Characteristics of Private Limited Company

Difference Between Company and Partnership Firm

A company and partnership difference is rooted in their legal definitions and formation processes. A company is an incorporated entity under the Companies Act, 2013, with shareholders owning the business. Conversely, a partnership firm is an unincorporated association of individuals governed by the Indian Partnership Act, 1932, where partners collectively own and manage the business.

Here's a table highlighting the main differences:

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Understanding a Company

Definition of Company

A company is a distinct legal entity formed by an association of people to carry on a business. The Indian Companies Act of 2013, Section 2(20), defines "company" as "a company incorporated under the Companies Act 2013 or any previous company law." Companies can be public or private, with private limited companies having 2-200 members and public companies having at least 7 members with no upper limit.

Types of Company

Here are the types of companies:

1. Private limited company: A privately held company with 2-200 members, where the transfer of shares is restricted.
2. Public limited company: A company that can invite the public to subscribe to its shares, with a minimum of 7 members and no upper limit.
3. One Person Company: A company with only one member.

Characteristics of a Company

• Separate legal entity
• Limited liability for members
• Perpetual succession
• Transferable shares
• Managed by Board of Directors
• Stringent compliance requirements

Company registration involves a formal process, including filing Memorandum and Articles of Association, obtaining DIN for directors, and submitting requisite documents to the Registrar of Companies.

Understanding a Partnership Firm

A partnership firm is a business structure where two or more partners come together to run a business collectively. The partners share the profits and bear the losses of the business in the agreed proportion.

Definition of Partnership Firm

A partnership firm is a business structure formed by an association of two or more people who agree to share business profits. The Indian Partnership Act of 1932, Section 4, defines Partnership as "The relation between persons who have agreed to share profits of business carried on by all or any of them acting for all."

Partnerships can be general partnerships where all partners have unlimited liability, or limited liability partnerships (LLPs) with both general and limited partners. The key differences between a company and partnership relate to legal structure, liability, management, ownership transfer, regulatory compliance, and taxation.

Characteristics of a Partnership Firm

• Formed by an agreement between partners
• No separate legal entity from partners
• Unlimited liability for partners
• Profit sharing as per partnership deed
• Jointly managed by partners
• Fewer compliance requirements compared to companies
• Ideal for small and medium-sized businesses

Similarities Between Company and Partnership Firm

Despite their difference between company and partnership firm, they share some common characteristics:

• Formed for carrying on a business
• Require registration with relevant authorities
• Aim to earn profits
• Governed by specific laws and regulations
• Require maintenance of books of accounts
• Can sue and be sued in their own name

Which One Should You Choose?

Choosing between a company and a partnership depends on business goals, liability, taxation, and compliance requirements. Below are hypothetical examples to help you decide.

1. Business Size & Growth Potential

• Choose a Company: If you plan to scale your business, attract investors, or raise capital, a company structure is ideal.
  
  • Example: Raj and Meera start an AI-based edtech startup. They plan to raise funds from investors and expand globally. To do this, they register as a private limited company and issue shares to investors.
• Choose a Partnership: If you prefer a small-scale business with direct decision-making, a partnership is a better choice.
  
  • Example: Aarav and Kunal start a custom furniture workshop in their city. Since they don’t need external funding and want to split profits equally, they form a partnership firm.

2. Liability Protection

• Company: Offers limited liability, meaning the owners’ personal assets are protected in case of losses.
  
  • Example: Neha runs an organic skincare brand. A customer files a lawsuit over an allergic reaction. Since Neha's business is a registered company, her personal assets remain safe, and only the company’s assets are at risk.
• Partnership: In a general partnership, partners have unlimited liability, meaning personal assets can be used to settle business debts.
  
  • Example: Vikram and Ramesh own a small event management business. They take a loan for an event but incur heavy losses. As a partnership, both partners are personally responsible for repaying the loan, even if it means selling personal assets.

Note: In a Limited Liability Partnership (LLP), personal liability is restricted.

3. Taxation Structure

• Company: Pays corporate tax, and profits distributed as dividends may be taxed separately.
  
