Advantages of Partnership Over Private Limited Company
Some advantages of partnership over private limited company include ease of establishment and lower costs.3 min read
2. Disadvantages of a Partnership
3. Advantages and Disadvantages of a Private Limited Company
Some advantages of partnership over private limited company include ease of establishment and lower costs. A partnership consists of two or more individuals who own a business together and share all its profits and losses, as well as the right to manage and make decisions on behalf of the business.
Owners of a partnership are liable for business debts and obligations. Private limited companies are owned by shareholders and managed by directors. They carry limited liability for business debts, which reduces personal risk. Choosing the correct business model must involve consideration of tax and legal advantages of each type of entity.
Advantages of a Partnership
- Partnerships are easy to form and do not need to register with the state or take other formal steps. You can create a partnership agreement either orally or in writing. In some states, you can choose to register your partnership even though it is not required.
- If you're a sole proprietor, joining with one or more individuals means that you'll have more resources, more skills, more capital, and more effort devoted to the business.
- Each partner has a right to make decisions on behalf of the business. This cooperative management approach can improve problem-solving.
- Partnerships can be changed in size, structure, or purpose at any time as long as all the partners agree. No legal steps are required to do so.
- The risk is shared equally among all partners. This lowers the potential financial burden for each individual.
- A partner can prevent a decision that is not in his or her best interest because each person has equal say. In severe disagreements, one partner leaving the partnership results in dissolution. No further steps are required.
- Each person can contribute his or her area of expertise. For example, if you start a law firm as a partnership, you can recruit partners in each practice area you want to offer. The same is true for doctors and specialty areas.
Disadvantages of a Partnership
- All partners share liability for legal judgments and collections against the business. This means that each individual's personal assets are at risk.
- Unlike a corporation or limited liability company (LLC), a partnership is not a distinct legal entity. That means that if a partner retires, becomes incapacitated, goes bankrupt, or dies, the partnership will cease to exist.
- If partners disagree on a serious issue, discontent and conflict can result. When compromise is not possible, this could lead to the end of the partnership.
- A partnership can have no more than 20 partners, which places a natural limit on the availability of capital. For this reason, most partnerships are small businesses.
- Shares cannot be transferred to others outside the partnership unless the other partners have consented to the sale. This makes it difficult for someone who wants to leave the partnership to be reimbursed for his or her original investment.
Advantages and Disadvantages of a Private Limited Company
Private limited companies are easier to organize and administer than public limited companies. They do not need to obtain a Certificate of Commencement, file a prospectus, hold an annual meeting, or file an annual report. Members enjoy limited personal liability. A private limited company exists in perpetuity, even if every member leaves the business or dies. This makes it the ideal structure for those who want privacy and control while protecting their assets. However, members may not freely transfer shares among themselves and shares may not be sold to the public.
Businesses that are growing quickly and want to raise funds from investors and venture capitalists should become private limited companies. Partnerships cannot offer investors a seat on their board of directors and would instead require them to become a full partner.
A private limited company is required to register with the state, submit annual filings and tax returns, have quarterly board meetings, and file minutes from these meetings. The business may also be subject to a statutory audit.
Private limited companies have few tax advantages compared to other business entities. They must pay both the minimum alternative tax and the dividend distribution tax. In most states, they are taxed at a flat rate of 30 percent.
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