In the partnership firm, there must be at least two persons, mutually agree to run the business and share the profits or losses in a manner prescribed in the agreement. The maximum number of partners a partnership firm could have is only 20. This gave rise to the evolution of Company, in which there can be any number of members. The company is an association of persons who came together for a common objective and share its profit and losses.
We all know that Partnership firm and Company are two very different terms, so come let’s start understanding the difference between them.
Content: Partnership Firm Vs Company
|Basis for Comparison||Partnership Firm||Company|
|Meaning||When two or more persons agree to carry on a business and share the profits & losses mutually, it is known as a Partnership firm.||A company is an association of persons who invests money towards a common stock, for carrying on a business and shares the profits & losses of the business.|
|Governing Act||Indian Partnership Act, 1932||Indian Companies Act, 1956|
|How it is created?||Partnership firm is created by mutual agreement between the partners.||The company is created by incorporation under the Companies Act.|
|Minimum number of persons||Two||Two in case of private company and Seven in case of public company.|
|Maximum number of persons||100 partners||50 in case of a private company and a public company can have unlimited number of members.|
|Management of the concern||Partners itself.||Directors|
|Contractual capacity||A partnership firm cannot enter into contracts in its own name||A company can sue and be sued in its own name.|
|Minimum capital||No such requirement||1 lakh in case of private company and 5 lakhs in case of public company.|
|Use of word limited||No such requirement.||Must use the word 'limited' or 'private limited' as the case may be.|
|Legal formalities in dissolution / winding up||No||Yes|
|Separate legal entity||No||Yes|
Definition of Partnership Firm
The kind of business organization in which, two or more persons agree to carry on the business, on behalf of the firm or partners and to share profits & losses mutually. There are three major points in this definition, they are:
- Agreement – There must be an agreement between partners, irrespective of oral or written.
- Profit – The profit & loss of the business must be distributed among the partners, in the specified ratio.
- Mutual Agency – Each partner is an agent of the firm as well as of the other partners who carry on the business.
The persons are known as partners in their individual capacity, while they are jointly referred to as the firm. The agreement in which the terms and conditions of the partnership are written is known as “Partnership Deed.” However, in the absence of any partnership deed, Indian Partnership Act, 1932 is referred. The primary objective of the creation of the partnership is to carry on business.
It must be noted that the partners are responsible for the acts of the firm, as there is no separate identity of the firm itself and therefore the partners are held liable for the same. Moreover, the partners cannot transfer their shares without the consent of the other partners.
Definition of Company
A company is an association of persons, formed and registered under the Indian Companies Act, 1956 or any other previous act. The following are the major features of a company:
- It is an artificial person.
- It has a separate legal entity.
- It has limited liability.
- It has perpetual succession.
- It has a common seal.
- It can possess property in its own name.
There are two types of company: Public Company and Private Company
The company can file a suit in its own name and vice versa. The company is run by its representatives known as directors, which are appointed by the members of the company at the “Annual General Meeting”. In addition to this, there is no restriction on the transferability of shares in case of a public company, but if we talk about a public company there are certain restrictions.
Key Differences Between Partnership Firm and Company
- A partnership is an agreement between two or more persons who come together to carry out a business, and share profit & losses mutually. A company is an incorporated association, also called an artificial person having separate identity, common seal and perpetual succession.
- The registration of the partnership firm is not compulsory whereas to form a company; it needs to be registered.
- For the creation of a partnership, there must be at least two partners. For the formation of a company, there must be at least 2 members in case of private companies and 7 in regard to public companies.
- The limit for the maximum number of partners in a partnership firm is 100. On the other hand, the maximum number of partners in case of a public company is unlimited and in the case of a private company that limit is 50.
- The next major difference between them is, there is no minimum capital requirement for starting a partnership firm. Conversely, the minimum capital requirement for a public company is 5 lakhs and for a private company it is 1 lakh.
- In the event of dissolution of the partnership firm, there are no legal formalities. In opposition to this, a company has many legal formalities for winding up.
- A partnership firm can be dissolved by any one of the partners. In contrast to this, the company cannot be wound up, by any one of the members.
- A partnership firm is not bound to use the word limited or private limited at the end of its name while a company has to add the word ‘limited’ if it is a public company and ‘private limited’ if it is a private company.
- The liability of the partners is unlimited whereas the liability of the company is limited to the extent of shares held by every member or guarantee given by them.
- As a company is an artificial person so that it can enter into contracts in its own name, the members are not held liable for the acts of the company. But in the case of a partnership firm, a partner can enter into a contract in their own name with the mutual consent of the other partners, and they can also be sued for the acts done by the firm.
Due to various drawbacks in the partnership firm the concept of the company came into being. This is the reason, now a very little number of partnership firms can be seen, these days. It has also evolved a new concept of Limited Liability Partnership (LLP).