  • Example: An IT consulting firm is structured as a private limited company. While it pays corporate tax, its owners benefit from lower tax rates on dividends compared to individual income tax.
• Partnership: Profits are taxed at the individual level, often leading to lower overall tax liability.
  
  • Example: A local bakery run by two partners is taxed based on individual earnings, avoiding corporate tax obligations and reducing overall tax liability.

4. Compliance & Legal Requirements

• Company: Requires mandatory registration, regular filings, audits, and compliance with corporate laws.
  
  • Example: A group of engineers launches a renewable energy startup. Since they have multiple stakeholders and need regulatory approvals, they register as a company, ensuring compliance with industry standards.
• Partnership: Has minimal legal requirements, making it easier and cost-effective to manage.
  
  • Example: A duo running a content writing agency operates as a partnership to avoid the hassle of extensive compliance, annual filings, and statutory audits.

5. Business Continuity & Stability

• Company: Has a separate legal identity, meaning the business continues even if owners change.
  
  • Example: A software firm registered as a company continues operations after one founder exits by transferring shares to a new investor.
• Partnership: Typically dissolves if a partner exits unless an agreement states otherwise.
  
  • Example: A law firm operating as a partnership dissolves after one partner retires, requiring a new agreement to continue operations.

In conclusion, understanding the difference between partnership and company is crucial for entrepreneurs when deciding on the most suitable business structure. While a Sole Proprietorship offers simplicity and control, a partnership firm enables collaboration and shared responsibility. On the other hand, a company, particularly a private limited company, provides limited liability and greater scalability. Consider factors such as liability, management, compliance, and growth prospects when choosing between a partnership vs company. Seek professional advice to make an informed decision aligned with your business objectives and risk appetite.

Frequently Asked Questions:

What is meant by Addition of Partner?

The addition of a partner involves introducing a new member into an existing partnership firm. This decision requires the unanimous consent of all current partners unless the partnership agreement stipulates otherwise. The incoming partner must possess the legal capacity to enter into a contract, as outlined in the Indian Contract Act, 1872. New partners bring specialised skills and industry expertise, enhancing operational efficiency. Their networks open doors to new business opportunities and markets. Overall, this flexibility enables firms to bring in fresh capital, skills, and expertise to support growth and expansion.

Process Of Addition Of Partners

The process of introducing a new partner involves several key steps:

1. Agreement on terms and conditions: The existing and incoming partners must mutually agree on aspects such as profit sharing ratio, capital contribution, roles and responsibilities.
   
2. Execution of deed of admission: A supplementary agreement containing the terms of admission should be drafted and signed by all partners, including the new entrant.
   
3. Capital contribution: The incoming partner must bring in the agreed capital.
   
4. Intimation to Registrar: Form 3 along with the prescribed fee should be filed with the Registrar within 30 days of the change.
   
5. Notification to stakeholders: The firm must inform its bank, tax authorities, and vendors/suppliers about the new partner's admission.
   

Documents Requirement For Addition of Partners

The following documents are typically required for the addition of a partner:

• A Digital Signature Certificate (DSC) is necessary for e-filing with the Registrar of Companies (ROC).
  
• Form 3 must be filed to update the LLP agreement, reflecting the new partner’s inclusion.
  
• Form 4 is used to notify the ROC about the appointment and obtain the partner’s consent.
  
• A Limited Liability Partnership Identification Number (LLPIN) is essential for all filings.
  These documents ensure the smooth onboarding of a new partner while maintaining regulatory compliance under the LLP Act, 2008. of Admission/Supplementary Partnership Deed
  

Advantages Of Adding Partners in Partnership Firms

The introduction of a new partner offers several benefits to a partnership firm:

• Capital infusion to support business growth and expansion
  
• Fresh expertise and skills to enhance the firm's capabilities
  
• Shared responsibilities and decision-making
  
• Potential for increased profitability and market share
  

What is meant by Removal of Partner?

