What is the difference between LLP and partnership firm?

A Limited Liability Partnership, generally referred to as an “LLP”, has become an alternative business vehicle for doing different kinds of businesses as it blends the features of a private company with a conventional partnership.

Since the inception of the LLP concept, the ‘partnership’ arrangement is thought to have lost its significance because its partners have unlimited liability, which means they are collectively and personally responsible for the business’s debts. Nevertheless, low prices, ease of setup, and minimal enforcement requirements, still make it a viable choice for some, such as home-based businesses that are unlikely to accept any debt.

So which one you think is suitable for you. In this blog, let’s find out the difference between LLP and partnership to see which one is optimal for your type of business.

Difference between LLP and partnership

Meaning of partnership

A General Partnership is a business arrangement in which two or more individuals manage and operate a business in line with the requirements and goals set out in the Partnership Deed.

Meaning of LLP

A Limited Liability Partnership (LLP) is a form of a partnership formed and registered under the Limited Liability Partnership Act, 2008. To clarify, it can be formed by any group of individuals to carry on any lawful trade, profession, service, or occupation to make profits.

The basic difference between LLP and partnership

The most basic difference between a limited liability partnership and a general partnership is:

Unlike a partnership, the responsibility of liabilities (if any) of the LLP lies with the entity itself and does not fall on the individual partners.

A limited liability partnership is a legal entity that is separate from its partners and, thus, offers limited liability to its partners wherein any debts or obligations of the LLP will be met out of the assets of the LLP. That is to say, the liability of a partner is limited only to the extent of his contribution towards the LLP, except for any deliberate fraud or wrongful act of omission or commission committed by the partner himself. On the other hand, in a traditional partnership firm, the partners are jointly and severally liable for each and every debt or obligation of the partnership firm.

As far as risk is concerned, LLPs have a real advantage over partnerships. This is so because creditors may compel payment of their claims only to the extent of the assets of the LLP. Thus, while a partner will lose all the money he puts into or agrees to put into the LLP, he cannot be pushed to contribute additional funds out of his own pocket to meet the LLP’s business debts.

Difference between LLP and partnership – A complete list

The difference between LLP and partnership can be summarized in the following list of pointers:

1. Governing law: An LLP is governed by the Limited Liability Partnership Act, 2008 and the rules made thereunder, i.e., the Limited Liability Partnership Rules, 2009. The provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership. Whereas a partnership is governed by the Indian Partnership Act, 1932 and the rules made thereunder.

2. Creation: A general partnership may be created by a contract entered into between two or more persons. An LLP, on the other hand, is to be mandatorily created by law.

3. Registration: Registration is optional in the case of General Partnerships. But, for an LLP, registration with the Registrar on the MCA’s portal is required (by the filing of Form FiLLiP).

4. Easy to Start: If you decide not to register your partnership business, all you need to get started is a partnership deed that you can have ready in just two to four working days. Even registration, for that matter, can be done in a day if you have the Registrar’s appointment. As opposed to a private limited company or LLP which may take 7-10 days to get registered, the start-up process of a partnership is much easier.

5. Choice of name: The terms “Limited Liability Partnership” or its acronym “LLP” shall be used by every Limited Liability Partnership as the last words in its name. However, a partnership may be formed by any name as per choice.

6. Separate entity: A limited liability partnership is a body corporate formed under the LLP Act, 2008 and is a legal entity having a separate identity distinct from its members. Thus, the nature of an LLP firm is that of a body corporate. A partnership, on the contrary, is not a separate legal entity. Therefore, it can neither own properties in its name nor it can sue and be sued in its own name.

7. Perpetual succession: A limited liability partnership has perpetual succession. Hence, the existence, privileges, or obligations of a limited liability partnership shall not be affected by any alteration in the partners of such LLP. But, contrary to this, a partnership has no perpetual succession.

8. Structured approach: An LLP gives entrepreneurs and businessmen a more streamlined and structured vehicle for operating their businesses in comparison to a sole proprietorship or a conventional partnership firm. That is why it is sometimes preferred.

9. Liability of partners: An LLP offers limited liability status to its partners. Consequently, the liability of a partner is limited to the extent of his capital contributed as per the LLP agreement. On the other hand, a general partnership is characterized by the unlimited liability of partners, i.e., the partners in the business are personally liable for all of its debts. This means that if a partner is unable to repay a bank loan for some reason or is responsible for paying a fine, it may be recovered from his or her personal belongings. So their jewelry, home, or car will be allocated to the bank, institution, or supplier.

10. Relatively Inexpensive: A general partnership is cheaper to start than an LLP. Even over the long-term, it turns inexpensive due to the minimal compliance requirements. Moreover, you would not need to hire an auditor.

11. Number of partners: The minimum number of partners to start both a general partnership and an LLP is 2.

In addition to this, for a general partnership, the maximum number of partners cannot exceed 100. But there is no limit to the maximum number of partners in an LLP. For example, if you are creating a large advertising agency, you would not need to worry about any cap on the number of members if it’s an LLP.

