There has always been a slight confusion in the minds of first time entrepreneurs on the distinction between a proprietorship firm, a partnership firm and a company.  Invariably, most entrepreneurs who have established their business as proprietorship concerns or partnership firms refer their entity as companies. They are not clear why they want a Company or which is the form of business structure best suited to them.  Sometimes it can be because they want to participate in some tender and the tender requires only private companies to participate.  But before jumping to form a Company, businessmen need to really think whether they need a registered company and are they ready to go through all the compliances related to a company which are perpetual in nature unlike other forms of business.

Below is an attempt to provide basic clarity on the forms of business organizations. 

Proprietorship Firm 

A proprietorship firm is not an incorporated entity and is not governed by any statute or regulations. As the name suggests a single owner runs a particular business on his terms only subject to taxation laws, regulatory registrations relating to the nature of business and compliances relating to the business. Being an unincorporated entity under an individual ownership a proprietorship firm is free to do any business. In fact various business can be undertaken by a single  proprietorship firm without  reference to any charter documents without reference to geographic restrictions, business restrictions, documentation restrictions, etc. Liquidation of a proprietorship firm is effected on the decision of the proprietor/owner of the business. 

Partnership Firm 

A partnership firm is also not an incorporated entity but comes into existence by means of a Partnership Deed which Deed may or may not be registered with the Registrar of Firms. As the name implies a partnership firm can be constituted with two or more people and a single person cannot constitute a partnership firm. All partnership firms are governed by the Indian Partnership Act 1932. In the event of certain provisions not being provided under the Partnership Deed, regulations of the Act would be deemed as applicable. Profits and losses of a partnership firm are dealt with as per the Partnership Deed and as agreed to amongst the partners. Each of the partners is exposed to unlimited liability vis-a-vis the debts of the firm jointly and severally.. A partnership firm can be wound up at the discretion of the partners and as agreed to amongst the partners. 

Company 

An incorporated entity comes into existence as a company under the Companies Act, 1956 only on registration with the Registrar of Companies in terms of the Act. All the companies are bound by and governed by the provisions of the Companies Act, 1956 and on incorporation becomes an independent legal entity created by law and distinct from its shareholders/directors. A company is a perpetual entity (which means it survives even if the shareholders change) and is free to do any business as authorized by its charter documents being the Memorandum of Association of the company. The shareholders and directors of a Company are under an obligation to carry on business and act within the parameters of the Memorandum of Association and Articles of Association of the Company as drafted and registered with the Registrar of Companies. The companies incorporated under the Companies Act, 1956 are subject to various legal and statutory compliances as required under the Act. The companies can be either private limited company or public limited company. A private limited company can have a maximum of only fifty shareholders and a public limited company can have any number of shareholders. 

Shareholders of a company establish their link with the company through shares issued and allotted by them by the company. However, no shareholder is entitled to any assets of the company nor can make any claim on the property of the company so long as the company is a going concern. All property is owned in the name of the company and not in the personal names of the directors or  shareholders. 

Profits are shared amongst the shareholders in the form of dividend and not as a percentage of the revenue which most people mistake to be.  We often hear first time entrepreneurs saying…”I hold 25% stake in the company and I will get 25% out of this project….or we will share the revenue in the proportion of our investment”. 

For best business options and implementation of the same, contact Lex Valorem India Pvt. Ltd. 405, 7th Cross, IV Block, Koramangala, Bangalore – 560 034, Ph : 080 – 25534374, Mobile : +91 9980533405,E-mail : This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

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