Partner removal in a partnership firm or LLP occurs when an existing partner exits, either voluntarily or by a decision of other partners, as per the partnership agreement. The process must comply with the Indian Partnership Act, 1932, which allows removal only if expressly stated in the agreement and with the consent of all partners (except the one being removed). In LLPs, removal must also adhere to the Limited Liability Partnership Act, 2008 and LLP agreement terms.

Why Removal of a Partner May Become Necessary?

The removal of a partner may become necessary due to several reasons:

• Voluntary retirement or withdrawal
  
• Breach of partnership agreement or trust
  
• Incapacity or inability to perform duties
  
• Misconduct or negligence detrimental to the firm
  
• Insolvency or bankruptcy
  
• Death of the partner
  

Steps Involved In Removing a Partner

The process of removing a partner typically involves:

1. Serving notice: A notice of the proposed removal, specifying the grounds, should be served on the concerned partner.
   
2. Considering reply: The concerned partner must be allowed to submit a response to the notice.
   
3. Majority approval: Obtain at least 75% approval from the remaining partners through a resolution.
   
4. Executing deed of retirement/reconstitution: The change in partnership should be documented through a formal deed.
   
5. Intimating Registrar: Form 4 with the applicable fee should be filed with the Registrar within 30 days.
   
6. Settlement of accounts: The outgoing partner's accounts should be settled as per the partnership deed or mutual agreement.
   

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Section 31: Introduction of a New Partner

Section 31 of the Indian Partnership Act, 1932, governs the introduction of a new partner into an existing firm. It stipulates that a new partner can only be admitted with the consent of all existing partners unless the partnership agreement provides otherwise.

Rights and Liabilities of a New Partner

Upon admission, the new partner becomes entitled to share in the profits and is liable for the losses and debts of the firm from the date of their entry, unless agreed otherwise. They have the right to access the firm's books of accounts and to participate in the management of the business. However, they are not liable for any acts of the firm before their admission, unless they expressly assume such liability.

Section 32: Retirement of a Partner

Rights of Outgoing Partner

Section 36: Right to Conduct a Competing Business

Unless restricted by an agreement, a retiring partner has the right to carry on a business competing with that of the firm and to advertise such business. However, they cannot use the firm's name or represent themselves as carrying on the firm's business.

Right To Share

The retiring partner is entitled to receive their share of the firm's assets, including goodwill, as per the terms of the partnership agreement or mutual understanding. They also have the right to share in the profits of the firm until the date of their retirement.

Section 37: Entitled to Claim

The outgoing partner has the right to claim their due share from the continuing partners. If not paid outright, they are entitled to interest at 6% per annum on the amount due.

Liabilities of Outgoing Partner

Section 32(3) and (4): Liability to the third party

The retiring partner remains liable to third parties for all acts of the firm until public notice of their retirement is given. They are also liable for any obligations incurred by the firm before their retirement unless discharged by agreement.

Section 32(2): Agreement of Liability

The retiring partner and the continuing partners may agree to discharge the retiring partner from all liabilities of the firm, but such an agreement is not binding on third parties unless they are aware of it.

Section 33: Expulsion of a Partner

A partner may be expelled from the firm by a majority of partners if such power is conferred by an express agreement between the partners. The power to expel must be exercised in good faith. Unless agreed otherwise, the expelled partner can claim the value of their share as if the firm were dissolved on the date of expulsion.

Section 34: Insolvency of a Partner

If a partner is adjudicated as insolvent, they cease to be a partner from the date of the insolvency order. Their share in the firm vests with the Official Assignee or Receiver appointed by the court. The firm is dissolved unless the solvent partners buy the insolvent partner's share and continue the business with proper intimation.

Section 35: Death of a Partner

In the event of a partner's demise, their legal heirs or executors step into their shoes. The firm dissolves from the date of death unless the partnership deed provides for continuity. The deceased partner's share in the firm's assets, goodwill, and profits is settled as per the partnership agreement or mutual understanding.

