Partnership and Private Limited Company: Advantages & Disadvantages

Partnership and Private Limited Company have a number of advantages and disadvantages for each of the business types. On one hand, there is a great deal of flexibility available and on the other, there exist procedural compliances that have to be met. One should carefully choose among the two.

Introduction

When it comes to business associations, the two most common types that come to one’s mind is the partnership and private limited company. They are very popular when it comes to conducting the business. There must be some advantages to having such forms of business. That is why even Ratan Tata ventured to convert his public limited company to private limited company.[1]

In the forthcoming article, the advantages associated with each of these business forms would be examined and analysed. There is an expositorial approach followed in elaborating on the difference between the two types of businesses and henceforth, the difference between the two would be made clear.

Meaning

Partnership is defined in section 4 of the Indian Partnership Act, 1932 (hereinafter Partnership Act).[2] It provides that a partnership stands for a relation between persons known as partners. They have agreed to share profits. The Business would be carried on by all or any of them[3]

A private limited company is defined in section 2 (68) of the Companies Act, 2013 (hereinafter Companies Act).[4] It provides that a company not permitted to transfer its shares, issue prospectus for public issue of shares, having not more than 200 members is called a private limited company.[5]

With a bare perusal of the provisions, a clear comparable understanding is gained of how much they are distinct apart. The former appears to be far simpler when it comes to technicalities with regards to formation and procedure. The latter is the opposite in that regard. Little technical and various compliance requirements exist for the same.

Hence, in this statutory framework, the advantages and disadvantages between the two would be clearer.

I. Partnership

There is a great deal of flexibility that is present with a partnership business when it comes to undertaking its business. There are no strict or mandatory procedural requirements as they exist for a firm.

Advantages

In the clothing sector, researchers found that with partnership in place, there was cooperation among suppliers that reduced uncertainty with market risk. Needs of end-users was gauged and the products were accordingly specified.[6]

In such a market of stability between supply and demand, partnerships are encouraged to cooperate. Due to less formalisation and reduced compliance and regulatory control, there is a greater amount of producing capacity. Transaction costs are automatically lowered leading to an efficient outcome.[7]

Ciesielski has found in the classic research done that there are some crucial advantages of partnership which put a private limited company on a back seat when it comes to choosing the option of business.

• Firstly, there is a distribution of reward along with common goals and expectations.
• Secondly, there are economies of scale with reduction is production costs and increased resource use.
• Thirdly, there is a faster access to market because of joint development of both proiduct and process.[8]

There is left limited need of negotiating and separate contracts need not be entered into. The partners since have collaborated are able to cooperate upon production and have savings.[9] This shortens the production cycles and helps in achieving strategic results through coordination.[10]

If we take the example of partnership with distributors in clothing industry, there would be added advantage with respect to physical activities like that of marketing and greater product availability.[11]On the other hand, if the example of labour markets is taken, a constructive programme is chalked out and specific problems of the local markets can be tackled if there are local partnerships in place.[12]

Partnerships help bring together new approaches and past experiences and thus lead to innovation from the collaboration of efforts.[13] This leads to the emergence of new ideas and solutions and this would prove to be a boon for the economy and society.[14] As solutions are being talked about, the resource utilisation would become more efficient and thus the total level of resources would also improve.[15]

Coordination among different sources of power and generation of employment can lead to better management of sources. There is a huge scope in this form of business entity, that is, the partnership, to provide synergy of joint working. It is also referred to as a transformational learning process where the stakeholders learn from each other.[16]

If different producers enter into this relation of partnership, there will be an avoidance of duplication and there would be a collaborative effort to effectuate originality for the purposes of innovation.[17]When this spirit of community ownership prevails in an economic structure, it leads t the well being of all the stakeholders.[18]

But in any case, the bottom line remains that an organisation’s effectiveness and efficiency through coordination is increased with the help of the relation of partnership.[19] Choosing the kind of business for the purposes of achieving set motives can be done in either manner. But, in an important area, the benefit of partnership gets surfaced.

That crucial area is that of PUBLIC-PRIVATE PARTNERSHIPS. In the creation and development of cities or actual areas and colonies, a partnership among various bodies, whether public or private is very crucial for the overall development of the area. Such a collaboration for public development helps in the creation of positive external perception.[20]

Disadvantages

There are many risks and disadvantageous situations that can arise through the relations of partnership. The elements of qualitative nature may not be estimated correctly and the providers can be at the end limited to just one.[21]

Since a partnership is, after all, an association of different people and there is no clear statutory rule existing of how to manage the functioning of the same, there is a risk of conflict among differing mentalities and perspectives about business.

