Both company and partnership are associations of persons but the two differ in the following respects.
1. Formation and registration:
A company is created by law while partnership is the result of an agreement between the partners. In the formation of partnership no legal formalities are involved and registration of the firm is not compulsory.
A company can be formed only after fulfilling legal formalities and its incorporation under the Act is essential.
2. Number of members:
The minimum number of partners in a partnership firm is two and the maximum is 10 in banking business and 20 in other businesses.
In a private company, the minimum number of members is 2 and the maximum is 50. In a public company minimum number of members is 7 and there is no maximum limit prescribed by law.
3. Legal status:
A company has a separate legal entity independent of its members but a partnership firm has no separate legal entity different from its partners. Partners and the firm are one and the same in the eyes of law.
Property of a partnership firm is the joint property of partners. In a company members are not joint owners of its property.
4. Liabilities of members:
In a joint stock company, the liability of every member is usually limited to the unpaid money on the shares held or the amount of guarantee given by him. But in partnership, partners are jointly and severally liable to an unlimited extent.
5. Transferability of interest:
Shares of a public company are freely transferable but in a private company there are restrictions on the transfer of shares. A partner cannot transfer his interest in the firm to an outsider without the unanimous consent of all the partners.
Any person can become a member of a company by purchasing its shares but a new partner can be admitted only with the mutual consent of all the partners.
6. Statutory Control:
A company has to comply with several legal requirements and it must submit reports to the Government. On the other hand, there is no statutory regulation on day-do- day working of a partnership.
A company cannot change its objects and powers without complying with statutory requirements.
7. Change of objects:
The objects and powers of a company as laid down in its Memorandum of Association can be altered only by fulfilling legal formalities laid down in the Companies Act, 1956.
On the contrary, the objects of a partnership can be altered with the unanimous consent of all the partners without any legal formality.
In a partnership, all the partners can take active part in the management of the firm. But in a company, every member does not participate actively in the day-do-day management.
The company is managed by a Board of Directors consisting of elected representatives/ nominees of the members. There is divorce between ownership and management of a company but there is no such divorce in a partnership.
A company enjoys perpetual life or existence which is not affected by the retirement, death, insolvency, etc., of its members. The life of a partnership is uncertain and comes to an end with the retirement, insanity and death of a partner.
10. Majority rule:
In a company, all policy decisions are taken on the basis of majority opinion in a meeting of the Board of Directors or of the general body of shareholders. But in partnership all policy matters are decided through the unanimous consent of all the partners.
11. Accounts and audit:
A company must maintain its accounts in the prescribed form and must get them audited by a qualified auditor. Accounts and audit are not obligatory for a partnership unless the total sales turnover or gross receipts in a year exceed Rs 10 lakhs in case of professionals and Rs. 40 lakhs in other cases.
12. Implied agency:
In a partnership every partner is an implied agent of the other partners and of the firm as a whole. But no member of a company is an implied agent of other members or of the company.
13. Common seal:
In a partnership one or more partners are authorised to sign documents on behalf of the firm. In a company, on the other hand, the common seal is affixed on documents as official signatures. Two directors of the company sign the documents after the common seal is affixed.
14. Minimum paid up capital:
Law has prescribed no minimum paid up capital for a partnership firm. But a private company must have a minimum paid up capital of Rs. 1 lakh or such higher paid up capital as may be prescribed.
A public company must have a minimum paid up capital of Rs. 5 lakhs or such higher paid up capital as may be prescribed.
15. Distribution of profits:
In a partnership firm profits are distributed among the partners as per the partnership deed. In a company members get a share in profits only when dividends are declared by the Board of Directors and approved by the members.
16. Winding up:
A partnership can be dissolved at any time without any legal formalities. But several legal formalities have to be complied with for the winding up of a company.
17. Regulating statute:
A partnership is regulated under the partnership Act 1932. The Companies Act 1956 governs the establishment and functioning of a joint stock company.
State the Merits of a Company
The company form of organisation provides the following advantages:
1. Large capital resources:
A joint stock company has widespread appeal to investors of all types. Its capital is divided into shares of small value so that people with limited means can also buy them.
A public company can have unlimited number of members and sell shares to them. The credit-standing of a company is also high.
Different types of securities can be issued to mobilise funds from different kinds of investors. Therefore, a company can accumulate huge amount of capital for large-scale enterprises.
2. Limited liability:
The liability of a member of a company is limited to the face value of shares held by him. His personal property cannot be attached even if the company is unable to meet its creditors’ claims.