Section 38: Continuing Guarantee Revocation

The estate of a deceased or insolvent partner, an expelled or retired partner, is not liable for the firm's debts contracted after their death, insolvency, expulsion or retirement. A continuing guarantee given to a firm or a third party in respect of the firm's transactions is revoked as to future transactions by any change in the firm's constitution.

Conclusion

Changes in the composition of a partnership firm through the addition or removal of partners are significant events. While new partners can infuse capital and expertise, the exit of partners due to retirement, expulsion, insolvency or death can impact the firm's continuity and harmony. The Partnership Act provides a framework for inducting and removing partners. The terms of entry and exit should be clearly documented in the partnership agreement to minimise disputes. Intimations to the Registrar and third parties should be made promptly. With some foresight and planning, partnership firms can manage changes in their constitution smoothly and continue their business journey.

Frequently Asked Questions

What is the Winding Up of a Company?

Winding up a company refers to the legal process of closing its operations permanently. It involves selling the company's assets, settling its debts and liabilities, and distributing any remaining surplus among shareholders according to their rights. Once the process is complete, the company is dissolved and ceases to exist as a legal entity. Winding up may be voluntary, initiated by members or creditors, or compulsory, ordered by a court.

The main reasons for winding up a company include:

• Ceasing the company's operations
• Collecting the company's assets
• Paying off the company's debts and liabilities
• Distributing any remaining assets to the members

The main reasons for winding up a company include:

• Inability to pay debts (insolvency)
• Completion of the purpose for which the company was formed
• Expiry of the period fixed for the duration of the company
• The passing of a special resolution by the members to wind up the company

Key Aspects of Winding Up of a Company

The winding up of a company involves several key aspects that need to be considered:

1.  Appointment of Liquidator

A liquidator is a person or entity responsible for managing the winding-up process of a company, including selling assets, settling liabilities, and distributing remaining funds to stakeholders. A liquidator is appointed to manage the winding up process. He is appointed by members or creditors in voluntary winding up or by the court in compulsory winding up. 

2.  Realisation of Assets

The liquidator takes possession of all the company's assets and realises them into cash. This may involve selling the company's property, plant and equipment, collecting debts from debtors, and recovering any unpaid capital from the contributors.

3.  Payment of Liabilities

The liquidator settles all the company's liabilities, including debts owed to creditors, outstanding taxes and employee dues. The order of priority for payment is fixed by law, with secured creditors being paid first, followed by unsecured creditors and members.

4. Distribution of Surplus

After settling all the liabilities, surplus assets are distributed among the members in proportion to their shareholding. Preference shareholders are paid first, including any arrears, as per their rights. Once their claims are fully settled, the remaining surplus is allocated to equity shareholders in proportion to their shareholding. This process adheres to the company’s articles and legal requirements, ensuring an equitable distribution.

5. Dissolution of Company

Once the winding up process is complete, the liquidator submits a final report to the Tribunal or the ROC. The Tribunal then orders the dissolution of the company, and its name is struck off from the register of companies.

Types of Winding Up

There are three main modes of winding up of a company under the Companies Act 2013:

1. Compulsory Winding Up of a Company (By the Tribunal)
2. Voluntary Winding Up of a Company

a) Members' Voluntary Winding Up

b) Creditors' Voluntary Winding Up

3. Winding Up Subject to the Supervision of the Tribunal

Let us discuss each of these types in detail.

1. Compulsory Winding Up (By the Court)

Compulsory winding up of a company is when a company is wound up by an order of a court or tribunal. This is also known as "winding up by the court". The court may order a company to be wound up on various grounds specified in Section 433 of the Companies Act, 1956 (now governed by Chapter XX of the Companies Act, 2013).

Compulsory winding up of a company is initiated by a petition filed before the National Company Law Tribunal (NCLT) by:

• The company itself
• The company's creditors
• The company's contributors
• The Registrar of Companies
• Any person authorised by the Central Government

The grounds for compulsory winding up include:

• Inability to pay debts
• Acting against the sovereignty and integrity of India
• Conducting affairs in a fraudulent manner
• Failure to file financial statements or annual returns for five consecutive years
• The Tribunal is of the opinion that it is just and equitable to wind up the company

If the NCLT is satisfied that a prima facie case for winding up is made out, it admits the petition, appoints an official liquidator and makes an order for winding up.

