Difference Between a Partnership Firm and Private Limited Company

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An entrepreneur has are several option to start a business but two of the most common considerations are Partnership Firm and Private limited company. To analyze the key distinctions and potential benefits based on the business type, it is worthy to analyze a few factors to make a wise decision.

What are partnership firms?

A partnership firm is an organization which is formed with two or more persons to run a business with a view to earn profit. Each member of such a group is known as partner and collectively known as partnership firm. These firms are governed by the Indian Partnership Act, 1932. Following are the characteristics of Partnership Firm:

  • Number of Partners : Minimum number of person required to start a partnership firm is two and maximum limit is 10 in case of banking business and 20 in case of all other types of business.
  • Contractual relationship : A written agreement known as partnership deed which is signed by all the partners, binds them in a contractual relationship.
  • Voluntary Registration : Registration of partnership firm is not compulsory. Since the registration provides various benefits to the firm thus it is desirable.
  • Competence of Partners : Every partner must be competent enough to enter into the partnership agreement. He should not be minor (in some cases minor can be admitted only to the benefits of the partnership), lunatic or insolvent.
  • Sharing of Profit and Loss : In partnership firm all the profits and losses are shared by the partners in any ratio as agreed. If it is not given then they share it equally.
  • Unlimited Liability : Liability of partners of a partnership firm is unlimited. They are jointly held liable for the debts and losses of the firm.
  • Legal Status : Partnership firm has no distinct legal status separate from its partners.
  • Transfer of Interest : No partner can transfer its interest in the firm to anybody without the consent of other partners.
  • Principal – Agent Relationship: This relationship is based on mutual trust and faith among the partners in the interest of the firm. Business of the firm may be carried on by all the partners or any one of them acting for all. According to this, every partner is an agent when he is working on behalf of other partners and he is the principal when other partners act on his behalf.

What is a Private Limited Company?

A private limited company is a privately held business entity held by private stakeholders. The liability arrangement, in this case, is that of a limited partnership, wherein the liability of a shareholder extends only up to the number of shares held by them.

With the startup ecosystem booming across the country and more and more people looking to do something on their own, there is a need to be well-acquainted with different business registration types i.e sole proprietorship, limited liability company, and private limited company. 

In legal terms, Section 2 (68) of the Companies Act, 2013 defines a private company as: 

A Company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

  • Restricts the right to transfer its shares;
  • Except in case of One Person Company, limits the number of its members to two hundred;
  • Prohibits any invitation to the public to subscribe for any securities of the company.

In this article, we will talk about different sides of a private limited company.

Private companies have the upper hand over public companies with respect to investment in long-term strategies, keeping the values of their shares and financial figures discreet, freedom, and flexibility of operations.

Now that you know what a private limited company is, the next step is to know the characteristics of such a company:

  • Membership: Like any other company, a minimum of two shareholders are required in order to start such a company. But since it remains a small entity, there is also a maximum cap on the number of members fixed at 200. There is also a requirement of two directors to run the company
  • Limited liability structure:  In a private limited company, the liability of each member or shareholder is limited. Therefore, even in the case of loss under any circumstances, the shareholders are liable to sell their own assets for repayment. However, the personal and individual assets of the shareholders are not at risk
  • Separate legal entity: This is a separate legal entity and continues in perpetual succession. This means that even if all the members die, or the company becomes insolvent or bankrupt, the company still exists in the eyes of the law. The life of the company will be perpetual, not affected by the lives of its shareholders or members unless dissolved by way of resolution
  • Minimum paid-up capital: A private limited company does not require to have and maintain a minimum paid-up capital, however we recommend for capital of Rs. 1 lakh.

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Note: This Post was last updated on October 6, 2021

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