Home Business LLP (Limited Liability Partnership) Vs Partnership With Pros and Cons

LLP (Limited Liability Partnership) Vs Partnership With Pros and Cons

LLP VS Partnership

Starting a new business is an exciting time for an entrepreneur, it is the moment when they can finally see the dreams envisioned by them becoming a reality as all the things fall into place. Of the many factors to consider, one aspect that a new business owner needs to seriously ponder upon is the type of business form he must choose to go ahead with for his start-up. An entrepreneur needs to consider which type of business entity will best be suitable for his business and help the business prosper.

There are several business entities to choose from, such as a sole proprietorship, one person company, public limited company, partnership, and limited liability partnership. Usually, when entrepreneurs who have a start-up need to decide upon the type of business entity for their small business, they face a dilemma choosing between a partnership firm and a limited liability partnership.

A comparative list with the pros and cons of each will probably help entrepreneurs decide which business entity to go for. The list below will include the salient features of each of these entities and apart from this list, a vital deciding factor is also to take into account the process for registration for both the entities as well as the documents required for LLP registration and for partnership.

What is Partnership Firm?

Partnership firm is a legal entity where two people join together to form a business for profit.

A partnership is further defined as a business entity where each partner is jointly and severally liable for all acts of the firm, as per Section 25 of the Partnership Act 1932.

What is a Limited Liability Partnership (LLP)?

It is a type of partnership where some or all of the partners have limited liabilities and is a blend of partnership and cooperation.

Legally an LLP is defined as a form of body corporate and is a separate legal entity from that of its partners, as per Section 3(1) of the Limited Liability Partnership Act 2008.

Pros & Cons of Partnership and LLP pros and cons

The advantages and disadvantages of both LLP and Partnership firms are discussed here with respect to each point, to make a comparison and figure which one of the 2 entities is beneficial with respect to the factors in question.

  • Number of partners

A partnership firm must have a minimum of 2 partners and an upper limit is a maximum of 20 partners for a non-banking firm and in case of a banking firm, the maximum limit on the number of partners is 10 partners.

An LLP, on the other hand, needs a minimum of 2 partners and has no upper limit on the maximum number of partners

  • Liability of partners

The liability of the partners is unlimited in a partnership and each and every partner is jointly and severally liable for all acts of the firm. This means that each partner is liable for the debt of the partnership. And in case the situation arises where the assets of the firm are insufficient to pay the debt, then the partner’s personal property can be attached too, to clear the debts.

In an LLP the liability of the partners is limited and is dependant on the extent of the partner’s contribution to the business.

Owing to the limited liability of an LLP sometimes other business owners can be wary of entering into business with the LLP partners for fear of being victims of malpractice as the partners are not liable for each other’s conduct as  far as the business is concerned,

  • Dissolution of the entity

In a partnership firm, there can be a dissolution of the partnership by an agreement, or compulsory dissolution, or on the happening of certain contingencies, or by notice, or by the court.

For an LLP however, the dissolution of the entity can either be voluntary or compulsory.

  • Perpetual succession of the entity

A partnership does not allow for perpetual succession whereas an LLP allows for perpetual succession wherein the business continues irrespective of whether the partner or partners are alive or dead.

  • Whistle blowing

The partnership Act has no provision for whistleblowing while in an LLP the partners and employees are protected as per the Act in case of whistleblowing.

  • Naming of entity

A partnership firm does not have to follow a norm for its naming while a limited liability partnership entity needs to have Limited Liability or LLP as a suffix.

  • Tax structure and procedure

Partnership firms need to be taxed on the income of the firm and even need to pay the dividend distribution tax and an alternate minimum tax.

Limited Liability Partnerships, on the other hand, are liable to pay only 2 taxes, income tax and alternate minimum tax, thus having reduced tax liabilities comparatively.

  • Legal proceedings of entities

Partnership firms can sue or can be sued by the third party as per Section 69 of the Act which specifies the effect of non-registration. Similarly, an LLP can also sue and be sued too.

  • Registration

Registration is not mandatory for a Partnership firm and many can save the time and efforts for the registration process but having a registration gives the partnership firm protection against third parties and the right to sue or to be sued.

In the case of an LLP, registration is mandatory and can be done online as well.

  • Purchase of Assets

In case of purchase of assets, an LLP can purchase the assets in its own name since it is a separate legal entity while for a partnership the assets cannot be bought in the name of partnership firm but only in the name of the partners of the firm.

  • Filing of Financial Details

The financial details of the business need to be filed with respective regulatory authorities. This filing is not applicable in the case of a Partnership firm while in the case of an LLP the financial statements need to be filed on an annual basis with the Registrar of Companies and thus the business needs to be organized and keep the papers ready for the annual filing.

  • Turn Around Time

The time taken for the drafting of the Partnership Deed is approximately 2 to 3 days, given that all the documents and information required is ready. The time taken for the Registration of Partnership Deed will vary depending on the time taken by the Registrar of Firm.

For an LLP registration, the time taken is usually 15 to 20 business days for the LLP Registration to arrive and considering all the documents and information required is at hand. The time may extend in case of technical glitches while filling out the e-forms for LLP registration.

Lets us also consider the documents needed for the registration of a Partnership and Limited Liability Partnership as a further point of comparison.

Documents needed for Partnership Registration are:

Documents for partnerhship firm registration

Application Form, often referred to as Form A, which is to be filed online (In case of Maharashtra, it needs to be filed at the website – https://rof.mahaonline.gov.in/

  • Covering letter which has a court fee stamp of Rs 5/-
  • Blank stamp paper of value RS 10 or above in the name of the firm or the partner
  • Proof of ownership of the place of business of the Partnership firm, it can even be a rental agreement document
  • If the documents are submitted by an advocate or CA, then a Letter of Authority signed by all partners of the firm

Further, for specific business scenarios, there are additional documents that are required for the registration process. Some of which are listed below-

  • Documents like a certified true copy of Memorandum and Articles of Association of the Company and Board resolution is needed in case a Company is listed as a partner in the firm.
  • In case a Trust is a partner in the Partnership firm then the certified true copy of the Trust Deed is needed.
  • If the nature of the business of the partnership firm requires a license from any of the Government Departments, then the license is required to be furnished too.

Documents needed for Limited Liability Partnership Registration documents for limited liability partnership firm

which happens entirely online and the information that needs to be furnished for the registration is

  • Name of the partners
  • The Aadhaar card and PAN details of the partners as identity proof and address proof
  • The address proof of the place of business
  • The nature of the business
  • The date of commencement of the business
  • The profit and loss sharing ratio of the designated partners
  • The proposed name of the LLP to be registered
  • The registered LLP Agreement
  • The duration of the LLP
  • The initial amount contributed by the partners
  • The capital sharing ratio
  • The commission or salaries, if any, that are payable to each of the designated partner
  • The responsibilities, duties, obligations, etc of each of the partners

The registration process, the ease of registration and all of the basic distinguishing features of an LLP and a Partnership are thus discussed and can help you get an idea of which entity is comparatively better suited for your business- LLP or Partnership.

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