Difference Between Partnership & Private Limited Company

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Private limited companies are similar to limited liability companies in the U.S.
Private limited companies are similar to limited liability companies in the U.S. (Image: Photos.com/Photos.com/Getty Images)

A partnership is a legal entity created automatically by the intentions of the partners when two or more people or entities agree to share business profits and losses. A private limited company is created by statutory law in certain jurisdictions, primarily the United Kingdom and certain other British Commonwealth countries such as Ireland and India. These two business vehicles differ substantially in terms of liability and taxation.

Limited Liability

As a shareholder in a private limited company, you face no personal liability other than your investment in the company. If the company collapses, the value of your shares is reduced to zero. If you purchased shares but have not paid for them when the company collapses, your personal liability will be limited to the amount you owe the company for your shares. As a general partner, you are liable for all partnership debts. Creditors can even sue you individually for all debts, although that will leave you with legal claims against the other general partners for their proportionate shares.

Vicarious Liability

As a general partner, you can be held liable for the partnership-related misconduct of another general partner. If you are a general partner in a law firm and one of the other general partners loses a malpractice lawsuit and subsequently goes bankrupt, you can be sued for all of debt not already paid by the offending partner. This will leave you with a claim against other general partners whose debts have not been discharged in bankruptcy. As a shareholder in a private limited company, you cannot be held liable for the malpractice of another partner, although you remain liable for your own partnership-related malpractice.

Taxation

Private limited companies are taxed at the entity level at corporate tax rates, thereby reducing value of your shares. You are not taxed unless the company distributes dividends to you or you sell your shares for a profit. As a partner in a partnership, you are taxed individually on your proportionate share of partnership profits, at individual tax rates. Corporations that act as partners, however, are still taxed at corporate tax rates.

Limited Partners

General partnerships do not have limited partners. Limited partnerships and limited liability partnership do, however. As a limited partner in one of these types of entities, you enjoy the same limited liability as a shareholder in a private limited company. As a limited partner in a limited partnership, however, you can lose limited liability by taking an active role in day-to-day partnership affairs.

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