Indian Partnership Act
Partnership Firm and Company Compared
A firm and a company are the two classic ways of carrying on business together, and they are opposites in almost every respect that matters. A company is a separate legal person with perpetual succession and limited liability, created by registration and run by a board. A firm is a relationship between partners with unlimited liability and mutual agency, created by agreement. This note compares them feature by feature, explains the consequences that flow from the central difference of legal personality, and notes where a company is the better vehicle.
The firm and the incorporated entity compared, and the trade-off between freedom and limited liability
1. The Central Difference: Legal Personality
§ Person against relationship A company is a juristic person distinct from its members: Salomon v A. Salomon & Co. Ltd., [1897] AC 22. It owns its property, contracts in its own name, sues and is sued as itself, and its members' liability is limited. A firm is not a person: it is a compendious name for the partners. It owns nothing as itself, and its partners are personally liable without limit. Everything else follows from this. Succession, liability, property, management, and the manner of ending the business all differ because one is a person and the other is not. |
2. Feature by Feature
Feature | Partnership firm | Company |
|---|---|---|
Governing law | Indian Partnership Act, 1932 | Companies Act, 2013 |
Legal personality | None: a name for the partners | A separate legal person |
Formation | By agreement; registration optional | By registration with the Registrar of Companies |
Perpetual succession | No: affected by death, retirement, insolvency | Yes: the company continues regardless of its members |
Liability of members | Unlimited, joint and several: Section 25 | Limited to the unpaid amount on shares, or by guarantee |
Property | Held by the partners for the firm: Section 14 | Owned by the company in its own name |
Management | Every partner may take part: Section 12(a) | The board of directors manages; members do not |
Agency | Every partner is an agent of the firm | A member, as such, is not an agent of the company |
Transfer of interest | Only with the consent of all: Section 31 | Shares are freely transferable in a public company |
Number of members | Two to fifty | Private: two to two hundred; public: minimum seven, no maximum |
Audit and disclosure | Private accounts; audit only if tax law requires | Statutory audit and public filing of accounts |
Ending the business | Dissolution under Sections 39 to 55 | Winding up or striking off under the Companies Act and the Insolvency and Bankruptcy Code |
3. Consequences of the Difference
§ What legal personality changes • Liability. In a company, members risk only their investment; in a firm, partners risk their personal estates. • Continuity. A company survives the death or exit of a member; a firm is reconstituted or dissolved. • Ownership. A company owns its assets; a firm's assets belong to the partners for the firm. • Management. A company acts through its board; every partner may manage a firm. • Raising capital. A company can issue shares and debentures to the public; a firm depends on its partners and lenders. • Regulation. A company faces extensive statutory compliance; a firm is lightly regulated and private. |
4. Where a Company Suits Better
i. Large or capital-intensive businesses that need to raise funds from many investors.
ii. High-risk ventures, where limited liability protects the members' personal estates.
iii. Businesses that must outlast their founders, needing perpetual succession.
iv. Where free transfer of interest is important, as in a public company.
5. Where a Firm Suits Better
i. Small and medium businesses valuing simplicity, privacy and low cost.
ii. Professional and family businesses built on mutual trust.
iii. Where the partners accept unlimited liability in exchange for control and confidentiality.
6. Frequently Asked Questions
Is a company a separate legal person and a firm not?
Yes. A company is a juristic person distinct from its members, as Salomon's case held; a firm is only a compendious name for the partners.
How does liability differ between a firm and a company?
Partners have unlimited, joint and several liability; a company's members are liable only to the extent of the unpaid amount on their shares.
Does a company have perpetual succession?
Yes. It continues regardless of changes in its members, whereas a firm is reconstituted or dissolved when a partner joins or leaves.
Who manages a company and who manages a firm?
A company is managed by its board of directors; in a firm, every partner has the right to take part in the conduct of the business.