Differences between a Company and Partnership
The special features of a joint stock company can be well understood if we compare the features of a company form of organization with that of a partnership firm. The important points of distinction between the company and partnership are given below:
Any voluntary association of persons registered as a company and formed for the purpose of any common object is called a company. But a partnership is the relation between two or more individuals who have agreed to share the profits of a business carried on by all or any of them acting for all. The partners are collectively called as a firm.
A company is regulated and controlled by the Companies Act. But a partnership firm is regulated by the Partnership Act, 1932.
A company should be compulsorily registered under the Companies Act. Its formation is very difficult. But registration of a partnership firm is not compulsory under the Partnership Act. The firm is based on the partnership deed. Its formation is very easy.
4. Legal Position
A company is a body corporate and a legal person having a corporate personality distinct from its members. The members are not liable for the acts of the company. But a partnership has no legal existence distinct from its members. Partners are liable for the acts of the firm.
5. Life Time
A company is a mere abstraction of law. So its existence is not affected by the change of membership or death or insolvency of its members. But a partnership is a mere aggregation of individuals. So the life of a partnership ends on the death or insolvency or insanity of any one partner.
The maximum liability of the shareholders, in case of a limited company, is limited to the face value of the shares purchased by them. In case of companies limited by guarantee, the liability of the shareholders will be up to the amount guaranteed by them. But in case of a partnership. the liability of the partners is unlimited. The partners are jointly and severally liable for all the debts of the partnership firm.
7. Transferability of Shares
Shares of a company are freely transferable unless restricted by the Articles. But a partner cannot transfer his share without the consent of all other partners.
A member of a company can enter into a contract with the same company. But a partner of a firm cannot enter into contract with the same partnership firm.
9. Number of Members
A private company should have a minimum of 2 members and can have a maximum of 50 members. A public company should have a minimum of 7 members and there is no maximum limit. But a partnership should have a minimum of 2 and can have a maximum of 20 persons [10 in the case of banking business].
The accounts of a company should be audited by a qualified auditor. But in the case of a partnership, the accounts need not be audited. Even though the partners decide to arrange for the audit of their firm, the auditor need not be a qualified person. The powers, duties and liabilities of an auditor of a company are regulated by the Companies Act.
But in the case of a partnership audit, the duties are governed by the provisions of the contract entered into by the partners with the auditor.
11. Implied Agency
In case of a company, a shareholder is not regarded as its agent in dealing with third parties. But in case of a partnership, a partner is an agent of the firm and of all other partners in dealing with third parties.
12. Good Faith
Since they are more in number, most of the shareholders of the company may not know each other. We cannot expect that all the shareholders are just and honest to one another. But in the case of a partnership, the partners know each other thoroughly. The partnership agreement is based on utmost good faith. So the partners are to be just and honest to one another.
The management of a company is in the hands of a group of elected representatives of the shareholders. Even this group finds it difficult to administer the day-to-day affairs of the company. It is carried on mostly by salaried people. Such people cannot be expected to take active part in the management as the owners.
But in the case of a partnership, the management is in the hands of the partners themselves. They work in absolute sincerity. They can give personal attention to the customers and thus strengthen the customer-firm relationship.
In case of companies, taking decisions on important issues requires a fairly long time. But in case of a partnership firm, quick decisions are possible.
15. Issue of Debentures
Joint stock company is the only business organization which is authorized to borrow money through the issue of debentures. A partnership firm cannot issue debentures.
The outsiders who deal with a company should be aware of the provisions of its Articles of Association. This is because, the restriction on directors affect the outsiders. But in case of a partnership, restriction on any partner does not affect the outsiders. So they need not be aware of the provisions of the partnership deed.
The companies have to file their documents, returns, reports, balance sheet, profit and loss account etc. with the Registrar. Some of them are open to public. So, there is no secrecy at all in case of companies. But in case of a partnership, the firm need not prepare and file such documents. So its secrets are not leaked out. Outsiders cannot know the in and outs of the firm.
18. Capital Formation
Even people with limited resources can become the shareholders of a big company. This tempts them to save something out of their income for future. This is a green signal for capital formation in the country. Such a capital formation is not possible in the case of a partnership.
A company, being a creature of law, can only be dissolved as laid down by law. A partnership firm, on the other hand, is the result of an agreement and can be dissolved at any time by agreement.