Limited Liability Partnership FirmPartnership Firm

Difference Between LLP and Partnership Firm: Choose the Correct Form of Entity For Your Startup?

calendar19 Dec, 2019
timeReading Time: 5 Minutes
LLP

The LLP and Partnership Firm are business entities which are incorporated or brought into existence by two or more people who come together to form an entity. These people are called partners. Furthermore, the profits and loss of these firms are distributed between the partners of the firm as per the agreement made between them. Study the article to know more about the differences between the types of business entities in India.

Definition of LLP or Limited Liability Partnership

Limited Liability Partnership generally abbreviated as LLP in India is governed under the Limited Liability Partnership Act, 2008[1]. As per the Limited Liability Partnership Act, 2008, the LLP is defined as the partnership formed and registered under this Act. Furthermore, the LLP is an entity which is separate from its partners also it involves the following features;

  • An LLP has perpetual succession
  • Any change in the partnership should not affect the existence, rights or liabilities of the LLP

Definition of Partnership Firm

As I explained in my last blog on Partnership Firm, as per the Indian Partnership Act, 1932[2], a partnership is defined as the relationship between people who have agreed to share profits of a business. Similarly, partners are the people who are collectively running the firm, and the partners collectively are called a firm or partnership firm.

Benefits of choosing LLP over Partnership Firm

There are many benefits of choosing Limited Liability Partnership over Partnership Firm for your startup. The greatest advantage of forming an LLP is a limited liability and flexible management roles. Unlike Partnership Firms, LLPs does not expose their partners to unlimited liability. Also, the members or partners of a Limited Liability Partnership Firm can be sued, and they can sue someone as it is a legal entity.

Similarities between LLP and Partnership Firm

The resemblance between LLP and Partnership firms is as follows;

  • In both the forms of business entities, the partners are not the employees, but rather, they are agents.
  • Furthermore, the Partners are entitled to remuneration, only if it is provided in the agreement.
  • Moreover, no partner is allowed to carry on competing business without the prior consent of other partners.
  • A new partner can only be introduced to the partnership, with the permission of the existing partners.
  • Additionally, in the case of insolvency of a partner, he or she will not be allowed to continue as a partner.

Read our article:Partnership Firm Registration: Definition, Regulations, and Registration Procedure

Key Difference between LLP and Partnership Firm

The table shows the differences between LLP and Partnership Firms;

Particulars

LLP

Partnership firm

1.

Registration Act

Limited Liability Partnership Act, 2008

Indian Partnership Act, 1932

2.

Registered to

Ministry of Corporate Affairs

Registration of Firms

3.

Liability

Liability of partners is limited to the amount invested in the company

The partner and the firm are not considered as separate legal entity. For this reason, Partners  are personally liable for the  unlimited amount of liabilities  of the partnership

4.

Number of partners and other requirements

A Minimum of 2 and no upper limit for the maximum number of partners in LLP. And No minor can be a partner.  

A Minimum of 2 and a maximum of 20 partners can be a member of the partnership firm. Minors can be a partner.

5.

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

6.

Conversion/ transferability

The Shares can be easily transferred to another person after obtaining the required consent from all the Partners in an LLP. The transferee cannot become a partner automatically. LLP cannot be converted back to the partnership but can be converted to Private Limited Company or Limited Company easily.  

The Shares can be transferred to another person after obtaining the required consent from all the Partners in a Partnership. Transferability of the partnership is a lengthy process. Conversion of partnership to LLP or Private Limited Company is a burdensome process.  

7.

Compliance

Mandatory to file the annual return to Ministry of Corporate Affairs

No requirement of annual return filing

8.

Capital Required  

No minimum amount

No minimum amount

9.

Time is taken for registration

7- 8 days

5- 7 days

10.

Creation

Under law

Two people can start the firm

11.

Cost of creation

The cost of Formation is the statutory filing fees

Negligible fees

12.

Foreign participation

Foreign nationals can be partners in LLP

Foreign participation is not allowed in a partnership firm

13.

Ownership of assets

The firm has ownership of the assets of the company

The partners have equal ownership on assets

14.

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

15.

Tax liability

The income of LLP is taxed at a Flat rate of 30% plus education cess as applicable.

The income of the partnership is taxed at a Flat rate of 30% plus education cess as applicable.

16.

Inheritance of entity

Transferred as per the regulations of the LLP Agreement

Transferred to the legal heir

17.

The requirement for Designated Partner Identification Number (DPIN)

Each partner should obtain DPIN before they are appointed as the Designated Partner

No such requirement

18.

Digital signature

At least one Designated Partner must have Digital signature

No such requirement

19.

Dissolution

By agreement, court order, insolvency, mutual consent, etc.

It should be done voluntarily or by order of the National Company Law Tribunal

20.

Admission of partner

As per the regulation of the LLP Agreement

As per the regulation of the Partnership Deed

21.

Cessation of a partner

A person can continue to be a partner as per the LLP Agreement or by giving a prior notice before 30 days in case of the absence of the same

A person can continue to be a partner as per the regulation of the Partnership Deed

22.

Maintenance of Minutes

LLP is required to record the minutes of the meeting of partners 

No such requirement

23.

Voting rights

As per the terms of the LLP Agreement

As per the terms of Partnership deed

24.

Annual filing

It needs to be filed with Registrar of Companies

No need to file annual returns

25.

Audit of accounts

All LLPs except for those having a turnover less than Rs.40 Lakhs or Rs.25 Lakhs contribution in any fiscal year are required to get their accounts audited annually as per the provisions of LLP Act 2008

Under the provisions of the Income Tax Act

26.

Compromise/ merger/ amalgamation

LLP’s can enter into Compromise, amalgamation and merger

Partnership cannot enter into arrangement or compromise with the partners or creditors or merge with any other firm

Final words

The LLP and Partnership Firm are a similar form of entities but differ due to the way of functioning, terms and conditions, method of dissolution of the firm and many more. Also, both the kind of firms is governed under different regulations by the government.

Therefore, both the entities enjoy different types of liabilities, benefits/ advantages and freedom for commencing the business. Thus, it is important to know the minute differences between the both so that the entrepreneur decides accordingly that which entity shall be beneficial for starting with his startup.

Read our article:An Ultimate Guide to Registration of a Sole Proprietorship Firm in India

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