Partnership Firm and Company Compared: Table, Features, and Legal Distinctions
Understanding the difference between a partnership and a company is essential for Commerce students and anyone interested in starting or managing a business. These two business forms are governed by distinct laws, have different legal statuses, and offer separate advantages and disadvantages depending on business needs and risk preferences.
What is a Partnership?
A partnership is a business arrangement where two or more individuals agree to own and run a business together, sharing profits and losses as outlined in their agreement. This form of business is governed by the Indian Partnership Act, 1932.
Partners are collectively responsible for the management and workings of the business, and each partner's assets may be used to pay business debts if necessary.
What is a Company?
A company is a legal entity that is distinct and separate from its owners (called shareholders). Formed under the Indian Companies Act, 2013, a company can own property, enter contracts, and litigate in its own name.
Ownership is divided into shares, and a company exists independently of changes in ownership or the involvement of any one shareholder.
Similarities Between a Company and a Partnership Firm
Although companies and partnership firms differ in several key aspects, both serve as recognized business entities. Both types must maintain financial records, are expected to comply with certain legal requirements, and can be held liable for debts and obligations. They also require agreements or documents guiding their management—such as a partnership deed for partnerships and articles of association for companies.
Key Differences Between Partnership and Company
Choosing between a partnership and a company depends on several factors, including legal status, liability, number of members, governance, and more. Below is a comprehensive comparison:
| Basis of Difference | Partnership | Company |
|---|---|---|
| Meaning | A contract between two or more persons to share profits, losses and responsibilities. | A legal entity where a group of persons share ownership but not management. |
| Governed By | Partnership Act, 1932. | Companies Act, 2013. |
| Registration | Not compulsory. | Compulsory with the Registrar of Companies. |
| Members | Known as Partners. | Known as Shareholders. |
| Number of Members | Minimum 2, maximum 50. | Public: Minimum 7, no maximum. Private: Minimum 2, maximum 200. |
| Liability | Unlimited. | Limited to the value of shares held (except in companies with unlimited liability). |
| Profit Distribution | As per partnership deed or equally. | As per Articles of Association or directors’ decisions. |
| Regulatory Authority | Registrar of Firms under State Government. | Registrar of Companies under Central Government. |
| Main Documents | Partnership deed. | Memorandum and Articles of Association. |
| Separate Legal Entity | Not a separate entity. | Separate legal entity. |
| Audit | Not mandatory. | Mandatory. |
| Management | Managed by partners themselves or any of them acting for all. | Managed by directors elected by shareholders. |
| Transfer of Shares | Not allowed without consent of partners. | Allowed, except in private companies. |
| Type of Business | Any type, with consent of all partners. | Limited to objects stated in the Memorandum of Association. |
| Winding Up | By agreement or court order under Insolvency Act. | As prescribed in Companies Act, 2013. |
| Continuity | Affected by death, retirement or insolvency of a partner. | Not affected by death, insolvency or share transfer of shareholders. |
| Common Seal | Not required. | Required. |
| Change in Name | Easy with consent of all partners. | Requires Central Government’s approval. |
| Minimum Capital | No requirement. | Private company: Minimum ₹1 lakh, Public company: Minimum ₹5 lakhs. |
Examples and Practical Application
Consider two friends, A and B, who form a partnership to run a bookstore. If the bookstore accumulates debts beyond its resources, both A and B are personally liable for all firm debts.
If A and B form a company instead, their liability is limited to the unpaid value of their shares. The company continues to exist even if one of them leaves or sells their shares.
Such examples highlight how risk, continuity, and legal status change between these two entity types.
Solving Commerce Problems: Step-by-Step Approach
- Identify the business type—partnership or company—by analyzing legal documents (partnership deed, Memorandum/Articles of Association).
- Check the number of members and nature of registration.
- Analyze liability: Are owners personally liable or is their risk limited?
- Understand how profits are shared and how management decisions are made.
- Assess continuity and transferability in various business scenarios (death/retirement/share transfer).
Key Concepts and Principles
- Legal Status: Companies are separate legal entities; partnership firms are not distinct from partners.
- Liability: Partnerships have unlimited liability; companies generally limit liability to shareholding.
- Management: Partners directly manage their firm; companies appoint a board of directors.
- Registration & Documents: Company registration is compulsory, with detailed documentation; partnership registration is optional.
- Continuity: Companies remain unaffected by changes in ownership; partnerships may dissolve on partner exit.
Practice and Next Steps
To reinforce your understanding, practice identifying entity types and their features using tabular comparisons. Try solving problems involving liability, ownership, and succession for both company and partnership cases.
For further study and practice on this and similar Commerce topics, explore our expanded learning materials.
Strengthen your preparation by reviewing definitions, comparative tables, and real-world examples, and practicing classification or scenario questions based on these essential business forms.
FAQs on What Are the Differences Between a Partnership Firm and a Company?
1. What is the main difference between a partnership firm and a company?
The main difference is in their legal status and liability. A partnership firm is not a separate legal entity and has unlimited liability for partners. A company is a separate legal entity from its members and generally provides limited liability to shareholders.
2. Is registration compulsory for both partnership firms and companies?
Registration is compulsory for a company under the Companies Act, 2013, but not mandatory for a partnership firm under the Indian Partnership Act, 1932, though it is recommended for legal benefits.
3. Can the membership of a partnership firm and a company be easily transferred?
Membership transferability differs:
- Partnership firm: Transfer of ownership is restricted and requires consent of all partners.
- Company: Shares can be freely transferred in a public company, but may be restricted in a private company.
4. How is the liability of members different in a partnership and a company?
Liability differs significantly:
- Partnership: Partners have unlimited liability. Their personal assets can be used to pay firm debts.
- Company: Shareholders usually have limited liability up to the unpaid amount on shares.
5. Who manages a partnership firm versus a company?
- Partnership firm: All partners or any of them oversee day-to-day management as per the partnership agreement.
- Company: Management is in the hands of a Board of Directors elected by shareholders.
6. What are the minimum and maximum number of members in both entities?
- Partnership firm: Minimum 2, maximum 50 partners (subject to business type).
- Private company: Minimum 2, maximum 200 members.
- Public company: Minimum 7, no maximum limit.
7. Does a partnership firm have perpetual succession like a company?
No, a partnership firm does not have perpetual succession. It dissolves with the death, insolvency, or withdrawal of any partner. A company, as a separate entity, has perpetual succession and continues to exist even if members change.
8. What acts govern partnership firms and companies in India?
- Partnership firms: Governed by the Indian Partnership Act, 1932.
- Companies: Governed by the Companies Act, 2013.
9. Do both partnerships and companies need to get their accounts audited?
- Partnership Firm: Audit is not mandatory unless the firm’s turnover crosses the prescribed limit under Income Tax Act.
- Company: Statutory audit is mandatory every year for all companies, as per the Companies Act, 2013.
10. Can you explain the concept of separate legal entity with respect to a company?
A company is a separate legal entity distinct from its shareholders and directors. It can own property, enter contracts, sue, and be sued in its own name. This is not true for a partnership firm.
11. What documents are essential for formation of a partnership firm and a company?
- Partnership firm: The partnership deed is the primary document.
- Company: Requires Memorandum of Association and Articles of Association for registration.
12. What is the tax treatment difference between partnership firms and companies?
Taxation varies:
- Partnership firms are taxed as a separate entity but at different rates from companies.
- Companies pay corporate tax as per rates for domestic or foreign companies and are subject to additional compliance rules.
