November 18, 2021

Case Study on Partnership Firm vs. Private Limited Company in India

Insights

Case Study

Siena S.P.A., an Italian company is looking to invest in India and set up a company to produce wine and cheese in India. Siena S.P.A. would like to enter into a business co-operation with an Indian Company, Vineyards India Private Limited. Siena S.P.A. has been suggested by its Indian counterparts two forms of legal entities to commence their business co-operations – a partnership firm or a private limited company.  Siena S.P.A. would like to seek our advice on the form of legal entity it should set up in India.

Answer

To commence its business co-operations in India, Siena S.P.A. could consider both options (a partnership firm or a private limited company), however, choosing one or the other would be subject to the scope of business activities that Siena S.P.A. has in mind. The key advantages or disadvantages for Siena S.P.A. to consider whilst choosing a partnership firm or a private limited company have been specified below.

Legal Analysis

  1. Partnership Firm

Advantages

  • The process to set up a partnership firm is simple and less costly compared to a private limited company. A partnership firm can be established by entering into a partnership agreement which can either be oral or written. No minimum amount of capital is required to set up a partnership firm.  
  • Can be changed in form, structure, purpose at any time with just the consent of the partners.
  • A partner has direct control over the day to day operations of the firm. The business risks are shared in accordance with the partnership agreement amongst the partners.
  • Easy to terminate a partnership by merely entering into a dissolution agreement between the partners.
  • Less regulatory compliances compared to a private limited company.

Disadvantages

  • A foreign company cannot form a partnership in India without the prior consent of the Reserve Bank of India (RBI).
  • A partnership is inseparable from its owners. As a result, each partner is personally liable for the entire amount of any business-related obligations.
  • Ownership cannot be transferred freely unless provided for in the partnership agreement.
  • Change in a partner leads to the dissolution or formation of a new partnership.
  • Limited access to private equity funding as an investor would have to be made a partner in the partnership.
  1. Private Limited Company

Advantages

  • For a foreign company to set up a private limited company which engages in manufacturing activity does not require a prior government approval.
  • Each shareholder's liability shall be limited to the number of shares held in the company.
  • Ownership in a private company can be easily transferred and its existence is not dependent on its shareholders or directors.
  • A legal entity in the form of a private limited company is more tax advantageous than a partnership firm.
  • Greater access to private equity funding as a representative of the private equity fund can be appointed as a director in the company and such representative can participate in the management of the operations of the private limited company.

Disadvantages

  • It is mandatory to register a private limited company in India. The registration process is more costly and complex than a partnership firm.
  • A private company is required to fulfill more regulatory requirements such as appointing a statutory auditor, hold annual general meetings, maintain registers etc.
  • The process to wind up a private company in India is more complex as numerous regulatory requirements need to be fulfilled.

The professionals of Esplora Consulting Law Firm can advise you on any query that you may have with respect to your business investment in India. Please do get in touch at info@esplora-legal.com

Click here to learn about Establishing a Legal Presence in India through Unincorporated Entities.