Comparative study of a Company and a Partnership

Structure:
The study is divided into two parts which would address the following questions:
a. What is a Company? Advantages and disadvantages of a company.
b. What is a partnership company? Advantages and disadvantages of a partnership company.
c. Whether our law firm (50-50) should be a company or a partnership firm?

I.

Company

According to section 2 (20) of the Companies Act 2013, a company means a company
incorporated under the Companies Act (1866, 1882, 1913, 1956 and 2013)
A company is a product of collection of people (natural or artificial/ legal person) who come
together to achieve a common goal. The company to be a valid legal company has to be
registered under the Companies Act 2013. The company so formed will have legal personality
which has perpetual succession and a common seal.
Types of Company:
a. Private Company -section 2 (68) Companies Act 2013
b. Public Company section 2 (71) Companies Act 2013
It can further classify as: (section 3 (2))
1. Company limited by shares
2. Company limited by guarantee
3. Company limited by both shares and guarantee

Differences between Private Company and Public Company are:

Basis

Private Company

Public Company

Minimum no. of members

(Section 3 (1))

Prospectus

Two (except when it is a One

person Company)
(Section 3 (1)(c))
200
(section 2 (68) (ii))
Right to transfer is restricted
(but can be regulated by the
company)1
Cannot issue prospectus

Minimum paid up capital

1,00,000/-

May invite subscription

through it
5,00,000

Minimum number of directors

At least 2

At least 3

Consent of the directors

No need of Consent

Must file his/her consent to

the Registrar

Commencement of the
business

Commences immediately after

getting certificate of
commencement

Maximum no. of members

Transferability of shares

Appointment of directors

Seven
section 3 (a)
unlimited
Shares are freely transferable

Commences only when

receive certificate of
commencement business
from registration of companies
Appointed by single resolution Each director applied separate
resolution

Retirement of directors

Not required to be retired

2/3 of directors must retire by

rotation annually

Increase in no. of directors

Can increase to any no. not

exceeding to the number of
shareholders without central
govt. permission
Cannot accept

If no. of directors is 12, then

the permission of central govt.
is required

Share warrants

Cannot issue against its fully

paid shares

Free to issue

Further issue of shares

Need not offer further shares

to its existing share holders

Need to offer existing share

holders as their share rights.

Public deposit

Free to accept

1 http://www.bcasonline.org/articles/artin.asp?49 as accessed on July 16, 2014.

Managerial remunerations

No restriction

Not more than 11% of its net

profits

Advantages of a company:
1. Limited Liability: A person is liable only to the amount of capital that they have invested
in the business.
2. Taxation: Registered companies are subject to a different tax structure (corporation tax)
from sole traders or partnerships. The choice of structure can make a substantial
difference to the amount of tax paid on the same trading profits.
3. Privacy: Because the information of the companies are put in a public file, it becomes
established and it helps in obtaining the credit as it appears of a certain size and stable in
its growth.
4. Name Protection: The Company can register itself and protect its name.
5. Continuity: The Company is a perpetual succession of the business which is not affected
by death or any injury.
6. Outside Investment: A further advantage of becoming a limited company is that the
shareholders do not necessarily have to be directly involved in the running of the
company. It is also often the case that it will be easier to acquire further investment for
the business if it is a limited company again mainly due to the benefit of limited liability.
The company structure is ideal for offering outside investment in the business as
appropriate amounts and types of shares can be set up.
Disadvantages of a Company:
1. Additional Formalities: Registering a limited company and continuing registration
requires additional formalities. They are:
Keeping the registered information up to date, both at Companies House and on the
company's own registers. (Information to Companies House must be sent on the right official
form). Submitting an annual return and accounts. (In some cases accounts must be audited).
Holding board and general meetings and keeping minutes.
2. No privacy: The companies have to provide its information to the companies house and it

can be requested by anyone. It is put on a public file.

3. The assets of the company: The assets are considered to be of that of a company and not
of the individuals. But it could be put on floating charge (it is a mortgage for companys
assets)

4. Less flexible: The company structure, with the possibility of creating different classes of
shares and having directors who may, but need not be, shareholders, allows much more
complex patterns to created.

II. Partnership:
A business organization in which two or more individuals manage and operate the business. Both
owners are equally and personally liable for the debts from the business.
Advantages:
1.

Capital Due to the nature of the business, the partners will fund the business with start up
capital. This means that the more partners there are, the more money they can put into the
business, which will allow better flexibility and more potential for growth. It also means more

2.

potential profit, which will be equally shared between the partners.

