In the corporate law of India, two distinct concepts are recognised: the Limited Liability Partnership (LLP) and Private Limited Company. The Limited Liability Partnership Act 2008 provides the definition of a limited liability partnership as a corporate or incorporate body formed under this act. LLPs possess a separate legal entity from their partners and enjoy perpetual succession.
The changes in partners do not impact the existence, rights and liabilities of the LLP. Limited Liability Partnership is a relatively newer concept compared to a Private Limited Company.
What is a Private Limited Company?
A private limited company is a voluntary association comprising two or more members, with a maximum membership limit of 200 individuals. These companies enjoy the benefits of limited liability and restrict the transfer of shares to their members only. Unlike public companies, private limited companies are not allowed to offer shares to the general public.
When registered as private limited companies, they are recognised as independent legal entities. This means that they have the ability to own property, be subject to lawsuits and initiate legal actions, just like individuals. Private limited companies can remain relatively small, as they are only required to have two or more shareholders and two or more directors. The limited liability nature of these companies provides protection for the personal assets of their owners.
Once shares are allocated to the members or owners of a private limited company, the transfer of shares among them is restricted. This safeguard ensures proper control over share distribution. A private limited company can have a continuous existence if its members choose to do so. Similar to a limited liability company (LLC), the articles of association of a private limited company can establish additional requirements and regulations as determined by the members.
What is Limited Liability Partnership?
A limited liability partnership (LLP) is another type of business structure that combines elements of both partnerships and LLCs. Partnerships offer flexibility in structuring management, while LLCs provide liability protection. LLPs benefit from both these characteristics.
Forming an LLP requires a minimum of two partners and the LLP itself is considered a separate legal entity. There is no prescribed minimum capital contribution required from members. Capital contribution refers to the initial investment made by a member or partner into the business. LLPs establish partnership agreements to govern their operations. Converting to an LLP is relatively straightforward for other entity types and law firms, if desired.
Similarities Between LLPs and PLCs
LLPs (Limited Liability Partnerships) and PLCs (Private Limited Companies) share certain similarities in their legal requirements and documentation. Some of these commonalities are as follows:
Digital Signature and Director Identification Number (DIN/DPIN)
Both LLPs and PLCs require their directors to obtain a digital signature certificate (DSC) and a director identification number (DIN). In the case of LLPs, the director identification number for partners is referred to as DPIN (designated partner identification number).
Formation Documents
Both LLPs and PLCs are required to file specific formation documents for legal recognition. These documents include articles of association for PLCs and operating or partnership agreements for LLPs. These documents outline the rules, regulations and internal governance of the respective entities.
While LLPs and PLCs have their differences, they share these common requirements regarding digital signatures, director identification numbers and the need for formation documents to establish their legal existence.
Advantages of Limited Liability Partnership over Partnership Firms
The advantages of LLP over partnership firms:
Limited Liability
One of the significant advantages of LLPs is that partners are not personally liable to external creditors. Their liability is limited to the extent of their contributions to the LLP. In contrast, partners in a partnership firm are personally responsible for the firm’s debts. This limited liability protection in LLPs makes it more appealing for entrepreneurs.
Number of Partners
Both LLPs and partnership firms require a minimum of two partners. However, LLPs do not have an upper limit on the number of partners, while a partnership firm dissolves if the number of partners falls below two. In an LLP, even if the number of partners reduces to one, the sole partner can bring in a new partner without dissolving the LLP.
Government Control
LLPs, registered under the Ministry of Corporate Affairs, have the flexibility to shift their registered office and open bank accounts anywhere in India. In contrast, partnership firms are governed by the Registrar of Firms under the state government. This makes operating and relocating across different states in India more cumbersome for partnership firms.
Membership
LLPs allow for the inclusion of various entities as partners, both during incorporation and after incorporation. The following entities can be partners in an LLP: individuals, other LLPs, companies, foreign LLPs and foreign companies.
Difference Between Between LLPs and Partnership Firm
| Aspect | Limited Liability Partnership (LLP) | Partnership Firm | |
| Liability | Partners have limited liability, not personally liable for the firm’s debts | Partners have unlimited personal liability for firm’s debts | |
| Number of Partners | No upper limit on the number of partners | Dissolves if the number of partners falls below two | |
| Dissolution | Even if the number of partners reduces to one, the LLP continues | Dissolves if the number of partners falls below two | |
| Government Control | Registered under the Ministry of Corporate Affairs | Governed by the Registrar of Firms under the state government | |
| Membership | Allows various entities as partners (individuals, LLPs, companies, etc.) | Generally limited to individuals as partners | |
| Transfer of Ownership | Ownership can be transferred as per LLP agreement | Transfer of ownership requires the consent of all partners | |
| Flexibility | Flexibility to shift registered office and open bank accounts nationwide | Operating and relocating across different states may be complex | |
| Compliance | LLPs have fewer compliance requirements compared to partnership firms | Partnership firms may have additional compliance obligations | |
| Taxation | Taxed as a partnership firm for income tax purposes | Taxed as a partnership firm for income tax purposes | |
Conclusion
Both LLP registration and private company registration offer their respective benefits. However, online LLP registration is recommended for those starting a business due to its lower compliance requirements than company registration. As the business grows, it can consider converting its LLP into a private company, as company registration provides long-term advantages over LLP. For more details, connect with our experts at StartupFino.
