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Introduction
If you are planning to start a business, choosing a suitable business structure is one of the most crucial decisions every entrepreneur must consider. In India, the two most commonly chosen business forms are LLP and Partnership Firm. However, understanding the difference between LLP and partnership firm is crucial for entrepreneurs who are looking forward to starting a new business. Both of these business forms vary significantly in terms of long-term benefits, compliance, taxation, and legal compliance.
This blog will examine the key difference between LLP and partnership firm and help you to choose the right structure aligning to your business goals.
What are Partnership Firms?
A Partnership is widely known as a traditional form of business structure in India. Further, it is governed by the Indian Partnership Act, 1932. In this form of business structure, two or more individuals come together to start a business under the partnership firm name and share business profit or losses. This structure is ideal for small to medium sized businesses with minimal initial capital.
A partnership is established through a Partnership Deed, outlining the roles and responsibilities of each business partner, terms and conditions agreed upon, and profit-sharing ratio.
Registration of a partnership firm is optional and not mandatory. Even though the firm is not formally registered, the law recognizes it, and partners are responsible for any losses incurred
Key features:
- It is not a separate legal entity
- Unlimited liability for partners
- Decision making is straight forward
- Minimal Regulatory Compliance
What is Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a type of business structure in India introduced through LLP Act, 2008. It is registered with the Ministry of Corporate Affairs (MCA). This hybrid structure combines the features of a company and the partnership.
Partners of an LLP are accountable for their own actions and their liability is limited based on their contribution to LLP. It is suitable for professional service organizations, such as accountants, lawyers, startups, and small to medium enterprises, which doesn’t require immediate venture capital.
However, establishing an LLP is suitable for small and medium scale enterprises owing to their operational flexibility, low compliance expenses, and no minimal capital requirements.
Key features:
- It is a separate legal entity
- Limited Liability for partners
- Perpetual succession
- Higher credibility among the shareholders
Partnership firm vs LLP – Key Differences
The table below highlights the major differences between an LLP and Partnership firm:
| Differentiation Criteria | LLP | Partnership Firm |
| Governing Body | Limited Liability Act, 2008 | The Indian Partnership Act, 1932 |
| Legal Entity | It has a separate legal entity | Not separate legal status apart from partners |
| Liability | Limited liability | Unlimited liability |
| Credibility | High | Low-to-moderate |
| Compliance | Low compliance | Minimal compliance |
| Annual form filing | An LLP must ensure to submit the registration form and other forms with Register of Companies (RoC) | Must ensure to submit registration and partnership form with Register of Firms |
| Registration | Mandatory | Voluntary |
| Number of Partners | Minimum two partners with no upper limit | Minimum two partners and maximum 50 |
| Management Structure | Flexible | Equal decision-making authority |
| Power to own a Property | LLP can make a property in in its name | Property must be made in name of all partners, as per the partnership deed |
| Account Auditing | Accounting auditing is mandatory in LLP, if the annual turnover exceeds 40 lakhs and capital contribution exceeds 25 lakhs | According to Income Tax Act, 1961, if annual turnover exceeds 1Cr(business) or 50 lakhs (other professions) |
| Dissolution | An LLP can be dissolved voluntarily | It can be dissolved by making an agreement with the partners, court order, and settling debts |
| Name Suggestion | It must include the word “LLP” at the end of company name | Company can have any name and not mandatory to have include any word with it |
| Foreign Nationality | An Indian resident and foreign individual can form an LLP together | Foreign individuals cannot form partnership firms in India |
| Administration Responsibility | The chosen partners of LLP are responsible for handling day-to-day businesses and compliance matters. | There is no necessity of hiring a separate managerial personnel member, as the partners themselves handle day-to-day administration tasks of partnership firms |
| Digital Signature Certificate (DSC) and Designated Partner Identification Number (DPIN) | Each partner of the LLP should have a designated DPIN and DSC | The partners do not need to apply for DPIN and DSC |
| Taxation |
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| GST Filing | LLP must file monthly and quarterly GST returns
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Conclusion
Ultimately, understanding the difference between LLP and partnership firm is essential before establishing any business. A Limited Liability Partnership (LLP) offers higher credibility and improved legal protection, whereas a partnership firm is easier and simpler to establish a business.
If you are planning to start a small business which includes minimal risk, choosing a partnership firm is an ideal option. Conversely, an LLP is a suitable option, if you are planning to choose a scalable business with minimal level of risks.
So, assess your business goals, objectives, and long-term vision prior to making any decisions.
