Many proposed start-ups find it difficult to decide whether to incorporate a company or a partnership concern. Understanding the differences between the two would solve this problem.
The major difference between companies and partnerships may be considered under the following headings:
– A company is incorporated by registration under the Companies Act, 1956.
– A partnership is established by agreement which may be expressed or implied from the conduct of the partners and is subject to the Indian Contract Act, 1872 or the Indian Partnership Act, 1932. No special forms are required, though partnerships articles are usually written.
Status at Law:
– A company is considered to be an artificial legal person with perpetual succession. Thus a company may properly, make contracts and sue and be sued. It is an entity distinct from its members.
– A partnership is not a legal though it may sue and be sued in the firm’s name. Thus the partners own the property of the firm and are liable for the contracts of the firm jointly as well as severally.
Transfer of Shares:
– Shares in a company are freely transferable unless the company’s constitution otherwise provides; restrictions may, of course, appear in the articles of a private company.
– A partner can transfer his shares in the firm, but the assignee does not thereby become a partner and is merely entitled to the assigning partner’s share of the profits.
Number of Members:
– A private company must have at least two members and a maximum of 50 members.
– A partnership firm cannot consist of more than 20 persons (10 persons in case of banking business).
– Members of a company are not entitled to take part in the management of the company unless they become directors.
– Partners are entitled to share in the management of the firm unless the articles provide otherwise.
– A member of a company is not an agent of the company or that of other members, and he cannot bind a company by his acts.
– Each partner is an agent of the firm and his partners, and may bind the firm by his acts.
Liability of Members:
– The liability of a member of a company may be limited by shares or by guarantee.
– The liability of a partner is unlimited.
– The affairs of accompany are closely controlled by the Companies Act, 1956 and the company can only operate within the objects laid down in the memorandum of association, though these can be altered to some extent by special resolution.
– Partners may carry on any business as they please so long as it is not illegal and make whatever arrangements they wish with regard to the running of the firm from time to time.
– No member of a company can wind it up. Death, bankruptcy or insanity of a member does not mean that the company must be wound up.
– A partnership may be dissolved by any partner at any time unless the partnership is entered into for a fixed period of time. A partnership is also dissolved by the death or bankruptcy of a partner.