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In the beginning, many entrepreneurs establish their businesses as a Partnership. As the business grows, it becomes vital to convert it into a Private Limited Company to reduce liability. A Private Limited Company has various advantages over a Partnership business, such as limited liability, perpetual succession, and quick money access, to name a few. This drives a Partnership to be converted to a Private Limited Company.
A partnership business is a formal agreement between two or more parties to jointly manage and operate a firm. In a Partnership, a business arrangement is made up of two or more people who share profits and losses. Individuals, businesses, interest-based organizations, schools, governments, etc., can all be partners in a Partnership.
A Private Limited Company, on the other hand, is a business that is privately owned. In a Private Limited Company, a member's responsibility is limited to the number of shares they own. A Company is required to pay corporation tax on its profits and then distribute the remaining to shareholders. A Private Limited Company's shares cannot be traded publicly.
Advantages of conversion of Partnership to Private Limited Company
There are various advantages to forming a Private Limited Company over forming a Partnership. They are as follows:
Liability: Partners in a Partnership business bear unlimited liability for any losses incurred. The regulation of a Private Limited Company, on the other hand, distinguishes between the owner and the entity, limiting the owner's liability.
Legal entity: A Private Limited Company is a distinct legal entity, whereas a Partnership is not. A Private Limited Company has the authority to engage in contracts, sue and be sued, and possess the property but a Partnership business cannot.
Ownership transfer: If the shareholders give their consent, the ownership of a Private Limited Company is transferred. In the case of a Partnership, however, the partner cannot transfer its share without consulting the Partnership deed.
Fundraiser: A Partnership is limited to the funds of its partners, whereas a Private Limited Company has fundraising options and can raise larger sums of capital for expansion, such as borrowing from banks and financial institutions. The Company makes it easier to raise funds because there are no limits on the number of stockholders.
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