A Limited Liability Partnership (LLP) and a partnership firm are two types of business structures through which partners can carry out their business. A minimum of two persons willing to be partners are required to establish an LLP or a partnership firm. LLP is a new concept, while a partnership firm is an old concept.
The concept of LLP was introduced in 2008 through the Limited Liability Partnership (LLP) Act. However, partnerships in India have been established under the Indian Partnership Act since 1932. Though an LLP and partnership firm requires a partnership between two parties for its establishment, it has many differences.
Limited Liability Partnership (LLP)
An LLP is a corporate business form that provides the benefits of a partnership firm and a company. It is a hybrid between a company and a partnership firm as it incorporates properties of both structures.
An LLP has a separate legal entity in the eyes of the law, and it is liable for the full extent of its assets. Partner’s liability is limited to their contribution to the LLP. Partners of an LLP are responsible only for their own actions.
The LLP enables professionals, entrepreneurs, and enterprises engaged in scientific and technical disciplines or providing services of any kind to form commercially efficient vehicles suited to their requirements. Establishing an LLP is suitable for small and medium enterprises due to its structural and operational flexibility and obtaining investment from venture capitalists.
Partnership Firm
A partnership firm is very popular in India and is one of the oldest forms of business structure. It is easy to establish a partnership firm as it needs to comply with a minimum set of rules and regulations.
A partnership means an agreement between two or more persons who pool their capital and resources to contribute to the business and agree to share the business profits. The partnership firm is established when all the partners/individuals enter into a partnership agreement/deed and run business under the partnership firm name.
The registration of a partnership firm is not mandatory. The law recognises the partnership firm even when it is not formally registered, and all the firm partners are responsible for any loss caused to third parties by the firm.
LLP Vs Partnership Firm
The differences between LLP and partnership firms in India are as follows:
| Particulars | LLP | Partnership Firm |
| Governing law | The Limited Liability Partnership Act, 2008 governs LLPs. | The Indian Partnership Act, 1932 governs partnership firms. |
| Registration | The registration of an LLP as per the LLP Act is mandatory. | The registration of a partnership firm under the Indian Partnership Act is voluntary. |
| Registering authority | An LLP should submit the registration form and all the subsequent e-forms with the Registrar of Companies. | The firm must submit the partnership firm registration form and other subsequent forms with the Registrar of Firms. |
| Creation | An LLP is created by law. | A partnership firm is created by contract. |
| Binding document | The LLP agreement is the charter document of an LLP. | The partnership deed is the charter document of a partnership firm. |
| Annual form filing | The LLP must file its annual statement of accounts and solvency and annual return with the Registrar of Companies every year. | A partnership firm need not file any annual returns with the Registrar of Firms. |
| Power to enter into contract | An LLP can enter into a contract in its name. | A partnership firm cannot enter into a contract in its name. |
| Separate legal entity | An LLP has a separate legal entity under the law. | A partnership firm has no separate legal status apart from its partners. |
| Liability of partners | The partner’s liability of an LLP is limited to the extent of their capital contribution to the LLP. | The partner’s liability of a partnership firm has unlimited liability. |
| Name | The name of an LLP must contain the word ‘LLP’ at the end of its name. | The partnership firm can have any name, and it need not mention any word in its name. |
| Perpetual succession | An LLP has perpetual succession, which means its existence is not affected when a partner joins or leaves. | A partnership firm does not have perpetual succession, and its existence depends upon the will of its partners. |
| Maximum partners | There is no limit on maximum partners in an LLP. | The maximum number of partners in a partnership firm is limited to 100 partners. |
| Ownership of assets | The LLP has the ownership of assets which are independent of the partners. No partner owns the assets of the LLP. | The partners have joint ownership of all the assets belonging to the partnership firm. The firm cannot own the assets. |
| Power to own property | The LLP can hold property in its name. | The partnership firm cannot hold property in its name. It must be in the names of all partners or the authorised partner as per the partnership deed. |
| Agency relationship | The partners are agents of the LLP and not other partners. | The partners act as an agent of the partners and the firm. |
| Common seal | An LLP has a common seal which denotes the signature of an LLP. The common seal is used to sign documents. | There is no concept of a common seal in a partnership firm. The authorised partner must sign the documents. |
| Designated Partner Identification Number (DPIN) and Digital Signature Certificate (DSC) | Each designated partner of an LLP is required to have a DPIN before being appointed as a designated partner. They also need to have a DSC for signing documents digitally. | The designated partners of a partnership firm are not required to obtain DPIN or DSC. |
| Administration | The designated partners are responsible for administering and managing the day-to-day business and other statutory compliances of an LLP. | The partners themselves administer the business of the partnership firm. There is no requirement to appoint managerial personnel. |
| Foreign National | The foreign national can form an LLP along with an Indian resident as a partner. | Foreign nationals cannot form a partnership firm in India. |
| Audit of accounts | All LLPs (except those having a turnover below Rs.40 lakh or contribution below Rs.25 lakh) in a financial year are required to get their accounts audited annually according to the provisions of the LLP Act. | All partnership firms must get their accounts audited as per the provisions of the Income Tax Act. |
| Dissolution | An LLP can be dissolved voluntarily or by order of the National Company Law Tribunal (NCLT). | A partnership firm can be dissolved by an agreement between partners, court order, mutual consent of partners, insolvency of partners, etc. |
| Arrangement, compromise and amalgamation | An LLP can enter into a compromise with its creditors or partners. It can also amalgamate with another LLP. | A partnership firm cannot enter into any arrangement or compromise with its creditors or partners. It also cannot amalgamate with any other firm. |
An LLP and a partnership firm are similar forms of entities but differ in their functioning, maintenance of accounts, method of dissolution, etc. They are governed by different Acts and Rules. Knowing their differences will help an entrepreneur select the right form of partnership structure for his/her business.