The risk is known and restricted. The principle of limited liability also encourages people to invest money in a company. The risk of loss is diffused among a large number of persons.
3. Continuity of existence:
A joint stock company enjoys uninterrupted existence over a long period of time. As a company has a separate legal entity, death or insolvency of its members does not threaten its existence. Ownership of a company may change without affecting the continuity of operations.
4. Efficient management:
A company can employ highly qualified experts in different areas of business management. Employment of professional managers helps in improving the efficiency of business transactions.
The combined judgment and experience of several directors facilitate balanced and rational decisions having more than one manger results in specialisation and division of labour. Centralised management permits unity of action and continuity of policy.
5. Transferability of shares:
The shares of a public company are listed on the stock exchange so that a member can easily sell his shares. He is not bound to keep them for life. Such liquidity of investment stimulates investment in industrial and commercial companies.
6. Economies of scale:
The company form of business organisation provides tremendous scope for growth and expansion. Large capital and professional management facilitate large-scale operations. Therefore, a company can fully secure the advantages of large scale in production, marketing, finance and other area of business.
7. Democratic management:
The membership of a public company is large and its ownership is generally diffused. Management is vested in a board of directors elected by the members.
Directors are responsible and accountable to the general body of members. The Companies Act has laid down several restrictions on the powers of the directors.
This prevents oppression and mismanagement in a company and ensures that it is managed on democratic principles.
A company enjoys a good reputation and prestige in the business world. A company’s activities are subject to scrutiny by auditors and the Government. Its accounts are published and they are public documents. Therefore, a company enjoys public confidence.
9. Social advantages:
The company form of organisation mobilizes scattered savings of the community and channelizes them into productive uses. It thereby facilitates savings and capital formation.
A company offers employment to a large number of persons. It helps in the wider distribution of ownership of shares. Company organisation also facilitates the growth of stock markets, financial institutions and professional managers.
State the Demerits of a Company
A joint stock company suffers from the following weaknesses:
1. Legal formalities:
Formation of a company is a time-consuming and expensive process. Too many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business the momentum of an early start.
2. Lack of motivation:
The directors and other officers of a company have little personal involvement in the efficient management of a company divorce between ownership and control and absence of a direct link between effort and reward lead to lack of personal interest and incentive.
It is difficult to keep personal touch with customers and employees. As a result, efficiency of business operations may be reduced.
3. Delay in decisions:
Red tape and bureaucracy do not permit quick decisions and prompt action. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility.
There is lack of flexibility of operations in a company because objects can be changed only after altering the company’s Memorandum of Association.
4. Economic oligarchy:
The management of a company is supposed to be carried on according to the collective will of its members. But in practice, there is rule by a few (oligarchy). Often directors try to mislead the members and manipulate voting power to maintain and perpetuate their control.
The shareholders become mere pawns in the game of a small clique or coterie of directors. Shareholders are often ignorant and indifferent about the working of a company.
Therefore, they fail to exercise their voice in the functioning of the company. Majority group may oppress and exploit the minority shareholders.
5. Corrupt management:
In a company, there is often danger of fraud and misuse of property by dishonest management. Bogus companies may be formed to deprive the investors of their hard-earned money.
Clever and dishonest promoters and directors may exploit the small and ignorant investors for their personal gain. Companies may fall in the hands of incompetent and irresponsible persons who may utilise the company’s property for their selfish interests.
6. Excessive government control:
At every stage in the management of a company, there are legal rules and regulations. Several legal provisions have to be followed and reports have to be filed.
Such legal interference in day-do-day operations results in lack of secrecy. A lot of time and money are spent in complying with statutory requirements. Flexibility of operations is reduced.
7. Unhealthy speculation:
The shares of a public company are dealt in on a stock exchange. The prices of these shares fluctuate depending upon the financial health, dividend, future prospectus and reputation of the company.
Directors may manipulate annual accounts to make illegal gains through speculation in the company’s shares. A few individuals may corner the shares to gain control over the company.
Violent fluctuations in share prices caused by unhealthy speculation reduce investors’ confidence and lead to a financial crisis.
When the directors misuse inner information for speculative purpose, the shareholders of the company suffer. Reckless speculation also affects the goodwill of the company.
8. Conflict of interests:
There is a possibility of conflicts between various groups, e.g., shareholders, debenture holder, directors, etc. Such conflicts reduce employee morale and efficiency of operations.
9. Social evils:
Company form of organisation may give rise to growth of private monopoly and concentration of wealth in a few hands. Big companies may use their economic power to influence politicians and Government officials leading to corruption in public life.