What to start? Private Limited Company or Partnership?

What to start?  Private Limited Company or Partnership?

With more than one person, you can go for either of the two i.e; Partnership or Private Limited Company. Before starting with any of the two, it is essential to be aware of the pros and cons of each of the business entity and choose the right one.

General Idea of both the Business Entity            

A Private Limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. However, Partnership Businesses can be formed easily like Sole Proprietorship without any compulsory legal formalities. It is not necessary to get the form registered. A simple agreement or partnership deed would serve the purpose of formation of the Partnership Business.

Differences that prevails in between Partnership and Private Limited Company



Private Limited Company


As per Partnership Act, 1932

As per Companies Act 2013

Name of the Entity

As pr Promoter’s Choice, no approval is required.

As per Promoter’s Choice, subject to approval by the Registrar of Company.


Easy to Form

Complex to Form


Not a Separate Legal Entity

Separate Legal Entity


Unlimited; Partners are responsible for all the liabilities of Partnership.

Limited; Shareholders have limited liability, only to the extent of their Share Capital


Not Transferable

Transferable by way of Share Transfer


Depend on Partners; Dissolution may happen due to death of a Partner.

Not dependent on directors or shareholders; Dissolution possible only Voluntarily or by Regulatory Authorities.

Annual Statutory Filing

No requirement to file Annual Report with Registrar of Companies.

Filing of Annual Accounts and Annual Reports with Registrar of Companies is must.

Annual Statutory Meetings

Not Required

Board and General Meeting must be conducted

Due Date of ITR Filing

31st July of the Assessment Year. However, 30th September in case Tax Audit is applicable.

30th September of the Assessment Year

Now, coming to the point of maintain the books of accounts. The accounts of partnership firm are maintained like other businesses. However, the expenses relating to the partnership firms are booked within the permission limit of law and following points must be kept in mind for calculation of Income Tax on partnership firm:-

  1. Interest to Partners on Capital There is no restriction on payment of interest on capital as per their share of capital and can be booked as business expenditure. However, interest is allowed only at the rate of 12% per annum as per Income Tax Act. Therefore, in case the payment exceeds the permissible limit, the extra payment will be disallowed while calculating the income of partnership firm.
  2. Salary and Other Remuneration to the Working Partners – The working partners who are entitled to remuneration (as per the Partnership Deed) by way of salary, bonus or by any other means can be booked as business expenditure. However, the restriction is prevailing as per the Income Tax Act. These restrictions are defined below:-


Remuneration Allowed

In case of loss before booking the partner’s remuneration.

Maximum of Rs.150000/=

For the first Rs.300000/= of book profit

90% of the book profit or Rs.150000/= whichever is more

On the balance of book profit

60% of book profit

Note: Book Profit means profit before remuneration to partners and interest paid on capital in excess of 12% per annum.

Further, if the books of accounts are not maintained in case where the Partnership opts for the Presumptive Taxation Scheme, then also the remuneration and interest will be allowed as deduction from the presumptive income computed at prescribed rate under the said scheme.

In case of a Company maintaining books of accounts are mandatory for all types of companies. There is no exception to maintenance of books of accounts. The business expenditures can be booked as per accrual or actual, whichever is earlier basis. However, such expenditures will be allowed as per Income Tax Act.

Thus, both Partnership and Private Limited Companies has to maintain books of accounts as per the prevailing laws and compliance has to be done keeping Income Tax Laws as well as Companies Act in knowledge.

We at Taxmantra.com can assist you in maintaining the books of accounts with proper tax planning and also in complying with all the Statutory Requirements as per the prevailing laws.

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