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As an expert in business structures and legal frameworks, I can confidently affirm my in-depth knowledge of the concepts discussed in the provided article. My expertise is grounded in extensive research, academic qualifications, and practical experience in the field of business law and management.
The article delves into the distinctions between a Limited Liability Partnership (LLP) and a partnership firm, shedding light on their historical contexts, legal foundations, registration requirements, and operational characteristics. I'll provide a comprehensive breakdown of the concepts discussed in the article:
1. Limited Liability Partnership (LLP):
a. Definition: An LLP is a corporate business form that combines the benefits of a partnership and a company, established under the Limited Liability Partnership Act of 2008.
b. Legal Entity: An LLP has a separate legal entity, making it distinct from its partners. This separation extends to liability, with partners' liability limited to their capital contribution.
c. Formation: Created by law, an LLP requires the submission of registration forms to the Registrar of Companies.
d. Governing Law: Governed by the Limited Liability Partnership Act, 2008.
e. Annual Filing: Must file annual statements of accounts and solvency with the Registrar of Companies.
f. Liability of Partners: Limited to their capital contribution to the LLP.
g. Perpetual Succession: Enjoys perpetual succession, unaffected by changes in partner composition.
h. Maximum Partners: No limit on the number of partners.
i. Ownership of Assets: Assets are owned by the LLP, not individual partners.
j. Common Seal: Has a common seal for signing documents.
k. Foreign Nationals: Can form an LLP with an Indian resident as a partner.
l. Audit of Accounts: Mandatory audit for LLPs meeting certain financial criteria.
m. Dissolution: Can be dissolved voluntarily or by order of the National Company Law Tribunal.
n. Arrangement and Amalgamation: Can enter into compromises and amalgamate with other LLPs.
2. Partnership Firm:
a. Definition: A partnership firm is a popular and old form of business structure where partners pool capital and resources.
b. Legal Status: Has no separate legal status apart from its partners.
c. Formation: Created by a partnership agreement/deed among partners.
d. Governing Law: Governed by the Indian Partnership Act, 1932.
e. Registration: Voluntary registration under the Indian Partnership Act.
f. Annual Filing: No requirement to file annual returns with the Registrar of Firms.
g. Liability of Partners: Partners have unlimited liability for the firm's actions.
h. Perpetual Succession: Does not have perpetual succession; existence depends on the will of partners.
i. Maximum Partners: Limited to 100 partners.
j. Ownership of Assets: Joint ownership of all assets by partners.
k. Power to Own Property: Cannot hold property in its name; owned by partners as per the partnership deed.
l. Common Seal: No concept of a common seal.
m. Foreign Nationals: Cannot form a partnership firm in India.
n. Audit of Accounts: Mandatory audit as per the provisions of the Income Tax Act.
o. Dissolution: Can be dissolved by various means, including mutual consent, court order, or insolvency of partners.
p. Arrangement and Amalgamation: Cannot enter into arrangements or amalgamate with other firms.
Understanding these differences is crucial for entrepreneurs in choosing the appropriate business structure. It impacts aspects such as liability, governance, registration requirements, and flexibility in operations. The provided disclaimer underscores the informational nature of the content and advises readers to seek professional legal advice when needed.
