Difference Between A Partnership And A Limited Liability Company
Partnership and Limited Liability Company
One of the most commonly talked-about things when dealing with the broad topic of “Business Organizations/Units” is the difference between a partnership and a limited liability company. Before I carry on any further, it’s imperative that I let readers know that while a partnership and a limited liability company are both business organizations, they are not the same. They are two totally different business organizations all together. This therefore means that a partnership can never be considered to be a limited liability company, and vice versa.
While some of you might be aware of the difference between these two popular business organizations, there are many who aren’t fully aware of this and sometimes get confused about the difference. It is this confusion that motivated me to write this article. In this article we are not only going to take a detailed look at the major differences between a partnership and a limited liability company but we shall also be looking at the characteristics of each of them. One thing is for sure, the two business organizations are not the same.
What is a partnership business?
A partnership can be simply defined as any business organization that is owned by 2 or more people. A partnership occurs when 2 or more people come together to form a business unit with the sole objective of making profit. A partnership must have a minimum number of 2 people and a maximum number of 20 people. Anything apart from this is not a partnership.
What is a limited liability company?
This business unit comes about when a group of people come together to engage in business to make profit. They do this by buying shares in the business. Owners of limited liability business organizations enjoy a term called Limited Liability.
Another name for the limited liability company is a Joint Stock Company. So whenever you hear someone use the term joint stock company, just know that they are referring to a limited liability company.
What is the meaning of limited liability? It simply means that shareholders (owners) of a company are liable to pay the debts of the company only based on the amount of their shareholdings. Beyond this money, they will not be required to pay any more money when the company is in debt.
It’s worth noting that there are two types of limited liability companies, namely the private joint stock companies and public joint stock companies. In another article we shall be taking a look at the types of companies, but for now we want to limit ourselves to discussing only the differences between a partnership business organization and a limited liability company.
Characteristics of Partnerships
Below are the major characteristics of a partnership business:
- A partnership is owned by partners (2 to 20) who bring their resources together towards the starting and running of the business. Examples of resources that are pooled here by partners are: cash, land, labor, experience, entrepreneurial skills, etc.
- A partnership is not considered a separate legal entity, which means the owners of the business can enter trouble when the business also enters trouble. What is a separate legal entity? A separate legal entity means that the actions of a business organization are different or separate from that of the individual(s) forming the company. So for example, if in the course of engaging in business, the organization does something wrong which sees them involved in a legal action, then it is the organization that goes to court to defend itself and not the individuals or owners of the organization. The organization that enjoys a separate legal entity is considered a person on its own, which can sue and be sued. Limited liability companies enjoy this unique privilege whereas partnership businesses don’t. In a partnership business organization, the firm or business is not a separate legal entity, which means that the business owners are not separate from their business. The individuals owning the partnership business can therefore sue and be sued at court for redress regarding any issues that crop up in the course of doing business. Here, if the business is sued or is in debt, then the owners will have their personal belongings confiscated to pay the debt. If the business fails to pay tax, it is the owners who are held responsible for that.
- A partnership firm is managed by the partners of the business and no one else.
- A partnership tends to struggle a lot with a continual existence or longevity. For example, the death or retirement or even resignation of a key partner can bring the whole firm crumbling down.
- In partnership, auditing is not something that is compulsory. It only becomes compulsory if it is stated in the agreement of partners.
- Partnership has a minimum number of 2 people and a maximum number of 20 people. This is the reason why you will never find a partnership business organization having 21 or more partners. It is always 20 and below.
- Partnership businesses do not deal with shares and therefore cannot float shares to the public to subscribe to.
- It is easier to form partnership businesses than it is to form a limited liability company. Forming a limited liability company can be a very complex process. But this is not really the case for a partnership.
Characteristics of the Limited Liability Company
Below are the major characteristics of the limited liability company:
- A limited liability company is owned by shareholders. Anybody who buys a share in a company owns part of the company. For example, if a company like Nokia is floating shares and you buy some of these shares, you are technically considered to be one of the owners of Nokia. But in a partnership business, no one other than the partners who started the business can own the business.
- Limited liability companies are separate legal entities. This means the shareholders are considered separate from the business (company). Here, the company can sue and be sued at a law court and this will not affect the shareholders. If the company goes into debt, the personal properties of the owners (shareholders) cannot be sold to pay the debt.
- A limited liability company is managed by the Board of Directors, which is elected or appointed by the shareholders of the company.
- Limited liabilities are not really affected in a negative way by the sudden death or resignation of a shareholder. The company continues to exist and thrive even after the death of a shareholder. This is one of the major reasons why companies tend to enjoy greater continual existence than partnerships do.
- Auditing of limited liability companies is compulsory. Companies are audited by statutory. But for a partnership business, auditing is optional.
- Limited liability companies can have a minimum number of 2 people and a maximum number of 50 people if they are private companies. On the other hand, if they are public companies, then they must have a minimum of 7 owners and a maximum of infinity. Public companies can basically have an endless number of shareholders.
- Public companies can float shares and invite the public to buy these shares. Private companies can however, not float shares to the public.
- It is more difficult and complex starting a company than it is starting a partnership business.
This brings us to the end of our lesson on the difference between partnerships and companies. I hope that this article has helped increase your understanding of these two very common business organizations.
It is worth noting that these are not the only business organizations that exist. There are other types of business organizations such as sole proprietorships, co-operatives, NGOs, etc.
NOTE: In order to determine what type of business organization you are dealing with, looking at the ownership or the people who own the business can help you. For example, when one person owns a business, it is called a sole proprietorship. If the business is owned by between two and twenty people, it is called a partnership. And when the business organization is owned by shareholders, it is a limited liability or joint stock company. A public corporation is a business organization that is owned by the state or government.