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:

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Entity:

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.

Liability:

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.

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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.

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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.

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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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