Partnership firm v. LLP in India

LegalKart Editor

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Last Updated: Dec 3, 2024

Before establishing the business, a businessperson must first consider how he or she will go about setting up a business. The type and level of intricacy associated with various types of business creation are distinct from one another. As a result, the businessperson must select the type of his or her business or profession with great consideration, taking into consideration the essence of the industry or trade, the viable business assessment, the brand recognition, the scale of operations, the financial standing, and the level of autonomy. This initial decision will have a significant impact on the organization's future.

You may also read How to Convert Partnership Firm to LLP ? Process and Benefits.

Differences between LLP and Partnership firm

In India, partnerships established and governed under the Partnership Act, of 1932 was once a very prominent type of business organization given the ease with which they could be formed and maintained. The establishment of the Limited Liability Partnership (LLP) in India by the Limited Liability Partnership Act, 2008, has resulted in the LLPs gaining popularity and displacing partnerships as the dominant business structure. Limited Liability Partnerships (LLPs) are simple to establish, provide a variety of advantages to their owners, and are simple to manage, making them an excellent choice for many small and medium-sized businesses that might otherwise choose to form as a sole proprietorship or a private limited company.

Also read Which Is Better For A Small Sized Company: LLP Or Partnership?

The difference is as follows:

No.	Point of Difference	Partnership	Limited Liability Partnership
	Governing statute	Partnership Act, 1932 under Registrar of Firms which is not mandatory.	LLP Act, 208 under Ministry of Corporate Affairs and the registration is compulsory
	Liability	Partners and firms are not separate legal entities thus, partners have personal and unlimited liability.	Partner and firm are separate legal entities thus, the liability of the partner is limited to the stake of each partner in the firm.
	Minimum Requirement	Minimum 2 and maximum 20 partners. Even minors are permitted to be partners	Minimum 2 and no maximum number however, minors cannot be partners
	Charter Document	Partnership Deed is drafted which governs the operation and management of the firm. The decisions, methods of working and other operations are decided as per the Deed.	An LLP Agreement is drafted with is the governing document for all operations and management.
	Transferability and Conversion	The transferability of shares is free subject to the consent of all partners, however, it is a lengthy process. Converting a partnership to LLP or a private company is also a tedious process.	Shares can be easily transferred subject to the required consent of the partners. LLP cannot be converted back to a partnership but can easily be converted to a private or a public company.
	Compliance	The income is taxed at 30%+ education cess. However, no requirement for annual return filing	The income is taxed at 30%+ education cess. The annual return has to be mandatorily filled.
	Ownership of Assets	Partners jointly own all assets of the firm	LLP being a separate legal entity owns assets in its own name.
	Transfer or Inheritance of Rights	The rights are not transferable. However, In case of death, the legal heir shall receive a financial value of the share. The legal heir also has the right to obtain the refund of capital contribution as well as share in profits. The legal heirs shall not be partners in the firm.	Regulations relating to the transfer are subject to the LLP Agreement. The rights on death remain the same as a partnership.
	Restructuring	Partnerships cannot merge with other firms or enter into compromises or arrangements with creditors or partners	LLPs are permitted mergers and other arrangements and compromises.
	Audit of Accounts	The tax audit is done as per provisions of the Income Tax Act.	All LLPs (except those with turnover less than 40 lakhs) have to get an audit of accounts annually as per LLP Act.
	Data Availability	Any information or data of the Partnership is not disclosed in public.	The central registration with the MCA provides for the release of documents to the public, with the exception of the LLP Agreement. Additionally, the Master data of the company contains the most recent Balance Sheet filed with the MCA, resulting in a high level of creditability and dependability among the other parties to the LLP.
	Higher Credibility	Since other body corporates have more credibility than partnership firms, they are less preferred because of their lower credibility than partnership firms.	Since the LLP maintains higher levels of compliance and openness in its operations, its credibility has increased, making it easier to raise funds from financial institutions.

What should you choose: LLP or Partnership?

A LLP does not make you personally liable and limits the extent of your contributions to the extent of the capital contributed. A partnership on the other hand exposes you to unlimited liability including personal liability. Having said that, a partnership requires lesser compliances and low setting up costs than a LLP. Consider your long term goals prior to choosing the entity you wish to incorporate.

Also read Limited Liability Partnership (LLP).