LLP vs. Partnership: What are the Differences?
LLP or Limited Liability Partnership and Partnership are two varied business structures with a few distinct differences. If you want to start a new business or change the form of your existing business, it is crucial to understand the difference between LLP and Partnership. Below, we will examine the main points of difference between an LLP and a partnership firm, including legal status, liability, compliance, management, and taxation.
LLP or Limited Liability Partnership
In the difference between an LLP and a Partnership, know that an LLP is a business structure with the advantages of a company and a partnership firm. A hybrid between a partnership firm and a company is an LLP, a separate legal entity responsible for its assets' full extent. Here, the liability of the partners is limited to their contributions to the firm, so they are responsible only for their actions.
An LLP helps entrepreneurs, enterprises, and professionals from technical and scientific disciplines or those providing services from commercially efficient vehicles according to their requirements. Considering its operational and structural flexibility, both small—and medium-scale enterprises can establish an LLP by obtaining investment from different venture capitalists.
Partnership Firm
When trying to understand the difference between a partnership firm and an LPP, one should know that a partnership firm is one of the oldest business structures in India. Establishing one is easy, considering entrepreneurs must comply with minimal rules and regulations. It is formed through an agreement between two or more individuals who gather their resources and capital to start the business and agree to share profits and losses. A particular name is chosen for the partnership firm, and individuals or partners enter a certain deed to run the business jointly.
Registering a partnership firm in India is unnecessary, as the law recognises such businesses even if they are not registered formally. Nevertheless, all the firm partners are liable for the losses caused to third parties by the firm’s operation.
Main Points of Difference between LLP and Partnership Firm in India
The critical differences between LLP vs. Partnership firm are as follows:
- Registration
Registration of a partnership firm under the Indian Partnership Act is voluntary, but registration of an LLP under the Limited Liability Partnership Act 2008 is mandatory.
- Registering Authority
The Registrar of Firms is the registering authority for a partnership firm, and an LLP must submit its registration form and all other forms to the Registrar of Companies. Similarly, annual form filling for partnership firms must be done at the Registrar of Firms and for LLPs at the Registrar of Companies.
- Governing Law
The Indian Partnership Act of 1932 governs all partnership firms in India, and LLPs are governed by the Limited Liability Partnership Act of 2008 regulates LLPs.
- Liability
Partners in a partnership firm have never-ending liability and are personally liable for all business obligations and debts. On the other hand, in an LLP, each partner's liability is limited to the amount of money they have invested in the business.
- Taxation
Partnership firms are not taxed as separate entities. All partners in the firm are equally responsible for tax payments based on their share of business profits. Conversely, LLPs in India are taxed as separate legal entities, with the partners being taxed based on the income they make as profit distribution or salary.
- Management
The partners themselves manage partnership firms, but LLPs feature designated partners responsible for business management. A partnership firm's maximum number of partners is limited to 100, but LLP has no limit.
- Dissolution
A partnership firm must be dissolved by agreement between the partners, mutual consent, insolvency of the partners, and a court order. Nevertheless, an LLP can be dissolved voluntarily or by the orders of the National Company Law tribunal.
Arrangement, Amalgamation and Compromise
Partnership firms are not allowed to enter into any compromise or agreement with their partners or creditors and cannot amalgamate with other firms. Conversely, LLPs can compromise with partners or creditors and even amalgamate with other LLPs.
These are the main points between an LLP and a partnership firm in India. Although LLPs and partnership firms have similar business structures, they differ in account maintenance, functioning, and dissolution methods. Knowing LLP vs. partnership in India can help a business owner choose the right partnership structure for their business.