Partnership and a Private Limited Company: A Judicial Interpretation
Authored By- Aishwarya Bhat NS
Keywords- Identity, Governing Act, Registration, Dissolution, Conversion.
Partnership, primarily, requires not only a flexible, strong, and continuous relationship, but also beneficial cooperation between two or more persons to it. This article helps the investor to choose the best among ‘Partnership’ and ‘Private Limited Company’. This article concludes with a discussion of several topics as mentioned below.
In a marketplace where people come out to start a business and for the inception of their business; they first look into the survival of their business, later at earning profits. They find new ways to invest money and thereby make returns out of it. The Private Limited Company or a Partnership Firm is just two of the many options available in the market.
Definition of Partnership
Section 4 of the Indian Partnership Act, 1932 defines Partnership as “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.”[i]
Definition of Private Limited Company
Section 2(68) of Companies Act, 2013 defines private limited companies as those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. It is a form of business in which a small group of people manages the entity privately without any Public interference.[ii]
Major differences between the Partnership Firm and Private Limited Company are as follows
The difference between a Partnership Firm and a Private Limited company is the identity of the two. A partnership firm does not have its own identity, it comes into existence when two or more people join to start a partnership firm. A Private Limited Company is a separate legal entity and is treated as a separate person in the eyes of law.
Registration is not compulsory in case of a Partnership but registering a Private Limited Company is necessary. The name should not be identical or similar to any other firm doing the same business.
c) Governing Act-
The Partnership firm is governed by the Indian Partnership Act, 1932. The governing acts for the Private Limited Companies are Companies Act, 2013 and Companies Incorporation Rules, 2014.
To become a member of a Partnership Firm, one should not be minor, of unsound mind, and disqualified by law. There are two ways to become a member of a Private Limited Company (1) one should be a shareholder of that company or (2) one should be having his name mentioned in the Register of Members. This means that a person has willingly become a member of that Private Limited Company and is someone who holds some share of that Private Limited Company.
A partnership firm is regulated by the Registrar of Firms of the State Government whereas the Registrar of Companies of Central Government regulates the Private Limited Companies.
f) Capital Requirement-
1,00,000/- is the minimum capital requirement for the Private Limited Company, whereas, there is no such minimum requirement in case of a Partnership Firm.
In order to dissolve a Private Limited Company, there are legal formalities to be done but that is not the case of a partnership firm.[iii]
Requirements for the conversion of Partnership Firm into Private Limited Company:
a) Registered Partnership Firm with a minimum of 2 or more Partners.
b) The minimum paid-up share capital shall be Rs. 100,000/-.
c) There must be a provision in the Partnership deed.
d) There must be an agreement between the partners.
e) If the above requirement is not fulfilled by the Partnership Firm, then the Partnership deed should be altered.
f) Minimum two Shareholders and Directors. However, Directors and shareholders can be the same person.
g) Director Identification Number for all the Directors.[iv]
Advantages of a Private Limited Company
1. Private Limited Company as a separate legal entity can avail benefits of owning property in the name of the company or can even incur debts. It is the separate legal person which has perpetual succession held in the case of New Horizon Limited v. Union of India.
2. Private Limited Company is a separate legal entity, it has the ability to sue and be sued in its own name held in the case of Floating Services Limited v. MV San Fransceco Dipaloa.
3. The liability of the members of a company is limited to the number of shares that they hold.
Disadvantages of a Private Limited Company
1. Restricted Shareholders: In a Private Limited Company, the number of investors cannot exceed 50 people.
2. Division of Ownership: in a Private Limited Company, there must be at least two directors and two shareholders, so every decision related to Private Limited Company is taken by them.
Advantages of Partnership Firm
1. Easy to Form: No registration is required in a Partnership Firm. Moreover, only the consent of two or more persons is required to form a Partnership Firm.
2. Sharing of Risk: In a Partnership Firm, every partner bears the same amount of risk as it is one of the core principles of the formation of the Partnership firm.
Disadvantages of Partnership Firm
Uncertainty of Future: The future of a Partnership Firm is very uncertain; it gets dissolved if any of the partners dies or declares insolvency and the admission of a new partner is possible only when the remaining partners of the Partnership Firm agree to it.
The author concludes that the matter of interest vests with the investor as to where he wants to put his investment, it may be either in Partnership Firm or Private Limited Company. Both of them have different needs, different expected outcomes, and different approaches to forms business. Both of them have their own sets of ups and downs. Therefore, it is left to the discretion of the investor to make decision related to business start-ups.
 AIR 1994 Del 126.  (2004) 52 SCL 762(Guj) References: [i] https://www.toppr.com/guides/business-laws/the-indian-partnership-act/ [ii] https://taxguru.in/company-law/private-company-registration-india.html. [iii] https://blog.ipleaders.in/private-limited-company-vs-partnership/ [iv]https://www.caclubindia.com/experts/conversion-of-private-company-into-partnership-firm-1487529.asp/