Comparison of a Company with a Partnership firm and an LLP

In this article, the author seeks to briefly explain the meaning of Company, Partnership Firm and Limited Liability Partnership under the Indian legal regime. The article also compressively compares the business entity Company with that of a Partnership firm and an LLP.

I. Introduction

There are various forms of business entities which a person can choose from prior to starting his/her business. The selection of the form of business entity is very crucial and depends on numerous aspects such as objects of the proposed business, likely number of members, amount to be invested, the scale of operations, state control, legal requirements, tax implications, advantages of one form of business over another, etc.

Generally speaking, a business entity can be categorized either as corporate or non-corporate enterprise depending on whether they require registration to start functioning. Based on this categorization, a Partnership is a non-corporate entity whereas a Company or an LLP is a corporate entity. Before comparing a company with these two business entities, it is pertinent to have a basic understanding of these entities. There are different legislation to govern and regulate the functioning of these entities in India such as the Indian Partnership Act, 1932, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013.

II. The Features of a Company

A Company is a legal entity, allowed by legislation, which permits a group of people, as shareholders, to apply to the regulators for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights which are usually only reserved for individuals. According to the Indian Companies Act, 2013, Section 2(20) defines the term “company” to mean “a company incorporated under the Companies Act 2013 or any previous company law.”

Thus, it is evident that a company is a corporate body and a legal person having status and personality distinct and separate from the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. It is to be noted that a corporation is a legal person created by a process other than natural birth and is therefore referred to as an artificial legal person.

Being a legal entity, a company is clothed with many rights as well as liabilities which are available to a natural person such as to sue and be sued, own property, hire employees or loan and borrow money. In a legal sense, a company can be an association of both natural and artificial persons and is incorporated under the Companies Act, 2013.[1]

III. Partnership

In this form of an organisation, few like-minded persons pool up their resources to form a partnership firm. Section 4 of the 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”.

The persons who have entered into a partnership with one another are individually called “partners” and collectively “a firm” and the name under which the business is carried out is called “firm name”. It must be noted that a partnership is the ideal form of organisation for medium scale business operations which require a greater amount of capital and risks than a sole proprietorship or Hindu Undivided Family. This definition chiefly brings out the following features of partnership[2]:

• Contractual Relationship: – Since a partnership arises out of an agreement between persons, only those persons who are competent to contract can be partners.
• Existence of business: – There can be no partnership without business. The persons who have agreed to become partners must carry out some business activity.
• Sharing of profits: – The agreement to carry on business must be entered into, with the object of making a profit and sharing it among all the partners.
• Mutual agency: – The business must be carried on by all the partners or by any one or more of them acting for all the partners. Thus, each partner is both an agent and a principal for all other partners.[3]
• Limited Liability Partnership

The concept of an LLP was introduced in India via the LLP Act, 2008 to encourage entrepreneurship, knowledge and risk capital to spur on India’s economic growth. A need was felt for an alternative form of corporate form which was different from the traditional form of partnership with unlimited liability on one hand and a statute-based governance structure of limited liability company on the other hand to promote and enable professional expertise and entrepreneurial initiative to combine, organize and operate in a flexible, innovative and efficient manner.

Thus, it can be considered as a hybrid form of business where both the elements of partnership and a corporation exists. It implies that in case of an LLP, there will be the benefits of limited liability while allowing its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement[4].

Owing to flexibility in its structure and operation, LLP is useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. LLP is also very suitable for professionals like company secretaries, chartered accountants, cost accountants, advocates etc. as it helps them to form multi-disciplinary limited liability partnership firms.

