Private Limited Company or Partnership firm? (2024)

FAQs

Private Limited Company or Partnership firm? ›

2. Limited liability: The second biggest difference between a partnership and a private limited company is Liability. The liability of the partners in a partnership firm is unlimited jointly and personally. Whereas the liability of the shareholder is limited to the shares that they hold.

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%.

If you're looking for simplicity and shared decision-making, a partnership might be suitable. On the other hand, if you prioritise limited liability, access to external funding, and a more professional image, a limited company could be the better choice.

However, there are initial and ongoing maintenance fees involved, as well as corporate duties that come with being a company director. If you are still unsure how long-lasting and viable your business idea is, it may be better to start as a partnership.

A private limited company is a privately held business entity held by private stakeholders. The liability arrangement, in this case, is that of a limited partnership, wherein the liability of a shareholder extends only up to the number of shares held by them.

All limited companies have limited liability for their shareholders, however, partnerships do not issue shares and some partnerships may be structured to have unlimited liability. The structure of ownership and management also differs.

The benefits of becoming a private limited company include reduced risks as any debts remain separate from the owners – and the liability of shareholders is limited to the price paid for their shares.

Greater flexibility

Members of the LLC can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members. An LLC can also decide to have its members manage day-to-day operations (member-managed), or these duties can be performed by non-members (manager-managed).

In general, however, an LLP provides a little more legal protection for the individual partners. As mentioned, this legal protection is mainly asset protection from lawsuits or collections of business debts.

Why is a partnership better than a company? ›

The advantages of forming a partnership include: Inexpensive to set up. No formalities, registration or reporting obligations other than tax returns. More privacy than other business structures such as a trust or company.

Investing in a limited partnership gives the investor access to more control of their investment and decision making, as well as higher potential for returns. Limited partnerships also allow for tax benefits such as deductions on losses, deferring taxes on profits and limited liability protection.

Private limited companies have the financial designation of LTD while limited liability companies are LLCs. On their taxes, LLCs pay fees through their owners even though the company is a legal entity, while the IRS taxes LTDs as a separate legal entity and pays the taxes on their company profits.

Who runs limited companies? Directors – known as company officers – manage limited companies and they can be shareholders as well. A private limited company must have at least one director and most company owners are directors – meaning you can own and manage a limited company yourself or with others.

1 lakh is still a requirement for forming a Private Limited Company. So, as of 2015, there is no longer a minimum paid up capital for Private Limited company in India. However, an authorized capital of Rs. 1 lakh is still a prerequisite for the formation of such a company.

How they're different: All partners are general partners in a general partnership, and ownership responsibilities are spread equally among them. In a limited partnership, operations are handled by general partners, whereas limited partners do not take part in the day-to-day running of the business.

How they're different: Limited partners only share in losses and liabilities to the extent of their investment in the company. General partners have unlimited liability for debts and lawsuits.

A limited partnership is a type of partnership that consists of at least one general partner and at least one limited partner. A limited liability partnership does not have a general partner, since every partner in an LLP is given the ability to take part in the management of the company.