Last updated: July 16th, 2023 8:59 PM

What is the difference between a proprietorship and a firm?

Proprietorship and firm are two of the most common business structures in India. While both are essentially entities that allow individuals to run a business, there are some critical differences between them. This article will discuss the differences between proprietorship and firm in India.

Proprietorship

A proprietorship firm is India's simplest and most common form of business. It is a business entity where a single person owns and operates the business. In other words, the owner and the business are the same. The proprietor has complete control over the business and is responsible for all aspects of its operation, including its debts and liabilities. Some of the critical features of a proprietorship in India are:

• Sole ownership: The proprietor is the business's sole owner and is responsible for all aspects of its operation.
• Unlimited liability: The proprietor is responsible for all business debts and obligations.
• Simple registration process: Proprietorship registration can be with the Registrar of Firms by applying along with the required documents.
• Limited legal recognition: Proprietorship is not a separate legal entity; the proprietor and the business are the same.

Firm/ Partnership  Firm

A firm is a business entity where two or more persons come together to conduct a business activity. The persons who own the business are called partners, and they share the profits and losses of the business according to the partnership agreement. Some of the critical features of a firm in India are:

• Shared ownership: A firm is owned and operated by two or more persons who share the profits and losses of the business according to the partnership agreement.
• Limited liability: The liability of each partner is limited to the extent of their investment in the business.
• Complex registration process: A firm must be registered with the Registrar of Firms by submitting a partnership deed and the required documents.
• Separate legal entity: A firm is separate from its partners and can enter into contracts and sue in its name.

Key Differences between Proprietorship and Firm

Key Differences between Proprietorship and Firm in India are as follows:

• Ownership: The main difference between a proprietorship and a firm is ownership. A proprietorship is owned and operated by a single person, while a firm is owned and operated by two or more persons.
• Liability: In a proprietorship, the owner has unlimited liability, which means that they are personally responsible for the debts and obligations of the business. In a firm, the liability of each partner is limited to the extent of their investment in the business.
• Legal recognition: A proprietorship is not a separate legal entity, while a firm is a separate legal entity from its partners.
• Registration process: A proprietorship's registration process is more straightforward than a firm's, which requires the submission of a partnership deed along with the required documents.

Both proprietorship and firm are popular business structures. While a proprietorship is easier to set up and manage, it comes with unlimited liability. Conversely, a firm provides limited liability and is recognized as a separate legal entity. The choice between proprietorship and firm depends on various factors, such as the number of owners, the nature of the business, and the level of risk involved.  You can contact IndiaFilings Advisor for professional advice before choosing a business structure.