Hence the specific goals of a firm can remain unclear despite having broad aims in place.[22] Partners can be of varying temperaments, have different ethical standards, and there can be a significant amount of difference in philosophy of the partners.[23]

The reason such a situation is a disadvantage is because of the nature of the partnership business. Unlike a company, it is the partners who have to collaboratively carry on business.[24] In the garb of collaboration, some partners can also have hidden agendas and they can, therefore, leads to fragmentation of policy and disintegration of the entity.[25]

The effect of the working of partnership is difficult to measure whereby a partnership is usually seen as an end in itself rather as a means.[26] In today’s market, there is a high level of interdependence associated among producers due to which uniqueness in terms of product and to maintain the same is very difficult for a partnership firm.[27]

In a market technology and information are the dominating factors, sharing the knowledge about the same with other partners can be very troublesome situation for a firm to manage within itself.[28]

There can be a dependence upon a partner or technological and financial aspects.[29] The balance of power among different partners remains an area of concern in the functioning of the firm. It is because those who carry a significant amount of influence in the association will always target the policy decisions and try to paralyse the process thus dictating the terms of decisions.[30]

II. Private Limited Company

Advantages

If a business entity wishes to kick-start its business as a private limited company, the incorporation requirements would have to be met as per the Company’s Act. The series of advantages that can be gathered from such a choice of incorporation can be listed as follows-

1. It is the well-settled corporate jurisprudential principle that there is a separate corporate legal personality granted to a company. Thus, it is considered as a separate legal person.[31] Hence, if any of the members of a company[32] die or become bankrupt, there would be no effect whatsoever upon the status of the company and its businesses. It would not get dissolved.
2. The person of the business can acquire goodwill and hold the same which would not have been possible in other forms of business entities.
3. Allocation of shares to each of the members can take place with each member holding a share and thus getting a say in the management and functioning of the company.[33]
4. Since it is a limited company, there is a limit on the liability of each of its members. It is not like an unlimited company where each of the members has unlimited liability.[34] Hence the liability is limited only to the number of shares left unpaid since the rest is paid amount.[35]

Each person is, therefore, only liable in a limited manner. It is not having any mutual obligations for other members as it existed in the case of a partnership where each partner was considered an agent of the firm.[36] Such limited liability makes the members free enough to act and take decisions with a clear thought process.[37]

5. There is a greater ability present with a company to acquire huge capital amount and also borrow money. [38]
6. There can be a lot of members in a company. With the new legislation in 2013, there was a major shift from the 1956 regime whereby the number of members was increased from 50 to 200.[39]
7. Employees of the company can also become involved in the management of the company by holding certain amount of shares and thus getting requisite amount of voting power.

If a suit has to be filed under the Civil law, it can be filed under the name of the company along with a person nominated by the company as responsible for handling the said affairs.[40] The Court held that the ambit of the word person is wide enough to encompass such organisations which are being separate legal entity under the purview of law.[41]

A company as distinct from its members has a special right to sue and be sued and thus be entitled for damages in libel or slander as the case may be.[42] Such a special right does not exist when it comes to a partnership firm.

Disadvantages

Authors have described the incorporation of a business entity as a private limited company disadvantageous on sentimental grounds.[43] Since a company is a separate person altogether,[44] the property which a promoter might have purchased, gets registered in the name of the company. It means that the company is the owner and not the person.

It is the landmark decision of the Hon’ble Madras High Court that the property of the firm is considered separate. In the case of R.F. Perumal v. H. John Deavin,[45] it was held that-

“No member can claim himself to be the owner of the company’s property during its existence or in its winding-up”

Thus, for a promoter who could have regarded such contributed property as personal, would face a loss of the property at the hands of a company. If there is a tort that is committed against the member of the company, he or she cannot sue in the name of the company.[46] It is because such a right can only be exercised by the company for the matter was involved to a company.[47]

The documents which are used for incorporating the company are considered public documents and are hence kept open to all for inspection purposes. Such a legal requirement leaves room for doubt and suspicion in the minds of people since they can be fearful of copying and plagiarism of the ideas so mentioned in Articles and Memorandum.[48]

Companies Act lays down multiple restrictions upon the holding of meetings and voting requirements thus having a lot of requirements stipulated which at the end of the day increases the transaction cost for the company to function. Such procedural requirements have relaxed the case of Partnership.

A promoter has to bear all the expense of incorporation of the company and also pay the stamp duty therewith. This strains the very purpose for which the company was formed. At the very initiating step, there exists a blockade of disincentive.

Conclusion

Every form of business would have its own form of advantages and disadvantages. It is upon the producer or the concerned person which particular form suits the best interest of the particular initiative that has been planned for the financial year.

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[1] ET Bureau, Making Tata Sons private co legal move: Corp Affairs Min, The Economic Times (Jan. 5, 2020, 10:52 AM), https://economictimes.indiatimes.com/news/company/corporate-trends/making-tata-sons-private-co-legal-move-corp-affairs-min/articleshow/73093332.cms.