Flexibility A partnership is generally easier to form, manage and run. They are less strictly
regulated than companies, in terms of the laws governing the formation and because the partners
have the only say in the way the business is run (without interference by shareholders) they are

3.

far more flexible in terms of management, as long as all the partners can agree.
Shared Responsibility Partners can share the responsibility of the running of the business. This
will allow them to make the most of their abilities. Rather than splitting the management and
taking an equal share of each business task, they might well split the work according to their
skills. So if one partner is good with figures, they might deal with the book keeping and
accounts, while the other partner might have a flare for sales and therefore be the main sales

person for the business.

4. Decision Making Partners share the decision making and can help each other out when they
need to. More partners mean more brains that can be picked for business ideas and for the
solving of problems that the business encounters.
Disadvantages:
1. Disagreements One of the most obvious disadvantages of partnership is the danger of
disagreements between the partners. This is why it is always advisable to draft a deed of
partnership during the formation period to ensure that everyone is aware of what
procedures will be in place in case of disagreement and what will happen if the
partnership is dissolved.

2. Agreement Because the partnership is jointly run, it is necessary that all the partners
agree with things that are being done. This means that in some circumstances there are
less freedoms with regards to the management of the business. Especially compared to
sole traders. However, there is still more flexibility than with limited companies where
the directors must bow to the will of the members (shareholders).
3. Liability Ordinary Partnerships are subject to unlimited liability, which means that each
of the partners shares the liability and financial risks of the business. This can be
countered by the formation of a limited liability partnership, which benefits from the
advantages of limited liability granted to limited companies, while still taking advantage
of the flexibility of the partnership model.
4. Taxation It mean that partners must pay tax in the same way as sole traders, each
submitting a self assessed tax return each year. They are also required to register as
self employed with HM Revenue & Customs. The current laws mean that if the
partnership (and the partners) bring in more than a certain level, then they are subject
to greater levels of personal taxation than they would be in a limited company. This
means that in most cases setting up a limited company would be more beneficial as
the taxation laws are more favourable
5. Profit Sharing Partners share the profits equally. This can lead to inconsistency
where one or more partners arent putting a fair share of effort into the running or
management of the business, but still reaping the rewards.

Difference between Partnership and a Company:

Basis

Partnership

Company

Legal Entity

Dont have

Have

Property of firm

Property is of individual

Property belongs to the

company itself and not to the
individuals

Directors and shareholders

Agents of firm

Not agents of the firm

Liability

Joint Liability (Unlimited if

not restricted)
Partners contract on behalf of
the firm

Not joint (Limited liability)

Registration

Not required

Necessary

Transferability of shares

Not transferable without the

consent of the other partners

Shares can be transferred by

the share holders

Effect of death

The firm dissolves on the

death of partner

It is perpetually succeeded

Audit of accounts

Choice of partners

Compulsory

Dissolution

By way of agreement, death or According to the Companies

insolvency.
Act.

Who Contract

Shareholders contract on
behalf of the firm

III. Whether our firm should be a company or a partnership firm?

After having brief study of both the concepts: Partnership and Company, I realized that both has
its own advantages and disadvantages. It depends on us to decide our priorities. But according to
my knowledge, I would suggest that our firm should be initially started as a partnership firm
wherein the partners would have the sole discretion of policy making. Further it a simple setup,
which is flexible and can be molded according to the choice of partners. Additionally, taxes are
favorable unlike imposition of heavier taxes on a company. Furthermore, we can avoid the
additional formalities of registering a company. Initially, the partners would have to bear the
liability which could be restricted by making it a limited partnership firm.
Once we grow as a firm together, and develop further offices in different cities, then gradually
we can convert the partnership into a private limited company. Converting into company will
then help us by having equity shareholders. Also, we can then protect the companies name and
organize it in a way that helps us and other members.

Relevant sources of information:

1. http://indiacode.nic.in/acts-in-pdf/182013.pdf as accessed on July 16, 2014
2. http://www.bcasonline.org/articles/artin.asp?49 as accessed on July 16, 2014
3. http://www.vakilno1.com/legal-faq/company2/public-private-limited-company.html as
accessed on July 16, 2014
4. http://blog.thecompanywarehouse.co.uk/2010/03/01/advantages-and-disadvantages-ofpartnership/ as accessed on July 16, 2014
5. http://www.companylawclub.co.uk/topics/advantages_and_disadvantages_of_running_a_
business_as_a_company.shtml as accessed on July 16, 2014