Difference Between Company vs Partnership Firm vs LLP

Before launching a business, a businessperson considers how they will get started. Distinct business formations have different natures and levels of complexity.As a result, the businessman must carefully select the nature of their business/profession by considering whether they want to start as a partnership firm, the advantages and disadvantages of partnership vs LLP, difference between the various types of companies and doing a deeper study on the same.Now we'll look at the three main types of businesses, i.e. Company, Partnership firm & Limited Liability Partnership (LLP), and will understand their differences.

Did you know?

The features of LLP can also be applicable to perpetual succession. It can undertake all the activities that are performed by LLP in its day to day operations.

What is a Company?

A company is a legal organisation founded by people to engage in and operate a commercial or industrial business. Depending on the corporate legislation of the country, a company can be constituted in a variety of ways for tax and financial liability purposes. The word 'company' comes from the Latin word Com Panis (Com means 'with or together,' and Panis means 'Bread,' which originally referred to a group of people who shared a meal. Merchants used to take advantage of celebratory parties to discuss commercial problems in the unhurried past.

In terms of the Companies Act, 2013, a “company” means a company incorporated under this Act or any previous company law [Section 2 (68)].

Characteristic Features of a Company

• Incorporated Association - The Companies Act requires that a company be incorporated or registered. In the event of a 'public company,' the minimum number of members required is seven, whereas in the case of a 'private company,' the minimum number required is two.
• Legal Entity Distinct from its Members - corporative personality is another name for this trait. Furthermore, the company's legal entity is distinct from the legal entity of its members. The case law of Saloman Vs. Saloman & Co. Ltd can also be referred.
• Artificial Person - It’s a very important feature of a Company that Company is an artificial person. A company is known as such type of or artificial person because Company is created by law and destroyed by law.
• Limited Liability - One of the main advantages of trading through a limited company is that the company members are only accountable to a limited extent for the payment of the company's debts.
• Perpetual Succession - As an artificial person, the company cannot be harmed by illness and does not have a predetermined lifespan. The Company is unaffected by the death, insolvency, or retirement because it is separate from them. Members may come and go, but the Company can go forever.

Also Read: Necessary details of LLP Registration

Types of Companies

• Private Company - A Private Limited Company must have a minimum of two members, which can be increased to a maximum of 200 at any time. The above-mentioned statutory limit must be followed at all times.
• Public Company - The Public Company has no upper restriction on the number of members. However, a minimum number of participants is required. A public company with seven members has been established. Companies that are listed on the stock exchange are examples of public companies.
• One Person Company - One type of private limited company where only one member is required to form a company. In OPC, there is only one member at any time during its existence.

Advantages & Disadvantages of a Company

Advantages

• Liability for shareholders is generally limited.
• The shares of the company held by the shareholders can easily be marketed in the stock market.
• The existence of the company is unaffected by the members.

Disadvantages

• The procedure for setting up a company is cumbersome. It involves several stages starting from the promotion, which is expensive.
• The long hierarchy of the organisation delays the decision process etc.
• The directors sometimes work towards the furtherance of their interests.

What Is a Partnership Firm?

Partnership Firms in India are governed by the Indian Partnership Act of 1932. As per Section 4 of the Act:

“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

This Act establishes the rights and obligations of partners to one another and any legal relationships between partners and third parties that arise due to the creation of a partnership.

Essential Elements of a Partnership Firm

• Contract for Partnership - A contract results in a partnership. It has nothing to do with social standing, the rule of law, or inheritance. As a result, when the father, a partner in the partnership firm, dies, the son is entitled to a share of the partnership property, but he cannot become a partner unless he enters into a contract with the other partners.
• Sharing of Profits - This key component stipulates that the agreement to do business must have as its goal the distribution of profits among all partners. Thus, there would be no partnership if the business was run for humanitarian purposes rather than profit or if only one of the partners was entitled to the entire profit of the business. Furthermore, how earnings and losses will be shared should be defined explicitly in the partnership deed.
• Mutual Agency in a Partnership - Another feature of a partnership is that the business must be run by all partners or by any (one or more) acting on their behalf, i.e. mutual agency. As a result, each partner acts as both an agent and a principal for himself and other partners, i.e., he can tie others by his actions and be bound by the actions of others. The importance of the mutual agency factor stems from the fact that it allows each partner to conduct business on behalf of the others.
• Carrying on of Business in a Partnership - Another important aspect of a partnership is that the parties must have decided to run a business together. The term "business" is used broadly to refer to any trade, occupation, or profession. As a result, if the goal is to do some humanitarian work, it isn't a partnership. Similarly, there is no partnership if a group of people agrees to split the profits from a certain property or divide the cost of items acquired in bulk.
• Maximum No. of Partners in a Partnership is 20 - Because a partnership is the product of a contract, at least two people are required to form one. The Indian Partnership Act of 1932 does not specify a maximum number of partners in a partnership firm. However, under the Companies Act, a partnership with more than 10 people for a banking business and more than 20 people for any other business is unlawful. As a result, they should be considered the maximum number of partners in a partnership firm.

Also Read: Successful shortcuts to Register a Business

What Is a Limited Liability Partnership (LLP)?

A limited liability partnership is a hybrid of a corporation and a partnership. It possesses the characteristics of both of these types. As the term implies, partners have limited liability in the firm, which means that their assets are not used to pay off their debts. It has become a very popular form of company in recent years, with many entrepreneurs opting for it. Professional firms, such as attorneys and accountants, frequently choose to form limited liability partnerships.

Because there are several partners in the firm, they are not liable or responsible for the actions of others. Each person is responsible for their actions. The Limited Liability Partnership Act of 2008 governs all limited liability partnerships.

On the other hand, LLP was first introduced in India in April 2009. It is a legal entity that exists independently of its owners. It can enter into contracts and purchase property in its name. The LLP structure is not only popular in India. It can also be found in nations like the United Kingdom and Australia.

Advantages

• Easy to Form - Creating an LLP is a simple procedure. It is not as sophisticated or time-consuming as a company's process. The minimal price for forming an LLP is ₹500 and the highest fee is ₹5600.
• Liability - The LLP's partners have limited liability, which means they are not liable to pay the company's debts out of their assets. No spouse is liable for the misbehaviour or misconduct of the other.
• Easy Transferability of Ownership - When it comes to joining and leaving the LLP, there are no restrictions. It is simple to join the firm as a partner and then quit or effortlessly transfer ownership to others.
• Perpetual Succession - The Limited Liability Partnership's life is unaffected by one of its partners' death, retirement, or insolvency. Only the provisions of the Act of 2008 will be used to wind up the LLP.

Disadvantages

• Less Credibility - One of the most significant disadvantages of a Limited Liability Partnership is that many people do not regard it as a legitimate firm. People still place a higher value on companies and partnerships.
• Transfer of Interest - Although interest and ownership can be transferred, the process is usually lengthy. Several formalities are required to comply with the act's terms.
• Partners Not Consulting - Partners of the Limited Liability Partnership don’t consult each other in case of decisions and agreement.

Differences Between Company vs Partnership Firm vs LLP Firm

 Conclusion

We hope that this article is useful for you in knowing about the different modes of carrying out businesses, i.e. partnership firm, LLP, company, their features, and differences.

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