Difference between Limited Liability Partnership (LLP) and Partnership Firm

Limited Liability Partnership Vs. Partnership Firm

Limited Liability Partnership (LLP)

As per the Limited Liability Partnership Act, 2008, the Limited Liability Partnership (LLP) is defined as the partnership formed and registered under the Limited Liability Partnership Act, 2008.

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. LLP is a body corporate and a legal entity separate from its partners. It also has perpetual succession.

 

Advantages of a Limited Liability Partnership

 

·         Separate legal entity

·         Limited Liability

·         Perpetual secession

·         Easy to wind-up

Disadvantages of a Limited Liability Partnership

 

·         Filing of various returns

·         Huge penalties

Partnership Firm

As per the Indian Partnership Act, 1932, a partnership is defined as the relationship between people who have agreed to share profits of a business carried on by all or any of them acting for all.

A partnership firm is one of the popular types of legal entity wherein two or more persons join together to undertake a business for profit.

 

Some advantages of Partnership Firm

·         Easy and economical to start

·         Easy decision making

·         Sense of Ownership

·         Sharing of Risk

Some Disadvantages of Partnership Firm

·         Unlimited liability

·         Number of Members

·         Lack of trust among the General Public

·         Instability/ Sudden Dissolution

 

Major Point of Difference between LLP and Partnership firm:

 

SN	Particulars	LLP	Partnership firm
1.	Governed by	Limited Liability Partnership Act, 2008	Indian Partnership Act, 1932
2.	Registered with	Ministry of Corporate Affairs	Registrar of Firms
3.	Registration	Mandatory	Not Mandatory
4.	Separate legal entity	Yes	No
5.	Liability of partners	Limited to the amount invested in the LLP	Partners  are personally liable for the  unlimited amount of liabilities of the partnership
6.	Joint Liability	No Joint liability	Joint liability of a partner for all acts of the firm while he is a partner
7.	Perpetual Succession	Yes	No exist
8.	Number of partners	Minimum : 2 Maximum – No limit	Minimum : 2 Maximum – 50
9.	Minor Partner	No minor can be a partner	Minors can be a partner
10.	Agreement between partners	LLP Agreement governs the operation, management and decision making methodologies and other activities of the LLP.	Partnership Deed governs the operation, management and decision-making methodologies and other activities of the partnership
11.	Transferability of Shares	The Shares can be easily transferred to another person after obtaining the required consent from all the Partners in an LLP.	The Shares can be transferred to another person after obtaining the required consent from all the Partners in a Partnership.
12.	Conversion	LLP can be converted to Private/ Public Limited Company easily but cannot be converted back to the partnership.	Conversion of partnership to LLP or Private Limited Company is a tough process.
13.	Compliance	Mandatory to file the annual return to MCA	No requirement of filing annual return.
14.	Audit of accounts	LLP having a turnover more than Rs.40 Lakhs or Rs.25 Lakhs contribution in any financial year are required to get their accounts audited by PCA	Under the provisions of the Income Tax Act, 1961, Tax Audit is mandatory if turnover/ gross receipt exceeds 1 crore and 25 Lakhs in case of profession.
15.	Minimum Capital requirement	No such requirement	No such requirement
16.	Time is taken for registration	7- 8 days	5- 7 days (for registered firm)
17.	Cost of creation	Nominal fees	Lesser cost than LLP
18.	Foreign participation	Foreign nationals can be partners in LLP	Not allowed in a partnership firm
19.	Ownership of assets	The firm has ownership of the assets of the LLP.	The partners have equal ownership on assets
20.	Legal proceedings	An LLP is a legal entity that can sue or be sued	Only registered partnerships can sue any partner or any other person
21.	Tax liability	The income of LLP is taxed at a Flat rate of 30% plus cess as applicable.	The income of the partnership is taxed at a Flat rate of 30% plus cess as applicable.
22.	Inheritance of entity	Transferred as per the regulations of the LLP Agreement.	Transferred to the legal heir.
23.	Designated Partner Identification Number (DPIN)	Each partner should obtain DPIN before they are appointed as the Designated Partner	No such requirement
24.	Digital signature	At least one Designated Partner must have Digital signature	No such requirement
25.	Dissolution	By agreement, court order, insolvency, mutual consent, etc.	It should be done voluntarily or by order of the NCLT.
26.	Admission / cessation of partner	As per the regulation of the LLP Agreement	As per the regulation of the Partnership Deed
27.	Maintenance of Minutes	LLP is required to record the minutes of the meeting of partners	No such requirement
28.	Voting rights	As per the terms of the LLP Agreement	As per the terms of Partnership deed

 

Why choose LLP over Partnership Firm?

There are many benefits of choosing LLP over Partnership Firm for your start-up. The greatest advantage of forming an LLP is a limited liability and flexible management. Unlike Partnership Firms, LLPs does not expose their partners to unlimited liability and no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Further, an LLP has perpetual succession. Any change in the partnership should not affect the existence, rights or liabilities of the LLP.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is a hybrid form of a company and a partnership firm. So, one is advisable to choose the form of business wisely which is most suitable to him/ her after considering the pros and cons.

 

 

Do write for any Queries/suggestions and to get a free PDF copy of the above text mail me at bhuwantaragi@gmail.com

 

 

Disclaimer: The information contained herein is not intended to be a source of advice and it is only for the convenience of the user. The contents of this article have been prepared in accordance with the relevant provisions and information available at the time of preparation and the views and opinions expressed in this article are those of the author’s understandings. The author does not have any responsibility/liability of the same and the article cannot be quoted without the consent of the author.

 

Thank you

 

You can connect me on:

YouTube channel:  CS Bhuwan Taragi LIVE

Telegram: https://t.me/TheLawTalks

Facebook Page: The Law Talks

LinkedIn: https://www.linkedin.com/in/csBhuwanTaragi