2. Voluntary winding up of a company

Voluntary winding up is when a company is wound up by its members or creditors without the intervention of a court or tribunal. Voluntary winding up is initiated by the company itself by passing a special resolution in a general meeting. There are two types of voluntary winding up:

1. Members' Voluntary Winding Up

This occurs when the company is solvent and can pay its debts in full. A declaration of solvency is made by a majority of the directors, stating that they have made an inquiry into the company's affairs and believe that the company has no debts or will be able to pay its debts in full within three years from the commencement of the winding up.

2.  Creditors' Voluntary Winding Up: 

This occurs when the company is insolvent and unable to pay its debts in full. No declaration of solvency is made in this case. The creditors play a greater role in this type of winding up compared to a members' voluntary winding up.

In a voluntary winding up, the company appoints a liquidator in a general meeting to conduct the winding up proceedings.

3. Winding Up Subject to the Supervision of the Court

A voluntary winding up (whether members' or creditors') may be converted into a winding up by the Tribunal if the Tribunal is of the opinion that the company's affairs are being conducted in a manner prejudicial to the interests of the public or the company.

In such cases, the Tribunal may order that the voluntary winding up shall continue but subject to the supervision of the Tribunal. The Tribunal may appoint an additional liquidator to conduct the winding up along with the liquidator appointed by the company.

Winding Up a Company Process

The procedure for winding up of a company in India depends on the mode of winding up. Here is a step-by-step procedure for compulsory winding up of a company in India and voluntary winding up:

The process of winding up of a company in India is complex and involves several legal formalities. It is advisable to seek the assistance of a professional (such as a company secretary or a lawyer) to ensure compliance with all the requirements.

Example of Winding up of a Company

One notable example of the winding up of a company in India is the case of Kingfisher Airlines Limited. Kingfisher Airlines was a prominent Indian airline that ceased operations in 2012 due to financial difficulties and mounting debts.

In 2016, the Karnataka High Court ordered the winding up of the company on a petition filed by the Airports Authority of India, which was one of the company's creditors. The court appointed an Official Liquidator to take charge of the company's assets and manage the winding up process.

The liquidator faced several challenges in the winding up process, including the recovery of dues from the company's debtors and the sale of its assets. The company had a fleet of aircraft and other assets, which had to be valued and sold to pay off the creditors.

One of the major issues in the winding up of Kingfisher Airlines was the recovery of dues from its promoter, Vijay Mallya. Mallya had given personal guarantees for some of the loans taken by the company, and the creditors sought to recover these dues from him. However, Mallya fled to the UK, and the Indian authorities have been trying to extradite him to face charges of fraud and money laundering.

The winding up process of Kingfisher Airlines is still ongoing, and the liquidator is working to realise the company's assets and settle its liabilities. The case highlights the challenges involved in the winding up of a large and complex company with multiple stakeholders and legal issues.

The Kingfisher Airlines case also underscores the importance of timely action by creditors in the event of default by a company. Many of the company's creditors, including banks and airports, had allowed the debts to accumulate for several years before initiating legal action. This delay made it more difficult to recover the dues and increased the losses for the creditors.

In conclusion, the winding up of Kingfisher Airlines is a cautionary tale for companies and creditors alike. It highlights the need for effective risk management, timely action in case of default, and the importance of following due process in the winding-up of a company.

Conclusion

In conclusion, the winding up is a legal process of  liquidating a company's assets, settling of liabilities and distributing surplus to its members. It is a complex process that requires careful planning and execution, and the guidance of professional advisors. 

There are three modes in winding up under companies act 2013: compulsory winding up by the Tribunal, voluntary winding up by the members or creditors and winding up under the Tribunal's supervision. 

These modes of winding up have specific requirements and procedures. Proper planning and professional guidance can help minimise the impact on stakeholders like creditors, employees and members, ensuring a smoother and compliant winding-up process.

Frequently Asked Questions