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Which is Better: Private Limited Company Or Partnership Firm?


Last Updated on June 13, 2024 by Kanakkupillai

Partnership firms allow partners to divide profits and losses according to an agreed formula, making formation simpler with minimal legal formalities required. They disband upon the death or bankruptcy of one member and dissolve when both members pass away.

The State/Central Government Registrar of Companies orders a minimum capital requirement of 1 Lakh to open a Private Limited Company.

As an entrepreneur looking at to launch their business, one of the important decisions they must make is choosing an appropriate legal structure. Multiple choices are accessible, such as private limited company, partnership firm, limited liability partnership (LLP), or sole proprietorship; each option possesses numerous advantages and drawbacks.

Partnership firms involve at least two people agreeing to share decisions and profits evenly among themselves, though any disagreement between partners could leave each liable for debts owed by the enterprise; limited companies offer greater personal protection.

Private limited companies have several advantages over partnerships, including their own separate identity and the ability to own property independently from partnership agreements. Tax benefits like reduced corporate rates also enable raising funds more easily, though private limited companies require greater compliance requirements and paperwork than their partnership counterparts.

Private limited companies possess another distinct advantage over partnerships. When disbanded, private limited companies must either be dismantled via court order or voluntary initiative from their directors and shareholders. In contrast, partnerships may be disbanded at any time by the partners themselves or statutory authorities.

Private limited companies must file annual accounts and file taxes according to their profits while also dispersing dividends – either final or interim, depending on how many shares each shareholder owns – among shareholders.

Profit-sharing arrangements in Limited Companies differ significantly from partnerships in that profits are distributed among shareholders based on which investment vehicles they hold shares, per rules contained within the Companies Act.

Other benefits

Private limited companies tend to enjoy greater credibility and find it easier than partnerships to raise funds; their governance by statutory bodies allows for oversight throughout. Therefore, this makes private limited companies ideal for entrepreneurs with aggressive revenue goals or who require external sources as funding sources.

Liability Partnerships hold each partner equally liable for all debts accrued by their business without limitations or caps; by contrast, limited company shareholders’ liabilities are determined by how much they paid for shares, mitigating risk while increasing startup expenses and paperwork burden.

Private limited companies must comply with all legal and regulatory requirements when filing their documentation, necessitating consultation with professional advisors such as Certified Accountants, Company Secretaries (CSs), or lawyers to achieve success. It’s vitally important that these advisors effectively address their needs to achieve this objective successfully.

Private limited companies also attract investors with low minimum capital requirements (often only Rs 1 lakh is needed). Furthermore, accessing alternative funding sources like loans or share sales gives your business an edge against those without corporate registration status.

Private limited companies present more challenges when disbanding than partnership firms due to higher taxes; directors and shareholders must pay corporation tax, national insurance contributions and income tax on salaries instead of only taxes on profit shares as they would do under partnership firms.

Both options offer benefits; therefore, it is crucial that you carefully assess the size, future plans, risks, and liabilities of your selection before arriving at an informed decision. Private Limited could potentially face closure by an administrative tribunal should any illegal activities or noncompliance occur, resulting in liabilities for its shareholders and directors.

Important to know

Private limited companies may be disbanded through various techniques, including transfers of ownership/transmission/forfeiture of membership/share buyback; voluntary winding-down by directors/shareholders themselves or court order may all lead to their disbandment; partnerships cannot disband until all their members cease being active or pass away;

Tax Benefits Limited companies provide their owners with legal protection from debts or liabilities associated with their businesses, making them particularly advantageous to entrepreneurs looking to increase revenues or access external funding sources.

Partnership firms may be an attractive option for smaller enterprises as they tend to be cost-effective to establish and require minimal compliance and initial capital requirements compared to private limited companies. But partnerships might not always suit every type of enterprise – as your enterprise grows or becomes more complex, additional expenses must be addressed.

Partnership firms must pay taxes on any profits earned, unlike private limited companies, which are tax-exempt entities. Partnership profits could incur as much as 30% tax plus surcharges and cess, while corporate taxes for profits earned by limited companies usually max out at 25%.

Private limited companies provide multiple tax benefits for their shareholders. Furthermore, owning properties directly through them while being sued under its name saves additional resources that can then be put towards new projects or expansion opportunities.

