While starting a business in India, one needs to make the right decision about registration type to sustain it in the long run. There are various forms of registrations; entrepreneurs need to decide between a firm and a company, each having different characteristics, legal frameworks, and benefits for a specific business and its scale of operations.
This blog examines the differences in firm registration versus company registration, as applicable to the Indian scenario. Understanding such differences will assist business owners in making informed decisions in line with their goals, resources, and future plans.
Introduction
India provides all types of structures under which different businesses can be carried out, but firm registration and company registration have been the most popular choices. Both options formalize a business, but they present two extreme contrasts in terms of legal recognition, compliance needs, ownership structure, and tax treatments.
Firms often correspond to registering in the following instances: Forming a firm is a procedure required under the Indian Partnership Act 1932 as well as setting up of any sole proprietor that does not essentially need any such registration procedure. The company refers to the procedure concerning the registration as per the Companies Act of 2013.
These alternatives would depend on the scale of business, the nature of operations, the risk appetite of the owners, and the level of compliance they are willing to undertake.
What is the Firm Registration?
Firm registration is basically applicable to partnership firms, and it also somewhat applies to sole proprietorships. A firm in India is regulated by the Indian Partnership Act of 1932.
- Partnership Firm– In this, two or more people combine to conduct a business venture, sharing both the profits and the liabilities.
- Sole Proprietorship– Though it is not officially registered, the law deems it to be a single-man-owned business.
While registration of a partnership firm is optional, it is advisable because it gives legal backing, and one will be able to access benefits like the ability to sue other parties in the firm’s name.
What is the Company Registration?
The registration of companies refers to the incorporation of a business entity under the Companies Act of 2013. The procedure of incorporating involves creating a separate legal entity different from the owners or shareholders.
The most common types of companies in India are- Public Limited Company, Private Limited Company and One Person Company.
Company registration affords a more exalted status in legal terms and operates on the benefit of limited liability for its shareholders and, with greater credibility in the markets. However, such registration involves tougher compliance and reporting rules.
Key Differences Between Firm Registration and Company Registration
1. Legal Framework and Governing Laws
- Firm Registration- Under Indian Partnership Act, 1932. A sole proprietorship is very common yet lacks a distinct governing statute unless registered under GST or other applicable statutes.
- Company Registration- The Companies Act, 2013. A company is must registered with the Ministry of Corporate Affairs and meets statutory requirements.
2. Legal Identity
- Firm Registration- The partnership firm lacks a separate legal identity. The partners will be liable for the liabilities of the firm jointly and severally. In case of the sole proprietorship, both the owner and the business are considered one and the same.
- Company Registration- A company is a legal and distinguished identity of its own. A company can acquire property, make contracts, sue, or be sued in its name and not that of the shareholders or directors.
3. Liability of Owners
- Firm Registration- In a partnership, the partners’ liability is unlimited. Thus, their personal assets may be used to pay for firm obligations. It is applicable in the case of sole proprietorship too.
- Company Registration- The shareholders of a company have limited liability. This means their financial liability is limited only to their shareholding in the company.
4. Ease of Formation
- Firm Registration- The formation of a partnership firm or sole proprietorship is easier and cheaper. Registration is a less paperwork process, and sole proprietorships can even operate without formal registration.
- Company Registration- Companies are more involved and require one to go through the process, which includes name approval, incorporation forms’ filing, issuance of a certificate of incorporation and compliance with periodic regulations.
5. Tax Implications
- Firm Registration- The Partnership firms are taxed at a flat rate of 30% (addition of cess and surcharges). Sole proprietorships are taxed as per the individual income tax slab rates.
- Company Registration- Companies are subject to corporate tax rates. They are usually lower compared to the rates for the partnership firm. For instance, domestic companies with up to Rs 400 crore turnovers are charged a 25% corporate tax rate, along with applicable surcharges and cess.
6. Ownership and Transferability
- Firm Registration- Adding or removing a partner in partnership necessitates an amendment to the Partnership deed. In case of sole proprietorships, there is no transferable ownership.
- Company Registration- The shares of a company can be easily transferred. Thus, it gives flexibility to change ownership.
7. Compliance Requirements
- Firm Registration- It has minimum formal compliance requirements, even for partnership firms. Sole proprietorships have little or no compliance obligations in formal terms.
- Company Registration- Companies have to comply with annual filings, board meetings, maintaining statutory registers and periodic reporting to the MCA. The violation of such would attract penal consequences.
8. Credibility and Access to Funding
- Firm Registration- Firms generally lack the credibility that comes with formal incorporation. The partnerships and sole proprietorships face challenges in raising funds from investors or any financial institutions.
- Company Registration- A registered company has higher credibility, and investments can be attracted easily by venture capitalists, angel investors, and banks.
Conclusion
Therefore, selecting between firm registration and company registration is a great decision because it depends upon several factors, including the scale of operations, appetite for risk, growth plans, and readiness for compliance.
Firms are perfect for small-scale enterprises and partnerships because they aim for simplicity and the least form of compliance. Company registration, however, is the way for entrepreneurs with prospects of scaleability, credibility, and growth for the long term.
Thus, understanding the differences and legal implications of each form is very crucial in making the right decision. With the appropriate framework, businesses will be compliant, grow well, and deliver their goals to the best possible extent.
References
The Companies Act, 2013 (Act No. 18 of 2013)