[2] Indian Partnership Act, 1932, § 4, No. 9, Acts of Imperial Legislature, 1932 (India).

[3] Id.

[4] Companies Act, 2013, § 2 (68), No. 18, Acts of Parliament, 2013 (India).

[5] Id.

[6] M. Ciesielski et. al., Strategie łańcuchów dostaw 54 (PWE, Warszawa 2010).

[7] Benton Maloni et. al., Supply Chain Partnerships: Opportunities for Operations Research, 101 European Journal of Operational Research 419, 429 (1997).

[8] J. Nowakowska et. al., Effectiveness of Logistics Processes of SMEs in the Metal Industry, 25 METAL 43 (2016).

[9] A. Harrison et. al., Zarządzanie logistyką 354 (PWE, Warszawa 2010).

[10] Id. at 339.

[11] R. Borowiecki, Zarządzanie przedsiębiorstwem. Analiza współczesnych uwarunkowań, koncepcji i determinant 121 (Fundacja Uniwersytetu Ekonomicznego w Krakowie, Kraków 2016).

[12] C. Nativel et. al., Localising welfare-to-work? Territorial flexibility and the New Deal for Young People, 20 (6) Environment and Planning C: Government and Policy 911, 932 (2002).

[13] J. Nelson et. al., Partnership alchemy: new social partnerships in Europe, 1 Copenhagen Centre 1, 2 (2000).

[14] Department for Work and Pensions, Building on New Deal 57 (DWP, 2004).

[15] M. Conway, Partnerships, participation, investment, innovation: meeting the challenge of distressed urban areas 23 (European Foundation, Dublin 1999).

[16] C. Miller, Partners in regeneration: constructing a local regime for urban management?, 27 (3) Policy and Politics 343, 358 (1999).

[17] Id. at 349.

[18] J. Rhodes, et. al., New developments in area-based initiatives in England: the experience of the SRB, 40 (8) Urban Studies 1399, 1426 (2003).

[19] A. Webb, Co-ordination: A Problem in Public Sector Management, 1 Policy and Politics, 19 (1991).

[20] Kotler et al., 1993

[21] Harrison A. et al., Zarządzanie logistyką 354 (PWE, Warszawa 2010).

[22] L. Montanheiro et. al. , Public and Private Sector Partnerships – The Enterprise Governance, 395 (Sheffield Hallam University Press 2001).

[23] SP Osborne, Managing public-private partnerships for public services: an international perspective 345 (Routledge 2000).

[24] Indian Partnership Act, 1932, § 4, No. 9, Acts of Imperial Legislature, 1932 (India).

[25] L. Dobbs et. al., Engaging communities in area-based regeneration: the role of participatory evaluation, 23 (3/4) Policy Studies 151,171 (2002).

[26] M. Ball et. al., Urban change and conflict: evaluating the role of partnerships in urban regeneration in the UK, 2 (1) Housing Studies 9, 28 (2005).

[27] J. Witkowski, Zarządzanie łańcuchem dostaw. Koncepcje. Procedury. Doświadczenia 39 (PWE, Warszawa 2003),

[28] M. Ciesielski et. al., Strategie łańcuchów dostaw 54 (PWE, Warszawa 2010).

[29] K. Rutkowski, Logistyka dystrybucji Specyfika Tendencje rozwojowe 270 (Dobre praktyki, Oficyna Wydawnicza SGH, Warszawa 2005)

[30] I. McDonald, Theorising partnerships: Governance, Communicative Action and Sport Policy, 34 (4) Journal of Social Policy 579, 600 (2005).

[31] Salomon v. Salomon and Co. Ltd., (1897) AC 22; New Horizons Ltd. v. Union of India, AIR 1994, Del 126.

[32] Companies Act, 2013, § 2 (55), No. 18, Acts of Parliament, 2013 (India).

[33] Id. at § 2 (84).

[34] Id. at § 2 (92).

[35] Id. at § 2 (64).

[36] Indian Partnership Act, 1932, § 18, No. 9, Acts of Parliament, 1932 (India)

[37] Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731.

[38] Companies Act, 2013, § 2 (91), No. 18, Acts of Parliament, 2013 (India).

[39] Id. at § 2 (68).

[40] Union Bank of India v. Khader International Construction and Other, (2001) 42 CLA 296 SC.

[41] Id.

[42] Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj).

[43] W. H. T. Brown, The Conversion of a Business into a Private Limited Company, 1 Woolsack n.s. 188 (1928).

[44] Lee v. Lee’s Air Farming Ltd., (1961) AC 12 (PC).

[45] R.F. Perumal v. H. John Deavin, AIR 1960 Mad 43.

[46] British Thomson-Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33.

[47] Id.

[48] W. H. T. Brown, The Conversion of a Business into a Private Limited Company, 1 Woolsack n.s. 188 (1928).

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