LLP and Partnership Firm: Meaning and Differences

[Ishita Ramani]

Introduction

When starting a partnership business, the first decision a businessman has to make is what type of partnership business they want to register. The 2 most common types of partnership business structures are Partnership Firm and Limited Liability Partnership (LLP). In this blog, we will discuss about the LLP and Partnership Firm with some differences.

What is a Partnership Firm?

A Partnership Firm is a popular business form in India and has been in existence for a long time. It is relatively simple to establish as it follows a minimal set of rules & regulations. A partnership is an agreement between 2 or more individuals who pool their capital and resources to contribute to a business and agree to share the profit earned. It is formed when all partners/individuals enter into a partnership agreement or deed & conduct business under the firm name.

What are the Benefits of Partnership Firm?

Here are the benefits of partnership firms:

• It is easy to establish.
• The firm will make a decision quickly.
• It does not burden you with compliance work.

What is a Limited Liability Partnership (LLP)?

An LLP (Limited Liability Partnership) is a business form that combines the benefits of a partnership and a company. It is a hybrid structure that incorporates elements of both structures. It is a separate legal entity & is liable for the full extent of its assets. The liability of a partner is limited to their contribution to the LLP and they are responsible for their own actions.

What are the Benefits of an LLP?

The following are the benefits of LLP:

• There is no minimum limit on the number of partners.
• The fees or cost of registering your LLP is low.
• There is no minimum capital requirement an LLP.

Difference between an LLP and Partnership Firm

Here are the main differences between an LLP and Partnership Firm:

1. Governance of Partnership Business: The process and provisions related to Partnership Firms governed by Indian Partnership Act, 1932, while in the case of LLP, it is governed by LLP (Limited Liability Partnership) Act, 2008.

2. Partners Liability in Business: The liability of partners in a partnership firm is unlimited, while in an LLP the liability of partners is limited to the amount of capital contributed to the LLP.

3. Major Document: A partnership Deed is the major document in the firm, while an LLP agreement is the major document in an LLP. Both documents specify the partners, their duties, shareholdings, etc.

4. Audit of Accounts: It is necessary for both Partnership Firm and LLP to audit their accounts. The firm has to audit their accounts annually as per the provisions of the Income Tax Act, while all the LLPs except those with a turnover of less than INR 40 lakhs or a contribution of less than INR 25 lakhs as per the LLP Act.

5. Separate Legal Entity: As per Indian Law, the LLP is a separate legal entity, while a partnership firm cannot be a separate entity.

6. Perpetual Succession: An LLP has perpetual succession, which means that its existence is unaffected by the addition or removal of partners, while a partnership firm does not have perpetual succession, and its survival is based on the will of its partners.

7. Ownership of assets: In an LLP, the assets are owned by the LLP and not by any of the partners individually. The assets of an LLP are jointly owned by the partners. This is different from a partnership firm, where all assets are owned by the partners jointly.

LLP registration process involves steps like selecting a unique name, obtaining digital signature certificates and Director Identification Number, filing the registration application with the Registrar of Companies, paying fees, and obtaining the Certificate of Incorporation. An LLP agreement is then executed to outline the rights and obligations of partners. Professional assistance can be helpful for a smooth registration process.

Conclusion

An LLP and a Partnership Firm are similar types of entities, but they differ in various aspects like partner liability, legal framework, audit of accounts, ownership of assets, etc. Understanding these differences might help individuals or entrepreneurs to choose the most suitable partnership structure for their business.