IV. Comparison of a Partnership Firm and a Company

• Prevailing Law: A partnership firm is governed under the Indian Partnership Act, 1932 whereas the law governing the existence of a Company is the Companies Act, 2013 and rules made thereunder.
• Distinct Entity: A partnership firm is a collection of the partners and not a legal person or a separate entity having any independent or distinct existence. It is nothing but partners bracketed together under one name. In contrast, a company is a separate juristic entity and is distinct from its shareholders.
• Registration: It is not mandatory to register a partnership firm with the Registrar of Firms whereas for a company to come into existence, it must be registered with the Registrar of Companies.
• Number of Members: The maximum number of members in case of a partnership firm is 100 as per the Companies Act, 2013. Whereas in the case of a private company, the maximum number of members is 200 and unlimited in case of a public company. Also, the minimum number of members in case of both a partnership firm and private company is 2 and 7 in case of a public company.
• Cost of Formation: The Cost of Formation is negligible in case of a partnership whereas in case of a company, the minimum statutory fee for incorporation of a Company is relatively high.
• Liability of members: In the case of Partnership firm liability of partners to contribute toward the payment of the partnership’s debts and liabilities is In contrast, the liability of members of a company (except an unlimited one) to contribute toward satisfaction of the company’s debts and liabilities is limited. The liability of shareholder may be limited either by shares or a guarantee.
• Perpetual Succession: It does not have perpetual succession as this depends upon the will of partners. It means that the death or insolvency of a partner dissolves the firm unless otherwise provided. A company on the other hand has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not affect the life of the company.
• Management: In the case of a Partnership, every member of a partnership may take part in its management unless the partnership agreements provide otherwise. On the other hand, the affairs of a company are managed by its directors, or managing directors or manager and its members have no right to take part in the management.
• Property: In a partnership, the property of the firm is the property of the individuals comprising it. On the other hand, in case of a company, it belongs to the company and not to the individuals who are its members.
• Authority of members: In a partnership, partners are the agents of the firm. A partner can dispose of the property and incur liabilities as long as he acts in the course of the firm’s business. Whereas members of a company are not its agents. A member of a company cannot dispose of the property and incur liabilities in the course of the company’s business.
• Transferability of Interest: A partner cannot substitute another partner in his place unless all the other partners agree to the same. In contrast, a shareholder can transfer his share to anybody he likes unless specifically provided in the articles of the Company.
• Relationship with creditors: Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be executed against the partners jointly and severally. On the other hand, the creditors of a company can proceed only against the company and not against its members.
• The requirement of Audit: It is not mandatory to audit the accounts of the partnership firm. The accounts of a firm are audited only at the discretion of the partners. On the other hand, a company is required to have its accounts audited annually by a chartered accountant.
• Right of Legal Representative: In case of death of a partner, the legal heirs have the right to get the refund of the capital contribution as well as the share in accumulated profits, if any. However, the legal heirs will not become partners in the firm. In contrast, in case of death of a member of a company, his legal representatives’ step into his shoes for the purpose of rights in the company.
• Dissolution: A partnership firm is the result of an agreement and can be dissolved at any time by agreement among the partners. However, a company, being a creation of law, can only be dissolved as laid down by law.
• Right to sue: Only a registered partnership firm has the right to sue a third party whereas a company being a legal entity has the right to sue and to be sued in return.
• Insolvency: The insolvency of a partnership firm means insolvency of all the partners which is not the position of a company as the winding up of an insolvent company does not make the members insolvent.
• Mutual Agency: Each partner is an agent of the firm as well as of the other partners who carry on the business but that is not the case with the company.

The major similarity between a company and a partnership firm is with regards to its tax liability. For instance, the income of Partnership is taxed at a Flat rate of 30% plus education cess as applicable. A similar disposition can be found with respect to the tax liability of a company as well since the income of Company is Taxed at a Flat rate of 30% Plus surcharge as applicable.[5] But it is evident that a company and partnership firm are very different business structures.

V. Comparison of a Limited Liability Partnership and a Company

Unlike a normal partnership firm, an LLP has more similarities with a company. It can be considered as a mix or hybrid of a partnership firm and a company. A brief comparison of a company and an LLP is given below:

• Prevailing Law: A Limited Liability Partnership is governed by the provisions of the Limited Liability Partnership Act, 2008 and the rules framed under it whereas the law governing the existence of a Company is the Companies Act, 2013 and rules made thereunder.
• Registration: It is mandatory to register an LLP with the Registrar of LLP and for a company to register with the ROC.
• Distinct Entity: Both an LLP as well as a company is a body corporate and therefore a legal entity distinct from its partners or shareholders. Both of them have perpetual succession indicating that any change in the partners or shareholders will not affect the existence, rights and liabilities of an LLP or a company.
• Name of the entity: It is mandatory that the name of an LLP must contain the suffix “Limited Liability Partnership” or “LLP”. Similarly, every public company should have the suffix “Limited” and every private company should have the suffix “Private Limited.”
• Number of Members: Every LLP should have at least two partners as per Section 6 of the LLP Act. Moreover, any individual and body corporate may be a partner in an LLP similar to a company. There is no maximum limit for partners in an LLP. In contrast to this, a private company has a maximum limit of 200 members and a minimum of 2 members.
• Director: Every private company should have a minimum of 2 directors and every public company should have a minimum of three directors. While Body Corporates can become a share holder of the Company, a Private Company will need minimum 2 Individual as a Director of the Company. In contrast to this provision, every LLP must have at least two designated partners, who are individuals and one of whom is resident in India. In the case of an LLP of which all partners are body corporates or in which case one or more partners are individuals and body corporates, at least two individuals who are partners or nominees of the body corporate are to act as a designated partner.
• Flexibility in Operation: In comparison with a company, an LLP has much more flexibility in conducting its operations. While it provides the benefit of limited liability, it is still a partnership firm which is regulated by a partnership deed executed between the partners. On the other hand, in the case of a company, the Companies Act prescribes a more rigid and formal board structure and decision-making requirements. It provides that decisions must be made at validly constituted meetings, passing of resolutions and maintenance of minutes of meetings and other statutory records to enable the Members/Directors take benefit of Limited Liability and other features of Private Company.
• Cost of Formation: Since an LLP which is a hybrid of Partnership Firm and a Company, it is comparatively cheaper to maintain than a Company. As LLPs are not required to hold regular Board Meetings, maintain Statutory Registers and even filing fees are very less as compared to a company. In contrast, the minimum Statutory fee for incorporation of a company is relatively high. It means that a company is more process-driven and cost intensive as compared to an LLP.
• Charter Documents: An LLP Agreement is a charter of the LLP which denotes its scope of operation and rights and duties of the partners vis-à-vis LLP. On the other hand, Memorandum and Article of Association is the charter of the company that defines its scope of operations.
• Liability of members: An LLP is a separate entity from its members and hence is liable to the full extent of its assets but the liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. However, the liability of the firm and that of the partners who have acted with intent to defraud the creditors or for any fraudulent purpose is to be unlimited for all or any of the debts or other. In the case of a company, the liability of the members is generally limited to the amount required to be paid upon each share.
• Tax liability: Profit of LLP is taxable at 30% plus a surcharge. However, sharing of profit among the members is not liable to tax under the current tax structure. In contrast, private companies with turnover up to Rs. 250 Crores are liable to pay tax at 25% plus surcharge and other Companies are liable for a 30 % tax rate. Moreover, a Pvt. Ltd. Company is required to pay a Dividend Distribution tax @ approx. 16.50 % at the time of distribution of profits to its shareholders. In contrast, Dividend Distribution is not applicable to LLP. Once profit is declared and tax is paid by LLP, the distributed income is tax-free in the hands of the partners.
• Statutory Audit: It is mandatory to conduct every year in case of a company whereas, in case of an LLP, it is only when the partner’s contribution exceeds 25 lakhs or annual turnover exceeds 40 lakhs that an LLP needs to audit its accounts.
• Share Transfer: In a Private Limited Company, a shareholder can easily transfer his shares to another shareholder. However, in a limited Liability Partnership, such transfers are governed by the LLP agreement.
• Annual Meetings: The Companies Act prescribes that it is mandatory for companies to conduct board and general meetings at the prescribed time. Minimum 4 board meetings are required during the financial year having 120 days gap between 2 meetings. General meeting of shareholders to be conducted once in a year mandatorily. However, there are no such compulsions for a Limited Liability Partnership.

VI. Conclusion

It is thus evident that each of these different forms of business structures has its own advantages and disadvantages. While there is ease or formation and flexibility in the case of a partnership, there is the benefit of limited liability in case of an LLP and a company. A partnership is more suited to small low-risk business. Likewise, there are a lot of similarities between a company and LLP as discussed above. A basic difference between an LLP and a company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement between partners.

The management-ownership divide inherent in a company is not there in a limited liability partnership. LLPs have more flexibility as compared to a company. LLP have lesser compliance requirements as compared to a company. Thus, it is evident that an LLP would be more suited to start-ups, Business, trade, manufacturers etc whereas a company is more suited to businesses having turnover and entrepreneurs who need external funding.

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References

[1] Avatar Singh, Business Law (10^th ed., 2014).

[2] Available Here

[3] Dy. CST v. Kelkutty (1985) 4 SCC 41

[4] Statement of Object and Reasons, LLP Act, 2008

[5] Mishra Devesh, Difference between Partnership Firm, LLP and Company, Available Here, (Last accessed on 01-12-20)

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Company Law