Private limited companies also possess another major benefit over partnership firms: they can be easily disbanded compared to partnership firms, which require extensive legal formalities and paperwork to dissolve. Furthermore, to remain operational, all private limited companies must submit annual returns with audited accounts to the Registrar of Companies each year.

Private limited companies tend to provide more secure business structures than partnership firms, making the fundraising process simpler with these vehicles. When selecting one as your organisation’s foundation, carefully weigh its potential advantages and disadvantages before coming to a final decision.

Establishing a private limited company might seem more complex than starting a partnership, but registration doesn’t need to be time-consuming or costly. With expert company formation agents available at reduced costs, this process can be quick and seamless while offering many advantages, including limited personal liability protection and tax savings, as well as producing paperwork such as annual returns. Furthermore, limited companies must register with Companies House using names that haven’t already been taken.

Even though creating a private limited company may cost more, its benefits outweigh this additional expense. You are protected from personal liability while taking advantage of tax breaks such as corporation tax on profits or dividend payments; additionally, directors will incur national insurance contributions when filing income tax on salaries paid out as dividends or payroll deductions.


One drawback of partnership arrangements is their potential risk should either partner become discontent with or experience difficulty; this could cause it to break apart and threaten business operations or their closure unless written agreements were in place before commencing operations; it is strongly recommended for any new venture that they secure these documents before starting activities.

Profits and losses among partners of a partnership are split evenly according to an agreed-upon ratio; any shareholder seeking to sell must first secure approval from all others involved; this makes partnerships an attractive option for small businesses without significant capital requirements.

Your business has various legal structures available, from limited companies and sole traders to sole traders and partnerships through limited liability partnerships (LLP).

Commerce students need a deep-rooted knowledge of the differences between Private Limited Companies and Partnership Firms. The former involves an arrangement where all partners share profits and losses according to an agreed-upon formula. In contrast, registration of Private Limited Companies involves mandatory filing requirements.

Identity A company is an artificial person governed by various statutory bodies like MCA or SEBI. It holds specific assets under its name that can be sued in court proceedings. Companies often adhere to stringent compliance standards to make fundraising easier while increasing the credibility of business activities and fundraising processes.

Private Limited Companies primarily conduct business by sharing profits and losses among their partners, paying both corporation tax on any taxable profits as well as national insurance contributions and income tax to ensure authenticity electronically.

Private limited companies provide their owners with limited liabilities; should anything go wrong, they only owe what is held within the company as a potential liability. This protects personal assets like houses and savings should any venture go bad.

The private limited business structure may help your firm appear more professional to clients, investors, and suppliers because it is registered with Companies House and makes its information readily available, including directors’ and shareholders’ details.

These business structures serve similar functions: raising capital through share sales (in companies) or partner contributions/external borrowings (in partnerships) while keeping accurate records and hosting annual gatherings. Partnership firms do not need to add “limited” or “pvt ltd” after their name; private limited companies do.

Registering of ownership ratios when registering a company helps ensure that each shareholder owns an equal portion. A private limited company comes under the purview of the Registrar of Companies, making all information about directors and shareholders publicly accessible.

As operating under a partnership can place personal assets at stake, many entrepreneurs prefer creating limited companies when embarking on new endeavours.

Private limited companies not only offer limited liability protections but can also bring other advantages like smooth share transfers and tax breaks that make conversion a worthwhile prospect for many partnerships today. Converting into a private limited company requires receiving written approval from all partners before passing a board resolution declaring compliance with all pertinent statutory regulations associated with operating such an entity.

Taxes A corporation is a legal entity capable of owning property and incurring debt under its name while fulfilling certain legal formalities, such as registering its name with authorities and filing annual returns and financial statements.

Partnership firms are legal business structures that permit several individuals to collaborate on one venture together. Each partner receives equal shares of any profits or losses accruing to their share; their agreement forms part of an official Partnership Deed document.


Private limited companies (Pvt Ltd) differ substantially from traditional partnership firms in many aspects, including minimum capital requirements and dissolution procedures, liability issues; shareholding limits may limit partners’ liabilities in Pvt Ltd; while traditional partnership liabilities extend indefinitely while shareholding levels restrict liability in a Pvt Ltd; traditional partners’ liabilities extend forever while in Pvt Ldis shareholding levels limit this risk; it also makes appointing directors and shareholders more easily; compliance must follow legal standards set out by shareholders when necessary etc.


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