12. Stability: Partnerships are unstable as they get terminated by the death, insolvency, insanity, expulsion, retirement, admission, or withdrawal of any one of the partners. But an LLP, being an artificial legal person, offers business stability due to its feature of perpetuity. The life of the LLP is not dependent upon the lives of its partners. Partners may come, partners may go; however, the LLP goes on forever unless and until it is being wound up.

13. Document defining rules and regulations: While partnerships are governed by a “partnership deed, an “LLP agreement” is the charter document defining the rules and regulations of an LLP. In both cases, these charter documents denote the scope of operations of the partnership firm/LLP (as the case may be) and the rights and duties of the partners.

14. Common seal: A partnership firm has no common seal; whereas an LLP shall have its own common seal denoting its signature.

15.  Director Identification Number (DIN)/ Designated Partner Identification Number (DPIN): Under a general partnership, the partners are not required to obtain an identification number. But each designated partner must hold a DPIN before being appointed as a Designated Partner of an LLP.

16. Digital signatures: Partnership firms have no requirement of obtaining a Digital Signature Certificate (DSC). But as e-forms of LLPs need to be filed electronically, at least one Designated Partner must have a DSC.

17. Credibility: Due to higher compliances, stringent regulatory framework, and transparency in operations, the credibility of LLPs is much higher as compared to partnership firms. Thus, it also eases the fund-raising processes of LLPs from outside financial institutions.

18. Filing of annual return: Every LLP needs to file its annual return in Form 11 with the Registrar within a period of 60 days from the close of the financial year. However, there is no such requirement for partnership firms.

19. Disclosure of data: Any of the information or details of a partnership firm are not disclosed on the public platform. On the other hand, central registration of LLPs with the MCA allows their documents including annual returns and financials to be available to the public for inspection. Such documents will be available for public inspection on payment of prescribed fees to the Registrar. However, the LLP agreement is not made public.

20. Audit of accounts: The accounts of every LLP shall be audited in accordance with Rule 24 of Limited Liability Partnership Rules, 2009. On the contrary, partnership firms need not get their accounts audited.

21. Conversion: Conversion of a partnership firm into LLP or Private Limited Company is possible. But an existing LLP cannot be converted back to a partnership firm; though it can be converted into a Private Limited Company or a Company Limited by Shares easily.

Some notes to consider:
  • Both for partnership and LLPs, there is no requirement of having a minimum amount of paid-up share capital.
  • Concessions by MCA: The MCA has granted some concessions to the LLP. An audit, for instance, needs to be carried out only if your turnover is greater than Rs. 40 lakhs or if your paid-up capital is greater than Rs. 25 lakhs. Moreover, while in the case of private limited companies, all operational/structural changes need to be communicated to the ROC, the criterion is minimal for LLPs.
  • Also, the income of LLPs/ partnership firms is taxable at a flat rate of 30%, plus education cess and surcharge as applicable.
  • Designated Partners: Unlike any such concept in partnership firms, the appointment of at least two “Designated Partners” shall be mandatory for every LLP. They shall be directly accountable for the compliance of all the provisions of the LLP Act, 2008 along with provisions contained in the LLP agreement.

A comparison table of difference between LLP and partnership

Legal entityNo separate entitySeparate entity
Perpetual successionNot applicableApplicable
Liability of partnersUnlimitedLimited
Compliance levelLesser complianceMore compliance under the LLP Act
Number of membersMinimum 2 and maximum 100Minimum 2 and no limit on maximum numbers
Governing LawIndian Partnership Act, 1932Limited Liability Partnership Act, 2008
Charter documentPartnership DeedLLP Agreement
Common sealNot applicableApplicable
NameAny name as per choiceUse acronym “LLP” as the last words in its name
Digital signaturesNot requiredAt least one Designated Partner must have a DSC
(DIN)/ (DPIN)Not requiredEach designated partner must hold a DIN/ DPIN
Annual returnNot requiredNeed to be filed with the Registrar
Disclosure of informationNot available to the publicAvailable to the public for inspection on payment of prescribed fees
AuditNot requiredMandatory if some specific limits are met

Final thoughts

From the benefits of a limited liability partnership as discussed above, it can be said that forming an LLP firm is more favorable than a general partnership firm. Most importantly, it is a separate business entity in the eyes of law and this, therefore, creates a wall between the personal assets of the investors/partners and that of the business.

Such forms of business organization are, however, typically suitable in the service sector and where there is no dependency on large amounts of external financing. You may want to register an LLP if you operate a business that is unlikely to need equity support.

When we compare with a company, an LLP is a business vehicle that, in terms of its formation, maintenance and termination, provides easy and flexible procedures while simultaneously having the requisite dynamics and appeal to be able to compete domestically and internationally. It offers its members the flexibility of managing business operations through internal arrangements in accordance with a mutually-arrived partnership agreement whilst also enjoying the limited liability status. This is as opposed to a company that is subject to strict compliance requirements under the Companies Act in most of its affairs.

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