Partnership or Limited Liability Partnership? Which Model BestSuits your Startup?

By Team YS|15th Mar 2012
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Lawyers at VakilSearch show you the way

As the year draws to a close, everyone is asking the same question – Should I form a Partnership or a Limited Liability Partnership? Which option will suit me better?

Technically, a Limited Liability Partnership has many advantages. In fact, it would not be wrong to say that an LLP combines some of the advantages of a Private Limited Company with some of the advantages of a simple Partnership.

On the flip side, a simple Partnership is much cheaper to form, unless you decide to register it. On the special request of a client, when we decided to register a Partnership deed in post- Anna Hazare India, we found that touts and agents were charging us between Rs. 7000 and Rs. 15,000 just to register the simple Partnership. It would actually have been much cheaper to form a LLP, where the registration is completely online!

So coming back to the main question we need to answer here, let us compare some of the features of a Partnership vis-à-vis an LLP.

PartnershipLimited Liability Partnership
Quicker to form, unless you need to get it registered Takes slightly longer, because of all the formalities and processes involved 
Can be terminated quickly Much more stable and not easy to terminate 
Registration is not mandatory Registration is mandatory but possible online 
Needs a minimum of 2 Partners Also needs a minimum of 2 Partners 
Liability of Partners is unlimited. Even the personal assets of the partners can be annexed to pay of the debts of the Partnership firm Liability of the Partners is limited. Only the amount contributed by the Partners to the firm can be used to pay off the debts of the Partnership firm 
Ideal for hobbies, very small enterprises or people looking to test the waters  For people more serious and convinced about the business opportunity, this is the safer option

From the comparison above, it seems very clear that a Partnership has certain limitations. We also recommend that in most cases, if you want to choose between the two, it makes a lot of sense to choose the limited liability partnership route. Even from the point of view of drafting contracts and interacting with third parties like investors, having an LLP is safer (although investors love Private Limited Companies).

If you want to form a Partnership for any reason, please note that it need not be registered. You can do business perfectly legally without registering the Partnership. The only disadvantage is that if there is a Court case, you need to fight in the name of the individual partners (which is not a major disadvantage since most people never fight a court case). So if you want to form a Partnership, go ahead and form one but steer clear of the burden of having it registered.

Finally, one major concern of many people is regulations and accounts. People choose to form a simple partnership because they do not want the legal regulations and secretarial norms that come along with forming a LLP or a Pvt. Ltd. Company. Worry not, the complexity is slightly overrated. While a Partnership is definitely easier from a regulatory point of view, all the basic procedures – getting a Service Tax / VAT registration, getting a PAN & TAN Card, opening a fresh bank account and getting an IEC still have to be complied with, even if you start as a simple Partnership. And if your income is above the taxable limit, you need to file tax returns irrespective of whether you are a simple Partnership, LLP or a Private Limited Company.

About VakilSearch

VakilSearch is India’s leading online legal services provider for businesses and individuals. As the official partner of the Confederation of Indian Industry (CII) and knowledge contributor to Sulekha.com, the Hindu Business Line, Entrepreneur Magazine and the All India Rubber Association, VakilSearch reaches out to thousands of businesses, entrepreneurs and individuals on a regular basis. So when you visit vakilsearch.com, you can be assured of quality legal guidance and comprehensive documentation for your business and personal needs, at affordable prices.

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