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Partnership vs. Private Company
When a sole-proprietary business expands and faces the problems of finance, liability, management, control, taxation, etc., the owner may think of entering into partnership with other entrepreneurs or may consider, converting it into a private company.


Postini Alternative

These two alternatives my be compared on the factors:

1. Re-organisation.
From this point of view, a partnership will have a relative advantage over a private company is so far as it does not call for the compliance of all those legal formalities which are required for the incorporation of a company.

2. Financial Resources. Both partnership and private company seem to be equally matched from the points of view of raising the amount required by a medium scale business. Thought the maximum number of members permitted for a private company (fifty) is larger than that permitted for a partnership (twenty), in actual practice, the number of members even in the case of a private company is usually round twenty. However, for raising additional resource from the money market, a partnership may enjoy netter goodwill and credit worthiness than a private company by value of the fact that the partner's liability is joint and several and unlimited.

3. Liability.
Partnership may be a better choice if the scale of business is not large and the business is of a character. If, however, the business of a speculative nature and the demand for its products or services is erratic, the limited liability of members will be a strong point in favour of private company organisation.

4. Control. In a partnership, the original owner has the share to control of the firm's affairs with the other partners each of whom has the right to participate in management directly. In case of a private limited company, the original owner of the business may be able to retain effective control over business by getting himself appointed as the managing director of the company. This can be achieved under a partnership only when the owner takes only sleeping or nominal partners and keeps the control to himself.

5. Management. In a partnership, every partner has a voice in the management of the business of the firm. If, therefore, the number of partners is large an they do not have enough understanding among themselves, the efficiency of management may suffer. Also, since the owners are also the manager, the firm may not undertake activities involving risk with the result that the business may not expand much. On the other hand, in a private limited company, the elected directors are responsible for management and, therefore, decisions can be taken more quickly and boldly then in a partnership.

6. Continuity. Theoretically at leas, a partnership is less stable than a private company organisation. But there is a bright side too. If the partners of a firm find some of the fellow partner troublesome and un-co-operative, they can easily dissolve the partnership and re-establishes the firm. However, the winding up of private company will be comparatively costlier n more difficult.

7. Secracy. In this respect, there is no much difference between a private company and a partnership except that the company will have to file its audited accounts with the Registrar. The audit requirement does not apply to a partnership.

8. State Regulation. A partnership has a clear edge over a private company on this point. In spite of a host of privileges and exemptions enjoyed by a private company under the Companies Act, it is open to considerably greater degree of State regulation and control than a partnership. According to tax consultants the cost of compliance with the provisions of company law and audit costs are quite heavy an have shown an upward trend over the years. Government regulation is normal in case of partnership firm.

9. Tax Liability. For a medium-scale operation, the tax liability works out higher for a private company than for a partnership firm. A non-manufacturing private company has to pay tax at a flat rate of 65 percent on its income net of salaries. The shareholders and directors will pay tax on their incomes separately. Since a Partnership ha to pay income tax on slabs of income, the tax liability in its case if generally lower for medium or small scale operation. According to the calculations of tax consultant, in 1972-72, in case of small partnership business (with two partners) where the estimated income is Rs. 10,000 the personal tax is nil while in case of a private company, it will mean a tax of Rs. 3,250 even if Rs. 5,000 as salary and allowances may have been allowed to the Managing Director. Taxation-wise, it is advisable to have a private limited company where profits are below Rs. 1 lakh each partner or individual. It is only in case of high bracketed income groups that the benefit of lower taxes in companies is available.

10. Legal costs.
In case of a private limited company, the cost of complying with requirements of law is often considerable. Even in winding up, legal expenses have to he incurred. On the other hand, there is no cost complying with the law bearing on partnerships or for dissolving a partnership firm.

A private limited company with limited membership is generally set up for the medium-scale business. In some case, it is the alternative chosen by a sole-proprietor to a partnership. This happens more often in case where business risks increase due to expansion or diversification or the income of the firm reaches a point where it will be more advantage to be assessed at a flat rat of tax as a private company then to pay tax on slab basis as a partnership firm. When, however, a private company finds its business expanding or hit upon a valuable large-scale project for succeeds in obtaining a manufacturing license for increasing capacity or setting up a large-scale business, it has to weigh between the existing pattern and the possibility of converting the private company into a public company. This decision will be facilitated by a consideration of the following factors.

1. Re-organisation. A private company can commence business right after incorporation whereas public company must raise the minimum subscription before commencing business. A change-over from the private company status to public company can be made by amending its Articles in respect to membership, offer o f shares to the public and transferability of shares. Issue of prospectus and organising the sale of its shares will, of course, entail legal formalities an additional cost for entrepreneurs.

2. Financial Resources. A private company will have relatively limited financial resources because of limit on the number of members. Its borrowing strength may be handicapped any limited liability. A public company has the opportunity of raising any amount of money from the public depending upon the attractiveness of its proposition and the reputation an name of its promoters and underwriters. Additional funds can also be raised from the public by issue of debentures an loans can easily be procured by a public company from the special industrial finance institutions like the Industrial Finance Corporation the Industrial Credit rand Investment Corporation and Industrial Development Bank of India, etc.

3. Control. A private company is a closely controlled company in the sense that it provides opportunity for the original entrepreneurs to retain effective control of business affairs as the managing director or manger. In case of conversion into a public company, control many have to be shared with other investors. Since investing institutions like the LIC, the IFC, IDB, etc., are now empowered to convert their loans into equity shares in pubic companies, the control may easily pass into the hands of any of these.

4. Management. The management of both private and public companies in entrusted to elected directors constituting the Board Directors. However, the Board consists of the entrepreneur and his close associates (sometimes it may consist of the original entrepreneur and his close relatives who may act as his dummies) in case of a private company. In a public company, the Bord will be elected by the holders of majority of shares present in a person or through proxies at the Annual General Meeting. The management of the private company may, thus, vest in entrepreneur-management whereas the management of a public company may be with professional managers and some people not directly involved in the affair of the company (outside directors).

5 Secrecy. As a closely held company, a private company enjoys a good deal of secrecy an exclusiveness in the conduct of its affairs. A public company has to report it s working and financial results and position to the general body of share-holders. This makes it difficult for a public company to maintain secrecy about its affairs.

6. Government Regulation. As a close association of persons who wish to conduct business with the assurance of limited liability,a private company is left relatively free to conduct its affairs without much government interference or regulation. A public company being a business institution representing winder pubic interest has to submit to a number of regulatory provisions affecting its management. Apart from the fact this limits the freedom of those controlling and managing the company, it is cumbersome and costly to comply with the numerous previous of company law.

Related Articles
Organs Of Company Management
Partnership vs. Private Company
Employment of Manager vs. Partnership
Problems of Expansions
The Initial Choice
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