Know your partnership: LLP vs. partnership firm

30th Mar 2016
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Entrepreneurship is not a cake-walk; we have seldom heard of a one-man show to be successful. Most times a startup is a journey of a team. Mostly people start their venture with their friends or like-minded people and formation of a partnership begins.

We all are aware that there are mainly two types of firms running in India. One is proprietorship firm, while the other is partnership firm. As partnerships are very common, we will try to give you a brief picture about its structure, benefits and requirements. In India, partnership firms exists in two ways.

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One is unregistered partnership firm: This is very simple and is incepted simply by creating a partnership deed on stamp paper and getting it notarised, after which you may also apply for a PAN card.

After obtaining PAN card, it simply means your firm has been incorporated and registered under income tax also. Yes, it is simple to create but this firm still does not have a legal existence. The main disadvantage of this type of firm is that there is a bar that unregistered firms cannot prosecute any person or a firm.

Second type of partnership is registered firm: The registration of firm can be done in two ways, by the firm registering itself with Registrar of firm along with the requisite fees, or register LLP under the Ministry of Corporate affairs. The comparison between the two is explained below:

Registered Partnership Firm in IndiaLimited Liability Partnership Firm in India
CreationIt's created by mutual understanding of partnersIt’s created by law i.e., under LLP Act, 2008.
RegistrationOptionalCompulsory
LiabilityIt has no separate legal entity. Partners are collectively referred to as 'firm'.It has separate legal entity. The liability of partners will be limited to their agreed contribution in the LLP.
AssetsPartnership firm can purchase assets in the name of partners only.LLP can purchase assets in its name.
LegalOnly registered partnership firm can sue.LLP can also sue and be sued.
NameNo such requirementSuffix ‘LLP’ has to be added at the last.
Designated Partner Identification NumberNo such requirementEvery partner of LLP must have a valid DIN
Voting RightNo such rightEach partner has one vote
Governing LawThe Indian Partnership Firm, 1932 and various rules made thereunderThe Limited Liability Partnership Act, 2008 and various rules made thereunder.
Annual Account and Annual ReturnNot requiredAA and AR to be filed with the ROC Annually.
AuditAs per Income Tax Act only.As per LLP Act 2008, audit is compulsory except if turnover is less than Rs 40 lakh and for professional Rs 25 lakh. Income Tax Audit also as applicable
MembersMinimum 2 and maximum 10 for banking and 20 for othersMinimum 2 and maximum has no limit

As per the view of legal existence, LLP is more preferable over registered partnership firm. Let’s have a brief understanding of LLP:

  • LLP has a legal existence under MCA only, just like a company. So it’s a perfect mix of ‘corporate structure’ and ‘partnership firm’. It can be said that LLP is a hybrid of a company and a partnership firm.
  • The major advantage of LLP registration is flexibility with legal enactments. LLP Act is more flexible for conducting business over Companies Act.
  • A partner is not liable on account of any decision or action taken by other partners jointly.
  • LLP cannot be made for a charitable or non-profit organisation. It has to be the objective of profit earning only.
  • As in company, where every director should have DIN , in the case of LLP, every partner needs to take a DPIN (Designated Partner Identification Number).
  • Firm/Private Limited/ Unlimited Public Limited Company can be converted to LLP.

Ministry of Corporate Affairs has provided us four entities, namely One Person Company, Private Limited Company, Limited Liability Partnership and Public Limited Company. Every entity has its own merits and demerits. The biggest drawback with LLP registration is that it cannot be converted to Private Limited Company due to which it cannot raise the fund from public as it has no equity which it can distribute in public.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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