Conceptual and Legal Nature
A partnership firm is governed by the Indian Partnership Act, 1932, and is based on a contractual relationship between two or more persons who agree to share profits of a business carried on by all or any of them acting for all. The firm has no separate legal personality distinct from its partners, which means the firm and partners are treated as the same legal entity. In contrast, a company is governed by the Companies Act, 2013 and comes into existence through registration under Section 7 of the Act. A company enjoys a separate legal personality, meaning it is an artificial person distinct from its members. This fundamental difference affects ownership, liability, continuity, and legal capacity. While a partnership relies heavily on mutual trust and agency, a company operates through statutory rules, formal management, and regulated corporate governance, making it more suitable for large-scale business operations.
Liability, Management, and Continuity
In a partnership firm, the liability of partners is unlimited and joint, as provided under Section 25 of the Indian Partnership Act, 1932. This means personal assets of partners can be used to discharge business debts. Management is usually carried out directly by partners, and decisions depend on mutual consent. A company, however, provides limited liability to its members under Section 2(22) of the Companies Act, 2013, restricting liability to unpaid share capital or guarantee amount. Management in a company is vested in a Board of Directors, ensuring separation between ownership and management. Moreover, a partnership firm lacks perpetual succession, as death, insolvency, or retirement of a partner may dissolve the firm. A company enjoys perpetual succession, continuing regardless of changes in membership.
Transferability, Compliance, and Growth Scope
The transfer of interest in a partnership firm is restricted and requires consent of all partners under Section 29 of the Indian Partnership Act, 1932. This limits flexibility and expansion. In contrast, shares of a company—especially a public company—are freely transferable under Section 44 of the Companies Act, 2013, facilitating capital mobilization. Compliance requirements for partnerships are minimal, making them easier and cheaper to operate, but this also limits credibility and access to large funding. Companies face stricter statutory compliances such as audits, filings, and disclosures, but these enhance transparency, investor confidence, and scalability. Hence, partnerships suit small businesses, while companies are preferred for long-term growth and investment.
Real-Time Example
Consider two friends starting a small retail shop as a partnership firm. They invest personal funds, manage daily operations themselves, and share profits equally. If the business incurs losses or debt, creditors can claim against their personal assets. Now compare this with a company like a startup registered under the Companies Act, 2013. Even if the startup fails, shareholders’ liability is limited to their investment. For example, many Indian startups choose company registration to attract investors, issue shares, and ensure continuity even when founders exit. This real-life distinction highlights why growing businesses often convert partnerships into companies.
Mnemonic to Remember the Difference
Use the mnemonic “PLUM-C” to remember key differences:
P – Partnership has Personal liability
L – Limited liability in Company
U – Unlimited liability in partnership
M – Management by partners vs Board
C – Company has Corporate personality
This mnemonic helps quickly recall exam-oriented distinctions related to liability, management, and legal status.
About Lawgnan
If you are an OU LLB student or preparing for judiciary and company law exams, clear and structured notes make all the difference. Visit lawgnan.in for exam-focused explanations, real-time illustrations, mnemonics, and section-wise clarity on Company Law topics. Our content is designed to help you write precise answers, understand legal concepts deeply, and revise efficiently before exams. Click the link now and strengthen your Company Law preparation with reliable, student-friendly resources.
