Distinction between Partnership and Other Forms of Business Organizations

The article 'Distinction between Partnership and Other Forms of Business Organizations' focuses on the subtle differences between partnerships and other types of business organizations.

It highlights the distinct legal and operational aspects that set partnerships apart from other types of businesses such as companies and sole proprietorships. The study seeks to provide a comprehensive knowledge of the distinctive qualities that distinguish partnerships in the diverse landscape of company arrangements by analyzing essential factors such as liability, decision-making processes, taxation etc.

What is Partnership?

A partnership is an agreement in which two or more people, termed business partners, engage to work together to further their shared interests. Individuals, businesses, interest-based groups, educational institutions, governments, and other combinations can form partnerships. Organizations may collaborate to raise the chances of each completing their objective and to broaden their influence. A partnership might result in the issuance and holding of equity or it may be regulated solely by a contract.

Indian Partnership Act, 1932 governs every aspect and function of the partnership in India. According to this law, a partnership is a relationship between two or more individuals or parties who have agreed to share the profits created by the business under the guidance of all the members or on behalf of other members.

Distinction between Partnership and Other forms of Business Organizations

1. Registration

Partnership: According to the Indian Partnership Act of 1932, registering a partnership firm is not required if the firm isn’t a separate legal entity. However, getting a registration ensures that the company exists lawfully.

Sole Proprietorship: In general, there is no need for registration. With a small investment, a single proprietorship enterprise can be established from one’s residence or on a commercial property. The only proprietor/owner who invests in the firm has complete control of the business.

Company: Registering a company typically involves incorporating it by filing the necessary documents and fulfilling legal requirements with the registrar of companies

2. Ownership

Partnership: The business carried out through a partnership deed is completely owned by its partners.

Sole Proprietorship: A business developed in the nature of sole proprietorship is solely owned by the single individual who developed it.

Company: A company is held by the shareholders or members.

3. Legal Structure

Partnership: Firms based on a partnership nature are regulated by the Indian Partnership Act, 1932.

Sole Proprietorship: Legal requirements must be followed, or the proprietor has to get a specific license or certificate in order to conduct the business.

Company: Businesses that fall under the title of a company must be registered under the Companies Act, 2013.

4. Decision Making

Partnership: A consensus approach incorporates all involved parties in the process of decision-making. Each partner has a chance to voice their thoughts about a decision & is responsible for outlining all of the benefits and drawbacks of the suggested decision.

Sole Proprietorship: The sole proprietor enjoys complete authority and control of the company’s affairs. Without any co-owners, you are the single owner of the company and can run it any way you see fit and similarly, you have the complete power and responsibilities to make any suitable decisions for the business.

Company: The board of directors’ powers must be exercised collectively. This implies that unless special powers are granted to individual directors, including a decision regarding a niche field of knowledge in which that specific director has experience/qualifications, corporate decisions must be taken jointly.

5. Liability

Partnership: Partners in the business hold and share the unlimited liability together. Each partner is in whole or in part accountable for every action of the firm committed when he serves as a partner, as well as individually.

Sole Proprietorship: The sole founder holds unlimited liability. All responsibilities are personally borne by the owner. As an outcome, he will be personally liable for any loans that his private inheritance may be able to recover if funds are insufficient.

Company: All the members of the company have different, independent and limited liability which they carry throughout the course of the business. All shareholders are accountable for their assigned actions.

6. Transferability

Partnership: Transferring ownership in a partnership may be prohibited. A partnership share can only be transferred with the approval of each of the partners. A co-partner cannot pass on his portion, interest, or ownership in properties without having the approval of the other partners.

Sole Proprietorship: To transfer the owner in a business of sole proprietorship one is required to transfer all acquired assets. It can be done by transferring the proprietorship by selling the assets to some other individual.

Company: In a company, shareholders can transfer ownership of their shares to other members and therefore, the ownership in a company can be easily transferred via shares. It must be in accordance with the laws.

7. Management

Partnership: The task of management in a Partnership is carried out by its active partners.

Sole Proprietorship: In this type of business the individual who started the business is responsible for the whole management of the same.

Company: In the matter of a company, the Board of Directors are responsible for overseeing the company's management

8. Maintenance of Accounts

Partnership: Accounts must be maintained in accordance with the terms of the partnership agreement.

Sole Proprietorship: The account is solely maintained by the individual owner of the business.

Company: A company’s accounts are maintained and audited by a qualified Chartered Accountant.

9. Members in Number

Partnership: A partnership firm needs a minimum of two members to form a deed and establish a business and if it is about banking then there must be at least 10 members and it requires 20 members for businesses associated with other interests.

Sole Proprietorship: A business developed by a single individual needs no other members and can be carried out individually.

Company: The quantity of members in a company varies depending upon its nature, a privately owned company must have at least two members, while a public company must have at least seven. In the case of a company that is private, the limit is 50. In a public company, there is no maximum number of members.

10. Rights and Duties of Members and Partners

Partnership: All the duties, rights and obligations assigned to every partner are decided prior to the establishment of the business and the same is carried out in the partnership deed and governed by the deed itself.

Sole Proprietorship: All the duties, rights and obligations attached to a business which is established by a single person can be associated with that person only and is governed by the same as well.

Company: The member’s rights, duties and obligations are governed by the AOA & resolutions approved by shareholders or board.

11. Continuity of Business

Partnership: A business based on partnership cannot be continued after the death or retirement of any of the partners and it also won’t be considered to be continued when one of the partners left the business in between.

Sole Proprietorship: In the case of sole proprietorship the business can’t be continued after the death of the sole owner unless there are provisions such as passing it on to heirs

Company: The company’s stability and perpetual lineage, as well as death, and insolvency do not influence the company’s continuity.

12. Dissolution and Termination

Partnership: It can be terminated by a contract, mutual agreement, insolvency, unforeseen circumstances, or a court order. It is the procedure by which the relationship between the partners of the company ends or is terminated. The term “firm dissolution” refers to the breakup of a partnership between all of the business’s participants. When a firm’s partnership dissolves, the firm disappears from existence.

Sole Proprietorship: The owners here are not required to communicate with anybody else before deciding to close their doors. The Proprietorship firm can easily be liquidated by cancelling all of its licenses and company registrations in order that the Proprietor does not have to submit any returns or comply in the future.

Company: A Company can dissolved either through Voluntary Dissolution or Compulsory Dissolution by the National Company Law Tribunal. The corporation no longer exists legally after dissolution.

Conclusion

It is essential for entrepreneurs and business owners to have a proper understanding of partnerships and other forms of business organizations. Partnership differs from sole-proprietorships and companies in terms of liability, decision making and taxation from sole-proprietorships. Generally, the structure of a business depends on its scope, risk tolerance and long-term goals. Comprehensive knowledge of these differences can help to grasp the business landscape in order to excel in a particular business

References

[1] Major Forms of Business Organizations, Available Here

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