Advantages of Partnership Firm Compared to Pvt Ltd Company
What are the Advantages of a Partnership Compared to a Private Limited Company?
Introduction
Choosing the right business structure affects daily operations, costs, and growth. A partnership firm offers simplicity and flexibility, often better suited than a private limited company for many small and medium-sized businesses in India.
Summary
Easy formation with minimal paperwork.
Lower compliance costs versus private limited company.
Tax benefits under presumptive taxation schemes.
Full control without formal board requirements.
Low maintenance expenses.
High privacy; no public financial filings.
What is a Partnership Firm?
A partnership firm involves two or more individuals sharing profits and losses. The arrangement is defined by a partnership deed. It is not a separate legal entity; partners bear unlimited personal liability. Formation is governed by the Indian Partnership Act, 1932. Registration is optional but gives legal standing.
How is a Partnership Different from a Private Limited Company?
Feature
Partnership
Private Limited Company
Legal Status
No separate legal identity; the firm and partners are legally the same entity.
Has a distinct legal identity under the Companies Act, 2013, separate from its shareholders.
Liability
Partners have unlimited personal liability; personal assets may be at risk.
Liability is limited to the unpaid amount on shares held by shareholders.
Formation
Formed by executing a simple partnership deed; registration is optional.
Requires MCA registration, DIN for directors, and DSC for digital filings.
Compliance
Minimal compliance; no ROC filings, board meetings, or audit (unless applicable).
High compliance; annual returns, board resolutions, audits, and ROC filings are mandatory.
Taxation
Firm is taxed at a flat rate; partners are not taxed on profit distribution.
Subject to corporate tax; additional tax on dividend distribution to shareholders.
Profit Sharing
Flexible, as agreed in the partnership deed, regardless of capital input.
Based strictly on shareholding percentage.
Privacy
Financials are not filed publicly; high confidentiality is maintained.
Financial statements and other details are filed with MCA and accessible to the public.
What are the Advantages of a Partnership compared to Private Limited Company?
Simple Setup Process: A partnership can be formed with just a partnership deed and PAN. There’s no need to apply for Director Identification Numbers (DIN), Digital Signature Certificates (DSC), or register with the Ministry of Corporate Affairs, which makes the process quicker and easier.
Lower Registration and Operating Costs: Starting and running a partnership is more affordable. There are no government filing fees, professional charges, or hidden costs that typically apply in a private limited company setup.
Fewer Compliance Requirements: Partnership firms are not required to conduct annual board meetings, file returns with the Registrar of Companies (ROC), or maintain complex statutory records. Only income tax returns and GST returns (if applicable) need to be filed.
Tax Benefits for Small Businesses: Under Section 44AD (for businesses) and Section 44ADA (for professionals), partnerships can declare income on a presumptive basis, reducing tax calculation complexities. Also, profits shared among partners are tax-free in their hands, unlike companies where dividends are taxed.
Greater Flexibility in Management: Partners have full control and can make decisions without waiting for formal board or shareholder approvals. This results in faster execution and daily involvement in business operations.
Profit-Sharing as Per Agreement: In a partnership, the profit-sharing ratio can be customized based on mutual understanding, not necessarily linked to capital contribution. This flexibility is not possible in companies where profit is shared according to shareholding.
Higher Level of Confidentiality: A partnership firm’s financials and internal decisions do not need to be disclosed publicly, unlike a private limited company whose records are available on the MCA portal. This ensures greater privacy in business affairs.
Easier Exit and Reconstitution: If a partner wants to leave or a new partner is to be added, it can be done easily by modifying the partnership deed. In companies, such changes require ROC filings and resolutions.
Direct Relationship and Trust-Based Structure: Partnerships are often built on personal relationships and trust, making them ideal for family businesses or small professional groups where partners are actively involved in operations.
Suitable for Professionals and Service Providers: Lawyers, consultants, architects, and other professionals prefer partnerships due to the ease of setup and control, especially when external investments are not required.
Why Choose a Partnership over Private Limited Company?
Simple Formation: Only a partnership deed and PAN are needed to start the business, with no requirement for MCA registration.
Low Compliance Requirements: No annual filings with the Registrar of Companies (ROC), no board meetings, and limited audit obligations.
Cost-Effective Structure: Lower registration and maintenance costs compared to a private limited company.
Flexible Decision-Making: Partners can take decisions quickly without formal approvals or resolutions.
Favorable Tax Treatment: Eligible for presumptive taxation under Sections 44AD and 44ADA, with no tax on shared profits.
Confidentiality Maintained: Financial records and internal matters are not disclosed publicly.
Customizable Profit Sharing: Profit ratios can be agreed upon mutually, regardless of capital contribution.
Easier to Exit or Modify: A partner can exit or join with mutual consent, and changes can be made easily in the deed.
Direct Involvement in Business: Encourages active participation by all partners, especially suitable for professionals and family-run businesses.
Best for Small to Mid-Sized Enterprises: Ideal for businesses not seeking external investors or a corporate structure.
Real-life Example
A local interior design duo opts for partnership. They benefit from presumptive taxation under Section 44ADA (₹75 lakh limit), maintain simple records, and make fast decisions without board layers. Their focus remains on clients and growth.
Conclusion
A partnership firm offers practical benefits for small ventures: low cost, legal simplicity, tax efficiency, and flexibility, unlike a private limited company. It suits businesses not seeking external funding or corporate branding. For entrepreneurs looking to keep governance straightforward and growth-focused, a partnership is an ideal choice.
Ishita Ramani is a young woman entrepreneur and currently the Operations Director at Ebizfiling India Private Limited. In her entire career so far, she has led a team of 50+ professionals like CA, CS, MBAs and retired bankers. Apart from her individual experience on almost every facet of Indian Statutory Compliances, she has been instrumental in setting up operations at Ebizfiling.com! Read about her journey at- https://www.greatcompanies.in/post/ishita-ramani-operation-director-at-ebizfiling-india-pvt-ltd
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