What is the Difference Between Company and Partnership Firm?

A company is a legal entity separate from its owner, established under the Indian Companies Act, 2013. It is started by an association of people to run a business, which can be either private or public. Public companies can have at least 7 members with no upper limit, and private limited companies can have 2 to 200 members.

Conversely, a partnership firm is formed by two or more persons who agree to share profits, governed by the Indian Partnership Act 1932. It can either be a general partnership, where partners will have unlimited liability, or a limited liability partnership, which can have both general and limited partners. The partners share the profits and bear the losses in the agreed proportion.

The key difference between a company vs partnership firm lies in the legal structure, management, share transfer, taxation, and regulatory requirements. Entrepreneurs can choose between these two business structures based on their business goals, liabilities, taxation, and compliance requirements. In this blog, we will walk you through the differences between a company and a partnership firm. 

Difference Between a Company and a Partnership Firm

The key difference between a company and a partnership firm lies in their legal definition and formation process. A company is an entity established under the Companies Act 2013, having shareholders who own the business. On the other hand, a partnership firm is a voluntary group of individuals having a common objective, governed by the Indian Partnership Act, 1932. The partners own and manage the business collectively. The table below lists the differences between a partnership vs company:

Similarities Between a Company and a Partnership Firm 

Apart from all the differences between a company and a partnership firm, there are some similarities also, which are as follows:

• Must maintain books of accounts
• Formed to run a business and earn profits
• Need to register with the relevant authorities
• Governed under specific laws and regulations

What is a Company?

A company is a separate legal entity started by a group of people to carry on a business under the Companies Act 2013. It can be either private or public, where public company can have at least 7 members with no upper limit, and private limited company can have 2-200 members. 

Types of Company

A company can be of numerous types based on ownership and membership. Here are the three main types of a company: 

• One Person Company (OPC): It is a company with only one member. 
• Private Limited Company: A company that is held privately with 2 to 200 members, where share transfer is restricted. 
• Public Limited Company: A publicly held company typically requires a minimum of 7 members, with no maximum limit on shareholders. It allows the public to subscribe to shares. 

Features of a Company

Here are the characteristics of a company:

• Shares can be transferred (Public Limited - Restricted, Private Limited - Freely Transferable
• It is a separate legal entity
• Follow perpetual succession
• Strict compliance requirements 
• The members have limited liability
• Managed by the Board of Directors

The registration process for a company involves a formal process. The process includes filing the Memorandum and Articles of Association, obtaining DIN for directors, and submitting the documents required to the Registrar of Companies. 

What is a Partnership Firm?

A partnership firm is a business structure formed by two or more partners who agree to share business profits with the aim of running a business together. The business's profits and losses are borne by the partner in the agreed proportion. It can be either a general partnership or a limited liability partnership (LLP). In a general partnership, all partners have unlimited liability; conversely, LLPs have limited liability for their partners, and they are separate legal entities from their partners. 

Features of a Partnership Firm 

Here are the characteristics of a partnership firm:

• Managed jointly by partners
• It has no separate legal entity. 
• Partners have unlimited liability
• Profits are shared as per the partnership deed
• Established by an agreement between partners
• Suitable for small and medium-sized businesses
• Fewer compliance requirements than companies

The main difference between a partnership vs company lies in the legal structure, liability, management, share transfer, ownership, taxation, and regulatory compliance.

Which One Is Best Between Company and a Partnership Firm?

Choosing between a company and a partnership firm depends mainly on your business goals, compliance requirements, liabilities, and taxation. Here are some examples for both Indians and NRIs to help you decide whether to incorporate a company or a partnership firm:

For Indians

Indians can consider the following examples to make a smarter choice between a company and a partnership firm:

Business Size & Growth

• Choose a Company: A company is ideal if you plan to scale your business, gain investors, or raise funds. 
  • Example: Two Indians started a medical courier service. They plan to raise capital from investors and expand their startup globally. To do so, they registered as a private limited company and issued shares to the investors. 
• Choose a Partnership:  It is ideal if your choice is a small-scale business with direct decision-making power. 
  • Example: Jatin and Neha start a custom furniture workshop in their city, but they don't have any external funding. Now, they wish to divide the profits equally, so they formed a partnership firm. 

Taxation Structure

• Choose a Company: The company pays corporate tax, and profits distributed as dividends may be taxed separately and paid corporate tax. 
  • Example: An IT consulting firm is structured as a private limited company. While it pays corporate tax, its owner benefits from lower tax rates on dividends than individual income tax. 
• Choose a Partnership: Profits are taxed at the individual level, which often leads to reduced tax liability. 
  • Example: Two partners running a local flower shop, which will be taxed based on individual earnings. It prevents corporate tax liabilities and lowers overall tax obligations. 

Liability Protection

• Choose a Company: It offers limited liability as the owners' personal assets are not affected in case of any loss. 
  • Example: Disha has a fashion clothing brand. A customer files a lawsuit over a defective product. Now, since her business is a registered company, her personal assets will not be affected, and only the company's assets are at risk. 
• Choose a Partnership: The partners will have unlimited liability in case it is a general partnership. It means the partner's personal assets can be used to pay off business debts. 
  • Example: Jay and Shrestha own a small event management business. They took a small loan for an event and ended up incurring a heavy loss. Since they follow a partnership structure, both of them will be responsible for settling the loan, even by selling their personal assets. 

