A sole proprietor has also the alternative of forming a private company. Similarly, the partners of partnership firm may decide to form a private company rather than increasing the number of partners. While selecting between the two forms of organization, the following factors should be taken into consideration:

(i)    Formation. It is easier to form a partnership because registration of the firm is not compulsory. But a private company must be registered under the Companies Act. For the incorporation of a company, a large number of legal formalities have to be observed. A large amount of expenditure and time has to be spent to form a company.

(ii)    Capital. Both the partnership firm and the private company can raise sufficient funds to meet the capital requirements of a medium size firm. However, a private company can raise more funds because the maximum limit, on the number of members of 50 as compared to the partnership firm where maximum limit of partners is 20. The credit standing of a partnership firm may be higher because of the unlimited and joint and several liabilities of the partners.

(iii)    Liability. The liability of the members of a private company is limited to the issue price of the shares held by them, whereas in partnership the liability of each partner is unlimited. A partnership organization is suitable only for those ventures where business is of stable nature and the risk is not very high.

(iv)    Control. If a partnership is created, the proprietor has to share the control with other partners unless the other partners are sleeping partners. In a private company, the promoter-owner may be able to retain effective control over the business of the company by working as the managing director of the company.

(v)    Management. In case of partnership, every partners has a right to be consulted with regard to the management of the affair of the firm. This may lead to inefficient management because of misunderstanding and conflict among the partners. This problem does not arise in case of private company where management is in the hands of a small group of directors. Decisions can be taken by the majority f directors, whereas in case of partnership, approval of all the partners is must n case of any policy decision.

(vi)    Secrecy. A partnership firm can maintain greater secrecy since it is not required to file its audited accounts with the Registrar of Companies as is required in case of a private company.

(vii)    Flexibility and Continuity. A partnership firm is more flexible than a private company because old partners can retire and new partners can joint easily. In case of a private company, a number of legal formalities have to be observed for this Purpose. Similarly, the objective sand authorized capital of a private company can be changed by flowing the cumbersome procedure only. But there is not such problem in case of a partnership firm. A private company having a separate legal entity continues irrespective of the death of a member. Shares are transmitted to the heir on the death of a member whereas in case of partnership, death or retirement of a partner dissolves the partnership unless there is any agreement to the contrary. Hence a private company is more stable than a partnership firm.

(viii)    State Regulation. A partnership firm is subject to the minimum of State regulation even if it is registered. But a private company has to file several returns with the Registrar of Companies and comply with various other legal formalities. A private company has to incur a huge expenditure on its creation and winding up because of the requirement of following the prescribed procedures.

(ix)    Tax Burden. At income below Rs. one lakh, the burden of tax is lower in case of partnership firm. Tax liability works out to be lower in case of private company if the profits are quite high because a company is subject to a fixed rate of income tax and a partnership firm is liable to pay income tax at a progressive rate. The rate of tax remains the same irrespective of the volume of profits of the company and it goes on increasing with the increase in the volume of profits of the partnership firm.

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