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

LLP

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 type 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 involved 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 for 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;

Sr. No. Particulars LLP Partnership firm
1. Registration under 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 a 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 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 Companyor 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

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.

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

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Shailza Sharma

Miss Shailza Sharma, BA. LLB graduate from Himachal Pradesh University. She holds an experience of 2.5 years in various Legal companies and organizations.

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