what is the difference between company and firm

For a lot of people who are quite unaware of business complexities, various terms may refer to one thing – business. However, technically, there might be various differences among them that only an expert can know. For example, a company and a firm may simply refer to an organization that is indulged in commercial activities. Though both these terms look quite similar to each other, there are some differences between them. In this post, you will get to know the difference between a company and a firm.

What is a Company?

The term ‘company’ is known to have no severe practical or legal reference. In general, it can be defined as a way to define a group of people who join hands to share a common objective. The objective that compels people to associate with others could be multifaceted and include monetary as well as non-economic purposes. However, in general context, the term ‘company’ is typically held in reserve for those who came together for economic objectives. One such objective is to do business and generate profit for the stakeholders. 

In regard to the aforementioned context, the term ‘company’, in the simplest possible criteria, can be used to describe a voluntary connotation of people who have come together to do some business and share the profits out of it.

According to Section 2(20) of the Companies Act, 2013, a company is defined as a way to an entity incorporated under this or any earlier company law.

What is a Firm?

A firm is defined as any business entity that works with a purpose to generate profit. The term ‘firm’ can be used to define various business skeletons, including sole proprietorships and corporations. A firm can be understood as a company involved in the sale of consumer goods to people in a region or a country. It can also be used to define service providers such as electricians. While the term firm can denote any for-profit business, it is most commonly used to describe entities in specific industries like law and accounting. A large number of people tend to use the terms “firm” and “company” interchangeably. 

Similar Post: How to Set Up a Partnership Firm?

How is a Firm different from a Company?

 If you want to know the major difference between a firm and a company, we have highlighted a table below for quick and better clarity.

AuditCompulsoryNot Compulsory
ManagementDirectorsPartners (in case of partnership or LLP)
Legal EntitySeparateConsidered as one
DissolutionOnly by lawMay take place if one of the partners gets deceased
Capital1 lakh for a private company and 5 lakhs for a public company.No minimum cap
Contractual LimitationsCan sue or be sued on its name.Not eligible to enter into contracts in its name.
MembersMaximum 200 members in private company and unlimited in public company.A max of 100 partners or members.
CreationCertificate of incorporation and commencement.Partnership Deed in case of partnership firm or LLP.
Perpetual SuccessionYesNo

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

Things To Know About A Firm And A Company

  • A firm and a company are not individual units.
  • A firm can be defined as a type of company.
  • The term firm was conventionally used for accounting and consulting businesses.
  • Firms are either sole proprietorship or partnership. On the other hand, the company is registered and backed by shareholders.
  • One can definitely derive that the firm is a subset of the term company.
  • In general, a company could be a firm.

The Conclusion

The Companies Act setup in India allows different types of companies to be incorporated in the country like public limited companies, private limited companies, one person companies, and several others. 

While a majority of firms are itemized as per the Partnership Act, a firm can also be registered under the Limited Liability Partnership Act 2008 which ensures that the firm owners are not individually held answerable for the losses and debts faced by the firm. 

In addition, while sole proprietorship companies and firms are quite prevalent in India, they are considered unregistered business entities. Their individuality is typically heartened under the Shops and Establishment Act, or via the registration done under the Goods and Service Tax paradigm.

By Manish

Manish Kumar is a seasoned Digital Marketing Expert with a passion for driving online success. With a wealth of experience in the dynamic field of digital marketing, he possesses expertise in SEO, SMO, PPC, and YouTube marketing, guiding numerous online businesses to achieve outstanding results.

Leave a Reply

Your email address will not be published. Required fields are marked *

Types of Dividend Policies