Before starting any business, one must know the type of business model one would like to enter into. If you are looking to start a business on a partnership basis, there are two partnership business models: LLP (Limited Liability Partnership) and Partnership firm.
In this article, we have provided key differences between an LLP and a Partnership firm. Have a look at them below:
What is a limited liability partnership?
A Limited Liability Partnership has advantages for both companies and a Partnership firm. It consists of a few features from both of these business models. In short, it is a hybrid business model.
As per the Law of India, a Limited Liability Partnership is considered a legal entity. Any loss incurred by the business is liable for its assets' full extent. Also, the liability of the partners is limited to the investment done by them in the company.
Due to the operational and structural flexibility, the LLP business model is suitable for anyone who plans to start a small or medium size business. LLP is an attractive business model that can draw funds even from Venture Capitalists. This business model is suitable for anyone providing scientific or technological services to end consumers.
What is a partnership?
A partnership is one of India's oldest yet most popular business models. Setting up a Partnership firm requires minimal rules and regulations.
A Partnership firm is established when two or more people plan to pool their investment and resources to start a business and then agree to share the profits from the company. The Partnership firm is established when all the partners agree to enter the Partnership deed and run the firm under the Partnership name.
Interestingly, the Partnership firm need not be registered. The Law of India recognizes it even when the firm is not legally registered. The Partners who get into the Partnership deed are liable for any losses incurred by the company.
LLP vs. Partnership
Now that you know what an LLP is and a Partnership firm is, here are a few key differences between both these business models:
- The Limited Liability Partnership is governed by the Partnership Act of 2008. On the other hand, the Indian Partnership Act is governed by the Indian Partnership Act of 1932.
- The registration form and other e-form related to the registration have to be submitted to the Registrar of Companies to form an LLC. On the other hand, the partnership registration form and other forms must be submitted to the Registrar of Firms.
- LLP firm is formed by law. A Partnership Firm is formed by a Contract.
- For an LLP, the LLP agreement acts as a chartered document. In the case of a Partnership firm, the Partnership deed serves as a Charter document.
- An LLP must file the annual account statements and returns to the Registrar of Companies. In the case of a Partnership firm, there is no need to file any annual returns.
- An LLP can enter into a business contract in its name. A Partnership firm cannot enter into a business contract as it does not have legal status.
- The liability of partners in the case of LLP is limited to the capital invested in the business. In the case of a Partnership firm, the liability is unlimited.
- In the case of LLP, there should be an 'LLP' at the end of the business name. A Partnership firm need not have the tag 'Partnership' at the end of the business name.
- An LLP firm has perpetual succession, which means when a partner joins or leaves the company, it does not impact the company. A Partnership firm does not have perpetual succession, as the partners form the face of the company.
- There is no limit to the number of partners in an LLP. The maximum number of partners in a Partnership Firm is limited to 100.
- As per the LLP Act, registration of LLP is mandatory. On the other hand, it is voluntary for a Partnership firm to register, as per the Indian Partnership Act.
- The LLP can enjoy the ownership of assets, and the partners have no power over it. In the case of a Partnership firm, the partners have joint control over the assets owned by the company.
- An LLP can hold the assets or property in its name. A Partnership firm cannot own any property in its name. It must be in the name of partners or any authorized person.
- Partners act as the agents of an LLP and not any other partners. In the case of the Partnership firm, the partners act as agents for the company and the partners.
- LLP has a common seal that acts as a signature of the company. Authorized partners can only sign in Partnership.
- Every designated partner of LLP must have a DPIN before being appointed as a designated partner. They also need to have DSC before signing digitally. DPIN or DSC is not required for the Partners.
- A foreign person can form an LLP with an Indian resident. It is not possible to start a Partnership firm with a foreign person.
- Designated partners carry out the day-to-day business activities in the case of an LLP. Partners will administer the business themselves.
- As per the LLP Act, LLPs with a turnover of more than 40 Lakh rupees or contributions of more than Rs.25 Lakhs in a year must get their accounts audited annually. As per the Income Tax Act, all Partnership firms must get their accounts audited per their provision.
- An LLP can be dissolved either by the National Company Law Tribunal or voluntarily. In the case of a Partnership firm, it can be dissolved only by court order, an agreement between partners, mutual consent between the partners, etc.
- An LLP can amalgamate with another LLP or compromise with other partners or creditors. A Partnership firm cannot enter into any compromise with its partners or creditors.
Conclusion
We hope this article has provided clear insights into the differences between a partnership and an LLP. Do let us know if you have any queries related to them.
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