 2 to 3 branches,then how we have maintain the accounts.
    6.what is the minimum turnover to colect the funds from the share holders.
    7.procedure of goods transfer from one branch to another branch in other state or districts.
    8.what is the benefits in taxes by having a women directors.


  62. Hello Sir,

    Me and one of my friends has planned to open a software company (however we are still not sure if we would be doing any business in current financial year)
    Our CA advised us to open a Pvt Ltd firm than LLP or partnership.
    Can you please discuss what are the average expenditures incurred on Pvt. Ltd. vs LLP or partnerhsip firms both while registering and average annual expenses (considering no business is conducted)

  63. difference between company and partnership in deeper sense.

  64. Hi,

    i had a pvt .ltd company in that i & my partner both has a stake of 50 & 50 %,now from the last few month my parther are not come to the office even he is not file the ITR retun of the company now i want to close the company hw i can i do this ? and how i resign the duties of the company plz suggest

  65. Dear Sir,

    I have a partnership comapny, our turn over more than 2.5 crore.
    Now We want to make this company in

    So, can you give suggetion to me which is the best for us.and wat is the benifit is there. and what is the procedure to changing and how much expenses are coming for is legal activity is there.Beacuse we are not having any idea in this field.Please give to us some beautyful tips for our future growth of the company

  66. Hello.

    I want to start a IT related business with my 2 friends so Should we for go pvt ltd. company or partnership Firm?
    Please suggest.

  67. hi,i m pritam agarwal ,age 26,2 yrs ago,i involvd in a little business.after get experince i will wnt to start a pvt ltd.but i need some money against cc a/c,or working is a long project ,bt ihv no place to give as a mortgage gurenty,wht is the short legal procedure to face 2nd one ques is firm is better or co is better;this business willbe held from state to national.plz advice me imediatly.plz tell me in detail.i will can fixed 30 percent of money against cc a/c .plz send me ur ph no

  68. Dear Sir, first of all a Loads of Thanks for such a helpful Blog …Further i want to discuss a few of personal matters …hese are off course related to my Firm and the process , but i just dont want to disclose it hereby…please be kind and provide me your cell no…..Thanks…and i am here , 9911870365…waiting for a favorable reply….just consider that i m in a very much need to talk to you….really.

  69. I am waiting for your words Sir…plz reply asap

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