Partnership firm or private limited company – which one is better to start with

If you have more than two persons to start an organization then you can select either of the two form of business i.e. partnership firm or private limited company.

If you are alone and do not have any one to join in then go for sole proprietorship business which does not require any registration to start.

With more than one person, you can go for either of the two. To get started let us understand both types of businesses and their requirements.

Also read: How to start a proprietorship business in India

Partnership Firm

Partnership firm or private limited company – which one is better to start withPartnership business can be started with more than one individual and can go up to 200 persons as partner.

There is no restriction on number of partners but as per companies act, if you are having more than 200 partners then company registration is a must.

To start with you are not required to have any paid up capital. However, whatever has been invested by partners that have to be present in partnership deed.

Partnership firm can be registered with the registrar of firms. Even without registration you can run your partnership firm with the partnership deed. However such business will not have any legal existence in India.

Under partnership firm, partner’s liability will be unlimited. It means each partner will be liable for the partnership liability and their personal assets can be taken out in discharging such liability.

Partners have to manage their management and with the help of partnership deed they can define their own limitations of work. However, in a general partnership business all partners use to manage the business instead of handing over it to someone else.

Partnership firms are not required to be audited under partnership act 1932.

However, if the profession or business turnover exceeds Rupees.25 lakhs or Rupees or Rs 1 crore respectively then income tax audits under section 44AB has to be done every year before 30th September.

If your income or turnover is in excess of Rupees. 1, 20,000 or Rupees.10, 00,000 respectively then you have to compulsorily maintain your books of accounts as required under income tax act even though it’s not required to be audited. If you are running a professional firm then such limit will come down. For details read our article on section 44AA.

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Private Limited Company

Partnership firm or private limited company – which one is better to start withCompare to partnership firm you can also start a private limited company with minimum number of subscriber or shareholder as 2 and can go up to 200.

Private limited company can be started without any share capital as the requirement of minimum paid up share capital of Rs. 1, 00,000 has been withdrawn with effect from 5th june 2015.

To start a private limited company, you need to get it registered with ministry of corporate affairs of India.

After getting the certificate of incorporation you can start your company. It will have legal existence and will be separate from its directors and shareholders.

Unlike in the case of partnership, company will only be liable for its liability. The shareholder’s and directors personal assets will not be touched while discharging company’s liability.

Shareholders of the company can appoint board of directors and ask them to run the company. In case they want to run it on their own then they can do so.

Companies have to compulsorily carry out annual audit as per companies act and in addition to that if their turnover exceeds Rs. 1 crore per annum then they also required to submit tax audit report of their books of accounts.

Distribution of profit for a partnership business and private limited company will be same as it depends on the capital that each partner or shareholder has invested in.

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Which one is better – Partnership Firm or Private Limited Company

Partnership firm or private limited company – which one is better to start withTo be honest, it all depends on your requirements. If you are looking for a long term prospect then we will suggest you to go for private limited company.

However, if you have started recently then go with partnership firm and when your business starts picking up, you can register it as a private limited company.

Let me explain you the reason for it.

Private limited company registration will cost you a lot compare to a partnership firm and it will go up based on your authorized capital that is mentioned while registering with MCA.

With the high cost you are also required to get into statutory compliance like yearly filling of balance sheet, profit and loss account and other statutory documents with MCA.

Every year you have to get your accounts audited from a charted accountant irrespective of your turnover who will also charge his/her fee for audit. If you can take out this much cost and compliance then go for a private limited company otherwise partnership firm is a better choice to start with.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.