Do you need clarification on the LLP and partnership business structure? When starting a business for the first time, knowing the difference between an LLP and a Partnership business model is essential.
In this article, we have listed down some of the pros and cons of both business models. Please have a look at each of them below.
What is LLP?
LLP stands for Limited Liability Partnership. This business model has the flexibility of a Partnership business model and a company. In short, it has properties of both these business models.
The business owner’s personal assets are not at stake in an LLP business model. It means that if the business is bankrupt, the creditors cannot go behind the owners’ personal assets. Moreover, an LLP business is considered a separate entity per Indian Law.
LLP is one of the best business entity you can opt for if you want to set up a small or medium size business. It is easy for the owners to obtain capital from venture capitalists.
What is a partnership firm?
A partnership is one of the oldest business models in India. This business model has a limited set of rules and regulations to follow. If two or more owners come forward to invest in a business, they can set up a Partnership firm.
Even when the Partnership firm is not registered, it is recognized by the Law of India. However, in this business model, the partners are liable to pay the creditors if the company goes bankrupt.
Difference between LLP and a Partnership firm
- An LLP business model is governed by the Limited Liability Partnership Act of 2008. On the other hand, a Partnership firm is governed by the Indian Partnership Act of 1932.
- It is mandatory to register an LLP company as per the LLP Act, whereas it is voluntary to register a Partnership firm as per the Indian Partnership Act.
- The Registrar of Companies must fill out a registration form and other e-forms. On the other hand, a Partnership firm must submit the registration and other forms to the Registrar of firms.
- An LLP company is formed per the Law, whereas a Partnership firm is formed per the contract.
- As per the Limited Liability Partnership Act, the partners in LLP have limited liability. On the other side, in the Partnership business model, the liability is up to the capital invested in the business.
- An LLP is considered a legal entity by Indian Law, whereas a Partnership firm does not have legal status.
- A company formed as per the Limited Liability Partnership Act of 2008 should have “LLP” at the end of the company name. Conversely, you can start a company formed per the Partnership Act with any name.
- An LLP business model requires a minimum of 2 members to form the company. It does not have a maximum number of members. On the other side, a Partnership business model can have a maximum of 100 partners.
- In the case of LLP, the LLP agreement is considered to be a charter document. On the other side, the Partnership deed is deemed a charter document of the partnership firm.
- An LLP company can enter into a contract in its name, which is impossible for the Partnership firm.
- Every year an LLP firm must submit the annual statements of returns and accounts and solvency to the Registrar of Companies. Conversely, Partnership firms do not have to file annual returns with the Registrar of Firms.
- The existence of an LLP company does not get affected when a partner joins or leaves it. On the other hand, the existence of a Partnership firm is affected by the partners’ will.
- In the case of an LLP, the owners do not have the right to access the company’s assets. On the other hand, the ownership of assets is in the hands of the partners in a Partnership firm.
- An LLP company can hold the properties in its name, whereas a Partnership firm cannot own the assets in a company name. The properties are in the name of the partners or any authorized person as per the Partnership deed.
- You can use a common seal to sign the documents in case of an LLP. Partnership firm, however, does not have a common seal. Only an authorized partner can sign in to a Partnership firm.
- In the case of an LLP, a designated partner should obtain a DPIN to sign the documents digitally. In the case of a Partnership firm, the designated partners need not have any DPIN or DSC.
- With the help of an Indian resident, an LLP can be formed by foreigners in India. On the other hand, foreigners cannot set up any Partnership firm in India.
- All LLP companies need to get an audit of accounts done as per the LLP act. Only companies with turnover less than Rs.40 lakhs annually are exempted from this. Conversely, all Partnership companies must have their accounts audited under the Income Tax Act.
- An LLP Company can be dissolved by an order from the National Company Law Tribunal or voluntarily. A Partnership firm can be dissolved by mutual consent of partners, court orders, or insolvency of partners, etc.
These are the key differences between an LLP and a Partnership firm. Depending on your vision and mission, you can choose one among the two business models listed above.