Business Continuity & Stability

• Choose a Company: It has a separate legal entity, so the business will continue even if the owner changes. 
  • Example: One founder of a software firm registered as a company exits, the company will still continue its operation by transferring the shares to a new investor. 
• Choose a Partnership: The partnership usually dissolves if a partner exits unless an agreement states otherwise.
  • Example: A law firm operating as a partnership dissolves after one of the partners retires. To continue operations, a new agreement needs to be created. 

For NRIs

Choosing between a company and a partnership for NRIs in India depends on your residency status, repatriation needs, tax treaty benefits, and FEMA compliance. In India, NRIs face several restrictions on owning certain businesses. However, both structures are achievable with the help of a proper setup, such as via NRE funds or RBI approvals. 

Business Size & Growth

• Choose a Company: It is ideal for NRIs planning to scale, attract FDI, or list shares, as private companies allow 100% NRI ownership in most sectors (except agricultural/retail). 
  • Example: An NRI in Dubai launches an IT services firm through a private limited company, repatriates profits freely post-taxation, and issues shares to the global investors under automatic FDI routes. 
• Choose a Partnership: It is ideal for small, local operations that have no expansion plans. NRIs can partner with residents but need approval from the RBI for fund inflows. 
  • Example: Two NRIs living in the US form a partnership for a Jaipur handicraft export business. They share the profits directly but limit scale due to unlimited liability and repatriation caps. 

Taxation Structure

• Choose a Company: A company pays corporate tax on profits (typically 22-30% under the new regime), and dividends distributed to NRI shareholders attract TDS. However, to avoid double taxation, you can claim relief through the DTAA with your country of residence. 
  • Example: An IT consulting firm structured as a private limited company by an NRI owner pays corporate tax first, and then the dividends are remitted abroad with DTAA credits applied in the NRI's home country, like the US. It can often result in an effective lower tax rate compared to individual slabs. 
• Choose a Partnership: A partnership or LLP uses pass-through taxation, where profits are taxed directly at the individual slab rates for NRIs, only on the income sourced in India. It helps avoid corporate tax and simplifies filings with potential DTAA benefits on remittances. 
  • Example: A local bakery run by two NRI partners (a resident nominee) as an LLP has its profits taxed at slab rates with TDS deducted at source. Since there is no separate corporate tax layer, it will help reduce overall tax liability.

Liability Protection

• Choose a Company: It offers limited liability, helping to protect your overseas assets from Indian business risks. 
  • Example: An NRI owns a skincare e-commerce company, and he faces a product liability suit. Here, only the company's assets will be at risk, safeguarding NRIs' NRE accounts abroad. 
• Choose a Partnership: It has unlimited liability and exposes personal assets also. A limited liability partnership offers limited liability and is NRI-friendly. It also allows 100% ownership.
  • Example: An NRI partner in an even firm incurred losses, so their personal overseas savings could be affected unless the firm is structured as an LLP. 

Business Continuity & Stability

• Choose a Company: A company has a separate legal identity with perpetual succession, allowing the business to continue smoothly even if an NRI owner changes their residency or sells the shares, with easy transfers under FEMA. 
  • Example: NRIs register a software firm, and one founder returns abroad permanently by transferring shares to a new resident or NRI investor. The business will still continue its operation without any interruption. 
• Choose a Partnership: A partnership usually dissolves upon a partner's exit, death, or residency changes unless the deed specifies continuity, while an LLP provides better stability through flexible partner substitution clauses. 
  • Example: An NRI law firm operating as a general partnership dissolves after one partner retires and moves back to India, requiring a new agreement to reform. However, an LLP deed would allow easy replacement to maintain operations. 

Compliance & Legal Requirements 

• Choose a Company: A company requires mandatory registration with the MCA, regular annual filings, audits, and FEMA reporting for NRI investments. However, all of this can be managed remotely through authorized signatures. 
  • Example: A group of NRI engineers launches a renewable energy startup as a company to meet regulatory approvals and FDI rules, handling MCA compliances via a resident director while complying with RBI's foreign exchange rules for inflows. 
• Choose a Partnership: A partnership has minimal legal requirements, like a simple deed registration, while an LLP requires MCA filings without mandatory audits for small turnovers, making it cost-effective and easier for NRIs using a power of attorney. 
  • Example: Two NRIs running a content writing agency from abroad operate as an LLP to avoid extensive annual filings, statutory audits, and complex governance. They focus only on the submission of ITR-5 with foreign asset disclosures in Schedule FA. 

The Bottom Line

When choosing the most suitable business structure, you need to understand the difference between a partnership and a company. A company offers limited liability and greater scalability, particularly a private limited company. Conversely, a partnership firm allows collaboration and shared liabilities. Try to consider some factors like management, compliance, taxation, growth prospects, etc., when choosing between a partnership and a company. 

Additionally, to make the best and most informed decision that aligns best with your goals, contact an expert at Savetaxs. At Savetaxs, we have a team of experts who can offer end-to-end consultancy regarding the complex, legal, and compliance requirements of incorporating a business, whether a partnership firm or a company. They can also help you ensure that you stay in adherence with all the legal and tax regulations. Connect with us now as we are actively working 24/7 across all time zones.