DIFFERENCE BETWEEN PRIVATE LIMITED COMPANY AND PARTNERSHIP FIRM

DIFFERENCE BETWEEN PRIVATE LIMITED COMPANY AND PARTNERSHIP FIRM

INTRODUCTION

People find innovative ways to invest money and build their fortune in a marketplace where they come out to start a company operation to improve their chances of survival. Being a member of a Private Limited Company or a Partnership Firm are only two of the numerous possibilities which are accessible. In this article, we’ll look at the meanings of the two terms stated above, and the difference between a private limited company and partnership firm , the rules that govern them, and their benefits and drawbacks. In this article, we’ll look at the many sorts of business structures and see who they’re best suited for.

WHAT IS A PRIVATE LIMITED COMPANY IN INDIA?

A Private Limited Company is a legal entity created under the Companies Act of 2013. A private company is a legal entity that exists independently of its partners. The company’s responsibility is restricted to its shareholders. Private Limited has perpetual succession, which means that even if one of its members dies, the company will continue to exist. Private Limited has the ability to sue and be sued in its own name. The property can be owned and held in the name of a Private Limited corporation. It is a business entity that must go through the Companies Act of 2013 registration process in order to be recognized.

The share capital is used to identify ownership in a Private Limited Company, and the ratio of ownership is defined by the number of shares held by the company’s owner. This structure appeals to investors above all others because it allows them to claim ownership of the firm while also limiting their responsibility to the shares they own.

WHAT IS A PARTNERSHIP FIRM?

In a partnership firm, the partners must come to an agreement, which might be written or oral. Profit and loss are divided in a predetermined ratio among the partners. Each member in the partnership is referred to as a partner, while the firm as a whole is referred to as a firm. The partnership agreement is created, which specifies the terms, liabilities, and circumstances that govern the partnership’s functioning. A partnership firm may or may not be registered, depending on the partners’ choice; nevertheless, it is recommended that it be registered. Without the permission of the other partners, partners are not authorized to transfer their shares.

TYPES OF PARTNERSHIP FIRM

There are three types of partnerships:

GENERAL PARTNERSHIP:

A general partnership is a commercial agreement in which two or more individuals agree to share all of the assets, earnings, and financial and legal responsibilities of a jointly held company. All legal and financial responsibilities, as well as profits, are shared equally by all partners in a General Partnership.

LIMITED PARTNERSHIP:

There must be at least one partner who will carry entire personal liability for the partnership’s obligations and one partner who will solely bear liability for the money invested in a Limited Partnership. The other partner is also known as a silent partner in a limited partnership. The silent partner will not be involved in the partnership’s management or day-to-day operations.

LIMITED LIABILITY PARTNERSHIP:

LLPs are a normal business form for professionals, particularly lawyers and accountants. As the name implies, the partners’ responsibilities are restricted to themselves, which aids in the preservation of one’s own assets in the event that one of the partners is sued for a crime. Even if the other partners are facing legal charges, the assets of an innocent partner will never be compromised. This aids in the preservation of personal property and is thus preferred by experts.

REGISTRATION OF THE PARTNERSHIP AND PRIVATE LIMITED COMPANY

Registration is not mandatory for a partnership, but it is required for a Private Limited Company. The name should not be the same as or similar to any existing company in the same industry. Another requirement is that the firm’s name should not include terms like “emperor,” “crown,” or “empire,” which imply government approval. Following are the steps required for registering a Private Limited Company:

Fill out an e-form on the Ministry of Corporate Affairs’ website to obtain a digital signature certificate.

Obtain a Director Identification Number from the Ministry of Corporate Affairs. This number is valid for life unless it is revoked or relinquished.

The certificate of incorporation and reserving a name with a distinct identity.

TAX RATE APPLICABLE

FOR PRIVATE LIMITED COMPANY

The filing of an income tax return is required, which implies that regardless of turnover, profit or loss, an ITR must be submitted and ROC compliances must be completed. Corporate taxes of private limited companies are divided into two categories in the Finance Budget: Turnover above Rs. 400 crores and Turnover below Rs. 400 crores. For medium-scale enterprises, the income tax rate for private limited corporations is fixed at 25%.

DOMESTIC COMPANY MORE THAN TURNOVER OF 400 CRORE

DOMESTIC COMPANY LESS THAN TURNOVER OF 400 CRORE

FOR PARTNERSHIP COMPANY

Flat rate of 30% on total income after deducting interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 12% if total income exceeds 1 Crore, which will be further increased by Health and Education Cess of 4% on Income-tax (w.e.f AY 2019-20 education Cess secondary and higher education Cess @ 3% replaced by Health and Education Cess of 4% on Income-tax).

ADVANTAGES OF A PRIVATE LIMITED COMPANY

Separate Legal Entity: A private limited company has a separate legal entity that allows a person to take advantage of benefits such as owning property in the company’s name and even incurring debts. The company’s shareholders or debtors will not be liable to the creditors for such debts.

Sue and be sued: The company can sue and be sued in its own name since it is a separate legal entity. This helps to keep the names of company members out, and the firm fights under its own name.

Limited Responsibility: The members of a company’s liability is limited to the number of shares they own. This relieves the added strain of shouldering all of the responsibilities on their own.

WHAT ARE THE DRAWBACKS OF A PRIVATE LIMITED COMPANY

A private limited company is a legally recognized legal entity under the Companies Act, the MCA requires various post-registration statutory compliances, which can be time-consuming and costly.

A private company must keep a large number of registers and have them audited on a regular basis.

The formation of a Private Limited Company is a long and complicated process that comes at a high cost, including government fees, stamp duty, and professional costs.

There must be at least two directors and two shareholders in a company, thus every decision must be made with the permission of two people, and even if the other shareholders own a small number of shares, there must be two shareholders.

ADVANTAGES OF A PARTNERSHIP COMPANY

A partnership firm is easy to form, as there is no necessity for registration, forming a Partnership Firm is as simple as getting the approval and willingness of two or more persons. This makes the start go more smoothly.

Partners are more interested in the day-to-day operations of the Partnership Firm, which assists in better management and a better decision-making process.

In a partnership firm, every partner shares the same amount of risk because it is one of the business’s founding principles; this relieves the burden on other partners.

WHAT ARE THE DRAWBACKS OF A PARTNERSHIP FIRM?

Partners’ responsibility is limitless, and they are jointly accountable for the firm’s debts and losses.

A partnership firm has no independent legal existence; it cannot exist without its partners, and it comes to an end when all of its partners die, go bankrupt, or retire.

Since every partner has an equal right to engage in management, this can often result in conflict or disputes among the partners, which can lead to the dissolution of the partnership.

A partnership cannot have more than 20 partners at any given moment, it can only raise a restricted amount of cash.

The transfer of shares to any outsider without the permission of the partners is prohibited in a partnership firm.

KEY DIFFERENCES BETWEEN PRIVATE LIMITED COMPANIES AND PARTNERSHIP FIRMS

WHICH IS BETTER PARTNERSHIP OR PRIVATE LIMITED COMPANY?

As a result of the foregoing discussion, we can conclude that each legal structure has advantages, and one should choose the legal structure for their firm based on their needs and requirements. If the entrepreneur prefers to start a business with a simple and rapid registration, he or she might choose a partnership firm over a private limited company. Furthermore, if the business requires a large amount of capital, it should form a private company, which may have up to 200 members compared to the partnership firm’s maximum of 20.

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