What is the difference between a Company and a Firm?

Many people who are not exactly familiar with business terms often use the words ‘company’ and ‘firm’ interchangeably. Since both are involved in commercial activities, they may seem to mean the same thing. However, the truth is that they are not exactly the same. There are many differences between a company and a firm. 

In this post, we shall discuss the main differences between a company and a firm. If you are planning to start a business in near future, we recommend that you understand these differences prior to choosing the right business structure for your venture. Doing so will help you make a more informed decision and avoid confusion later on. 

What is a Company?

The term “company” is generally used to refer to a group of people who come together so they can achieve a common objective. This objective could either be economic or non-economic. However, when we speak in a business context, the term “company” is commonly used to describe an association of persons who come together to carry on a business and earn profits for its members or shareholders. In the simplest sense, a company can be understood to be a voluntary association of persons formed so as to carry on a lawful purpose. 

It is important to note that not every company is incorporated for the purpose to earn profits. Some companies are actually established for charitable or other non-profit objectives like promoting education, art, science, sports, social welfare, religion, environmental protection or other similar purposes. Such companies are generally incorporated as Section 8 companies under Companies Act, 2013. Once a company gets incorporated, it becomes a separate legal entity that is considered as distinct from its members. 

According to Section 2(20) of Companies Act, 2013, a company means a company incorporated under Companies Act, 2013 or under any previous company law. It may be incorporated as a Private Limited Company, Public Limited Company, One Person Company (OPC), Section 8 Company, Producer Company or any other type of company that is recognised under Companies Act, 2013.

What is a Firm?

A firm is a business organisation that carries on commercial activities with the objective of earning profit. In common usage, the term “firm” is often used to refer to a business entity. However, in legal sense, a firm generally refers to a partnership firm where two or more persons (partners) agree to carry on a business and share its profits in accordance with the provisions of Indian Partnership Act, 1932 and partnership deed. 

A partnership firm may operate with or without registration under Indian Partnership Act, 1932. Partnership firm registration is a voluntary choice rather than a legally mandatory one. However, an unregistered partnership firm is subject to certain legal limitations like restrictions on enforcing contractual rights in court. 

The term “firm” is also commonly used for referring to professional businesses such as law firms, accounting firms, consulting firms, IT firms and architectural firms to name a few. As a result, many people use the terms “firm” and “company” interchangeably in everyday conversation, even though they have different legal meanings.

Similar Post: How to Set Up a Partnership Firm?

Company vs Firm: Table of Comparison

In the table below, we have explained the major differences between firm and company for quick and better clarity:-

Must Read: How to open an LLP Company in India? 

Key Things To Know About a Firm And a Company

Here are the key things you should know about a firm and a company:-

• A company and a firm are different from each other. They are two different forms of business organisation with distinct legal meanings.
• In legal terminology, the term ‘firm’ generally refers to a partnership firm governed by Indian Partnership Act, 1932. 
• The term ‘firm’ has traditionally been associated with professional businesses like law firms, accounting firms, consulting firms, IT firms and architectural firms.
• A partnership firm may be registered or unregistered, as registration under Indian Partnership Act, 1932 is totally a voluntary choice. In contrast to this, a company must be mandatorily incorporated and registered under the Companies Act, 2013.
• A company has a separate legal identity from its members or shareholders. A partnership firm does not enjoy a separate legal identity in the same way a company does.

To Put it Simply…

The words company and firm are often used interchangeably but are not legally the same thing. A company is a separate legal entity incorporated under the Companies Act, 2013 whereas firm generally means a partnership firm formed under the Indian Partnership Act, 1932. They differ from each other in a number of ways like qualification for registration, legal status, management, liability, perpetual succession, etc.

We hope this blog post has cleared all your confusion regarding the difference between company and firm. If you still need assistance in deciding the business structure that is best for your business, contact our consultants at RegistrationKraft for availing expert guidance and support. 

Frequently Asked Questions (FAQs)

Q1. Is it mandatory to register a Company with Registrar of Companies in India?

Yes. According to Companies Act 2013, it is mandatory to register a Company with the Registrar of Companies in India.

Q2. Is it mandatory to register a Partnership Firm in India?

No. According to Indian Partnership Act 1932, it is not mandatory to register a Partnership Firm in India.

Q3. How many partners are required to form a Partnership?

To form a Partnership, a minimum of two partners are required.

Q4. Do Firms need to appoint directors?

No. The Partnership Firms do not need to appoint the directors. The firm partners are responsible for managing the business and making decisions in accordance with Partnership Deed and provisions of Indian Partnership Act 1932.