Key differences between LLP and Partnership firm

Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a hybrid business structure in India that combines the flexibility of a partnership with the limited liability protection of a company. Introduced under the Limited Liability Partnership Act, 2008, LLPs provide partners with the advantage of restricted personal liability, shielding their assets from business debts. Each partner is liable only for their agreed contribution, and the actions of one partner do not bind others. LLPs are widely preferred for professional services and small businesses due to their minimal compliance requirements, tax benefits, and operational ease. They must be registered with the Ministry of Corporate Affairs (MCA).

Features of a Limited Liability Partnership (LLP)

• Separate Legal Entity

An LLP is a distinct legal entity, separate from its partners. It can own assets, incur liabilities, enter contracts, and sue or be sued in its own name, ensuring continuity even if partners change.

• Limited Liability of Partners

The liability of each partner is limited to their agreed contribution, protecting personal assets from being used to settle business debts or obligations. Partners are not responsible for the misconduct or negligence of others.

• Flexible Management Structure

LLPs do not follow a rigid hierarchy. Partners can define their roles and responsibilities in the LLP agreement, providing operational flexibility and decision-making freedom.

• Perpetual Succession

An LLP has perpetual succession, meaning its existence is not affected by the death, retirement, or insolvency of partners. It continues to operate until formally dissolved.

• No Minimum Capital Requirement

There is no mandatory minimum capital contribution to start an LLP, making it an accessible business structure for startups and small businesses. Contributions can be in cash, property, or intangible assets.

• Tax Efficiency

LLPs enjoy tax benefits under Indian law. They are exempt from Dividend Distribution Tax (DDT) and Alternate Minimum Tax (AMT) does not apply to them. Additionally, profits are taxed only once, unlike companies where dividend taxation applies.

• Low Compliance Requirements

LLPs require less compliance compared to companies. For instance, there are no mandatory board meetings, and annual compliance involves filing just two forms: the Annual Return (Form 11) and Statement of Accounts and Solvency (Form 8).

• Partner and Entity Separation

Partners act as agents of the LLP, not of each other. This separation ensures that the LLP is liable for obligations arising from authorized business activities, not individual partners, unless specified otherwise in the agreement.

Partnership firm

Partnership firm is a business structure where two or more individuals come together to operate a business with a mutual goal of earning profits. Governed by the Indian Partnership Act, 1932, partners share responsibilities, profits, and liabilities according to their agreement. The firm is not a separate legal entity; it operates under the names of its partners, who are jointly and severally liable for its debts. Partnerships are easy to form, require minimal formalities, and offer flexibility in management, making it an attractive option for small and medium businesses.

Features of a Partnership Firm

• Two or More Partners

Partnership firm is formed by the agreement of at least two individuals. The maximum number of partners allowed in a partnership firm is 50, as per the Indian Partnership Act, 1932. Partners contribute capital, share responsibilities, and jointly manage the business.

• Mutual Agency

Each partner in a partnership firm acts as an agent for the firm and for the other partners. This means that any act performed by a partner within the scope of the partnership agreement binds all partners, making them liable for the firm’s obligations.

• Profit Sharing

Partners of a firm share profits (or losses) according to the terms laid out in the partnership agreement. In the absence of a written agreement, profits are shared equally. The agreement may also specify the ratio in which profits and losses are distributed among the partners.

• Unlimited Liability

Partners in a partnership firm have unlimited liability. This means that if the business incurs debts or liabilities beyond its assets, the personal assets of the partners can be used to cover these debts. Each partner is liable jointly and severally for the firm’s obligations.

• No Separate Legal Entity

Partnership firm is not considered a separate legal entity from its partners. It does not have its own legal status and cannot own property in its name. The partnership exists only through its partners and is governed by the partnership agreement.

• Voluntary Association

Partnership is a voluntary association of individuals. The partners willingly enter into the partnership, and they can dissolve or modify the partnership at any time as per mutual consent. No external authority can impose a partnership on the individuals involved.

• Easy Formation and Flexibility

One of the key advantages of a partnership firm is its simple formation process. It requires minimal legal formalities, mainly the drafting of a partnership deed that outlines the terms and conditions of the business. This flexibility also extends to the management of the firm, where partners have the freedom to decide their roles.

• Limited Continuity

Partnership firm does not have perpetual succession. Its existence is tied to the continuity of its partners. The firm can be dissolved upon the death, insolvency, or withdrawal of any partner, unless the remaining partners agree to continue or form a new partnership.

Key differences between LLP and Partnership firm