A Limited Liability Partnership or LLP and a partnership firm are two business formats in which partners can conduct their operations. A minimum of two willing partners are required to form an LLP or a partnership firm. A limited liability partnership (LLP) is a novel concept, although a partnership business is an old notion.
The Limited Liability Partnership Act of 2008 established the idea of LLP but partnerships, on the other hand, have been established in India under the Indian Partnership Act since 1932. Although both an LLP and a partnership firm have a number of common points and similarities, there are significant differences between them as well, which must be clearly understood by entrepreneurs before choosing one for business.
Definition and Meaning of LLP and Partnership Firm
Limited Liability Partnership (LLP) Definition:
A Limited Liability Partnership (LLP) is a unique form of partnership where partners enjoy liability limited to the extent of their capital contributions. Unlike traditional partnerships, the personal assets of LLP partners are protected and cannot be used to settle the firm’s debts. Essentially, an LLP combines the features of both partnerships and companies, providing limited liability similar to companies, while retaining partnership characteristics such as perpetual succession, common seal and the right to hold properties in the firm’s name. However, partners’ direct control over business operations is limited in an LLP, making it a modified version of a traditional partnership that offers the benefits of a corporate entity.
Partnership Firm Definition:
A partnership is a collaborative relation formed by people who hold similar objectives and seek to earn profits together. It addresses the challenges presented by sole proprietorships, in which a single person bears all of the risks, invests capital and operates the business alone. A partnership, in very simple terms, is a commitment between two or more individuals to run a business jointly, sharing risks and spending capital jointly in order to make profits. In India, partnership firms operate under the Indian Partnership Act, 1932.
Similarities Between LLP and Partnership Firm
Given below are the essential similarities between partnership firms and an LLP:
- Partners as Agents: In both LLP and Partnership firms, the partners are considered agents and not employees of the business.
- Remuneration: Partners are entitled to receive remuneration only if it is specified in the partnership agreement.
- Non-Compete Clause: Neither LLP nor Partnership firm allows partners to engage in competing businesses without the prior consent of other partners.
- Addition of New Partners: Introducing a new partner to the LLP or Partnership firm requires the consent of existing partners.
- Insolvency of Partner: In the event of a partner’s insolvency, they cannot continue as a partner in both LLP and Partnership firms.
Partnership Vs Limited Liability Partnership Based on Features
Given below is the difference between partnership firms and LLP based on its essential characteristics:
| Features | Limited Liability Partnership (LLP) | Partnership Firm |
| Suitable for | Small and medium businesses not requiring much external funding | Small businesses with low investment and low risk |
| Liability | Limited liability (similar to private limited company) | Unlimited liability (personal assets at risk) |
| Compliances | Fewer compliances compared to private limited companies | Minimal compliance requirements |
| Tax Advantages | Tax benefits for profits over ₹1 crore | Taxed at individual partner’s income tax slab |
| Number of Partners | No limit on the number of partners | Typically, 2 to 20 partners |
| Start-up Cost | Cheaper with government fees around ₹5000 | Lower start-up costs |
| Ease of Start | Simple registration process | Easy to start with a partnership deed |
| Time and Effort | Saves time and effort due to fewer formalities | Minimal burden of compliance |
Partnership Firm Vs LLP Based on Other Criteria
Given below is the set of differences between LLP and partnership firms based on other criteria like governing law, creation, liability of partners, dissolution etc.
| Particulars | LLP | Partnership Firm |
| Governing law | The Limited Liability Partnership Act of 2008 oversees LLPs. | The Indian Partnership Act of 1932 oversees partnership firms. |
| Registration | Registration of LLP is mandatory under the LLP Act. | Registration of partnership firms under the Indian Partnership Act is only voluntary. |
| Registering authority | An LLP should submit registration forms and other e-forms with the Registrar of Companies. | The firm must submit partnership firm registration forms and other relevant forms with the Registrar of Firms. |
| Creation | An LLP comes into existence by statutory law. | A partnership firm is formed through a contract between partners. |
| Binding document | The LLP agreement is the fundamental document controlling an LLP’s operations. | The partnership deed outlines the terms and conditions of the partnership firm. |
| Annual form filing | The LLP must file annual statements of accounts and solvency and an annual return with the Registrar of Companies every year. | A partnership firm doesn’t have to file any annual returns with the Registrar of Firms. |
| Power to enter into contract | An LLP can enter into contracts in its name. | A partnership firm cannot enter into contracts in its name. |
| Separate legal entity | An LLP enjoys a separate legal entity status apart from its partners. | A partnership firm doesn’t have a separate legal status and it is the collective responsibility of the partners. |
| Liability of partners | In LLPs, the partners’ liability is limited to their capital contribution to the LLP. | In a partnership firm, the partners have unlimited liability for the firm’s debts and obligations. |
| Name | The name of an LLP must contain the word ‘LLP’ at the end. | The partnership firm can have any name without any specific requirements. |
| Perpetual succession | An LLP has perpetual succession and it continues to exist irrespective of partner changes. | A partnership firm does not have perpetual succession and is dissolved upon a partner’s exit or death. |
| Maximum partners | No upper limit is there on the maximum number of partners in an LLP. | A partnership firm cannot have more than 100 partners. |
| Ownership of assets | An LLP’s assets are owned by the LLP and not by the individual partners. | The assets of a partnership firm are collectively owned by the partners. |
| Power to own property | An LLP can hold property in its name. | A partnership firm cannot hold property in its name; it must be in the names of the partners or as per the partnership deed. |
| Agency relationship | Partners act as agents of the LLP and their authority is limited to the LLP. | Partners act as agents of both the other partners and the firm itself. |
| Common seal | An LLP can have a common seal for executing documents. | A partnership firm does not use a common seal. |
| Administration | Designated partners are responsible for managing the LLP’s day-to-day affairs and compliances. | Partners themselves manage the business without appointing managerial personnel. |
| Foreign National | Foreign nationals can form an LLP with an Indian resident as a partner. | Foreign nationals cannot form a partnership firm in India. |
| Audit of accounts | Most LLPs (except small LLPs) need to get their accounts audited annually. | Partnership firms must get their accounts audited as per the Income Tax Act. |
| Dissolution | An LLP can be dissolved voluntarily or by an order of the National Company Law Tribunal (NCLT). | A partnership firm can be dissolved by mutual consent, court order or insolvency of partners. |
| Arrangement, compromise and amalgamation | An LLP can enter into compromises with creditors or partners and amalgamate with another LLP. | A partnership firm cannot enter into compromises or amalgamate with other firms. |
Final Thoughts
Limited Liability Partnerships (LLPs) and partnership firms are distinct business formats that offer unique advantages to partners in India. An LLP provides limited liability that is similar to a private limited company while retaining partnership features, making it suitable for small to medium-sized businesses. Partnership firms are easy to start and require minimal compliance, which makes them ideal for the small businesses with low investment and risk.
Knowing the distinctions between these two forms of organisation is essential for new entrepreneurs in order to figure out the best structure for their business goals and preference. The legal framework, liabilities, registration process, management and other important features change greatly between businesses, making each different in its own way.
