Partnership vs Limited Company
Many people, when starting a business, do not pay attention to the structure of the business they should choose. This can lead to many problems later on, which is why it is important to understand the types of business entities and the one that suits one’s business requirements. Two of the most common business structures are partnership and limited company each having its own benefits and unique features. This article is meant to highlight the differences between a partnership firm and a limited company to enable people to choose either of the two structures while starting a new business.
Partnership is a type of business entity that is formed when two or more people come together to raise capital and lend their expertise to run a business. All the owners are called partners and share the profits and losses incurred according to their investments and working. A partnership firm can be started with just two people who happen to be its owners. A partnership firm can be started with the terms agreed upon by the partners mentioned in a document that is called a partnership deed. The document describes the investments and the shares of the partners in profit and loss. The document also describes the mechanism of dispute settlement and the manner of ending the agreement or the partnership.
In a partnership firm, there is no legal status of the business entity and partners are responsible for all the loss incurred. There is no concept of limited liability and the assets of partners may have to be liquidated to cover the losses. Though mostly there are equal partners in a partnership firm, organizations with junior, as well as senior partners, is not uncommon, especially in the case of law firms. Partnership firm does not pay income tax, but individual partners have to file income tax depending upon profits derived from the business.
Limited company is a business entity quite separate from the members running the business or those who own it. Of course, the owners are the stakeholders or the shareholders while the company is run by a board of directors. A limited company may be limited by guarantee or limited by shares. The main benefit of a limited company for the shareholders lies in the fact that the shareholders are not held liable for losses to the company. Shareholders cannot be held responsible for any debts taken by the company and their assets cannot be liquidated to recover these losses. The formation of a limited company has to be done by furnishing all the details to the authorities in the required format and after obtaining the license. A limited company has to pay taxes on the profits earned while the members called directors have to pay taxes on the salary or remuneration they receive from the company. In US, the entity called corporation is more common than Lmited Company.
What is the difference between Partnership and Limited Company?
• While it is easier to form a partnership firm, it better to form a limited company to have limited liability protection for the owners of the company.
• There is a simple partnership deed that describes a partnership business and contains all the terms and conditions such as the manner in which partners have raised the capital and the proportion in which the profits and losses will be shared by the partners.
• On the other hand, a limited company has to be established according to the formalities laid out by the government.
• There are differences in the structuring of partnership firms and limited companies.
• Liability of owners in a limited company is limited whereas the liability of the partners is unlimited.
• Limited company has to be registered and incorporated whereas it is not necessary for a partnership.
• Limited company continues even after death of owners whereas the partnership firm ends with the death of partners.
• There are differences in taxation of a limited company and partnership.