One of the biggest decisions to make while deciding to start your own business is deciding the business structure while incorporating the business. A business entity gives an organised structure to the enterprise and is formed and administered as per corporate law in order to engage in business activities.
When talking about businesses and the various types of business entities that can be chosen from, let’s remember a quote by Steve Jobs where he pointed out that “Great things in business are not done by one person. They are done by a team of people”. This thought of his, when translated in terms of business entity, makes it clear that while choosing a business structure, it is better to work together with someone, whether another partner or a team of shareholders and supporters. This means that a partnership or company wins over a sole proprietorship.
However, the difficult choice to make is between a partnership and a company. To make the decision, the vital features and the differences between these two business forms must be known.
What Is A Partnership?
A partnership can be defined as a business operation that is legal, between two or more individuals, all of whom share the management of the business along with the profits of the business too.
Salient Features Of A Partnership
A Partnership has several key features-
- A partnership agreement is drawn between two or more individuals.
- The profits are shared in a partnership as mentioned in the partnership agreement.
- Each partner in the partnership contributes equally towards the business, in terms of investment and duties within the partnership.
- Within a membership, the minimum number of members or partners needed is 2 and the maximum number allowed is 20 members.
- In a partnership, the liability of each of the partners is unlimited, and joint as well as they have several liabilities.
- Every partner within the firm can act on behalf of the firm and is responsible for their own actions as well as for the actions of the other partners within the firm.
- A partnership has collective management where the firm and the partners are one and the same and contracts made in the name of the firm makes the partners responsible for it collectively as well as individually.
- The shares or the other interests in the business cannot be transferred by the partners without the the consent of the other partners.
What Is A Company?
A Company is a legal entity that is composed of a team of people, known as members wherein the liability of the members or shareholders is limited to their shareholding in the Company.
Salient Features Of A Company
The characteristic features of a Company include-
- A company is a separate legal entity which has its own identity apart from its members.
- A company has shareholders who contribute towards the capital investment of the company as per their suitability and thus become the shareholders. The contribution can be other than monetary, such as space, time, etc.
- The profits are divided among the shareholders, depending on the number of shares or their contribution towards the company.
- The maximum number of members that can be included to form a company must not exceed 200.
- The liability of the shareholders within a company is limited and is usually equivalent to their share within the company.
- All the shareholders do not run a company, instead, few elected representatives are selected, termed as directors who handle the running of the company.
- The company and its shareholders have separate identities and thus the shareholders are not completely responsible for the actions of the company or of any of its shareholders.
- The shares of the company can easily be transferred, thus a company is always existent even though the original or founder members are no more present.
- A company can be of any of the following types
- Private Limited Company
- Public Limited Company
- One Person Company
Difference Between Partnership And Company
While discussing the salient features of a partnership and a company one can notice the differences that exist between the two types of business entities in terms of formation and operation and several other features which are discussed here.
- Business Entity
A partnership is usually the relationship between any two or more individuals who come together to run a business and share the profits and responsibilities and the coming together of the partners forms a firm. A company, on the other hand, is a voluntary association of people which is a registered body and is formed for the purpose of a common object.
- Governing Act
A partnership is governed by the Indian Partnership Act of 1932 while a Company is governed by the Companies Act, the revised version of which was in 2013. The registration of a partnership under the Act is not mandatory and can be based on a partnership deed which is easy to form. A company, however, needs to register itself mandatorily under the Companies Act with the Registrar of Companies.
In a partnership the management of the firm lies in the hands of all the partners, while in a company all the shareholders of the company select representatives, called as directors, who manage the company and carry out the day to day affairs of the company.
- Legal Position
A partnership does not have a legal identity that is separate from its members while a company is a corporate body which has its own separate identity from that of its members.
In a partnership, the members have unlimited liability. In fact, the partners are jointly and severally liable for all the debts of the partnership firm. In a company, the shareholders have limited liability and are not liable for the acts of the company. The liability of the shareholders will be up to the amount guaranteed by them.
A partner within a firm cannot enter into a contract with the same firm while a member of a company can enter into a contract with the same company.
- Number Of Members
In a partnership, the minimum number of members needed is 2 and the maximum limit is 10 members for banking, and 20 members for non-banking businesses. In a company, the maximum number of members allowed is 200 members.
- Decision Making
In a partnership firm, quick decisions are possible, while in case of companies, taking decisions on important issues requires a fairly long time.
- Capital Formation
A partnership does not let a person with limited resources be part of the capital formation of the firm, and thus not a part of the partnership either. In a company, however, even people with limited resources can become the shareholders of a big company.
In a partnership, after the death of a partner, the remaining partners and legal Heir of Deceased partner succeed the partnership, with the consent of other partners. In a company the succession is perpetual.
In a partnership, the firm can be dissolved with the consent of the partners while in a company legal procedures are required for winding up the company or for going ahead with liquidation as the case may be.
- Transfer Of Shares
Shares of a company are freely transferable unless restricted by the Articles. But a partner cannot transfer his share without the consent of all other partners.
- Filing of financials with regulatory authorities
The act of filing of financials with the regulatory authorities is not applicable for a partnership, while in a company financial statements are to be filed annually with the Registrar of Companies.
- Filing of forms for the creation of charge (in case of loans taken)
There are no legal formalities required within a partnership such as filing of forms for the creation of charge while in a company, in order to create a charge adequate forms need to be filed with the Registrar of Companies.
The differences between partnership and company can help understand both the business entities better and make a more informed decision about choosing the better one for a particular business.