What do I choose? Partnership or Limited Liability Partnership (LLP)?

Introduction

Partnerships registered under the Partnership Act, 1932, used to be a very popular form of Business Entity in India due to the simplicity of registration and ease of maintenance. With the introduction of the Limited Liability Partnership (LLP) in India through the Limited Liability Partnership Act, 2008, the prominence of Partnership’s has been replaced by the LLPs. LLPs are easy to register, offer a range of benefits to the promoters and is easy to maintain, making it ideal for many small and medium-sized business that would otherwise opt to start as a Proprietorship or a Private Limited Company. 

LLP v/s Partnership: The Entity

Partnership

Partnerships are registered under the Partnership Act, 1932. The partners of a partnership registered under the Partnership Act, 1932 are personally liable for an unlimited amount of Partnership liabilities. Hence, the partnership firm and the Partners are not considered separate legal entities; neither does the Partnership have perpetual existence.

Limited Liability Partnership

Register LLPs under the Limited Liability Partnership Act, 2008. The Partners of an LLP are not personally liable for the liabilities of the Partnership, and the liability of a Partner is limited to the amount of his/her capital contribution to the LLP. Therefore, the LLP and the Partners of an LLP are considered to be separate legal entities and the LLP has a perpetual existence, until dissolved by the Promoters.

Number of Partners

LLPs and Partnership Firms must have a minimum of two partners. There is no limit to the number of Partners an LLP can have. Partnership Act allows maximum of 20 (twenty) partners

In case of a Partnership Firm, if the number of partners at any time reduces below the mandatory minimum of 2 due to death, incapacitation or resignation of a Partner, the partnership firm would stand dissolved. On the other hand, in case of a LLP, if the number of Partners reduces below 2, the sole Partner can still find a new Partner to fill the position without dissolution of the LLP. During the time the LLP carries on business with a sole Partner, the sole Partner would be responsible individually for the commitment of the LLP incurred during that period.

Central Government v/s State Government

LLP is a separate legal entity registered under the Ministry of Corporate Affairs of Central Government of India. An LLP can shift its registered office between any of the States and also easily open a bank account anywhere in India.

Partnership firms are registered by the Registrar of Firms which is controlled by the State Governments. Hence, its more cumbersome to move operations across India

Membership

Members can be added to a LLP either during incorporation or after incorporation with the concurrence of existing Partner. The following persons can be partners in an LLP:

• Individuals
• Limited Liability Partnership
• Companies
• Foreign Limited Liability Partnerships
• Foreign Companies.

A Hindu Undivided Family, represented by its Karta, can be a partner of a LLP. A minor cannot become a partner of an LLP. However, in a partnership firm, a minor can be admitted, represented by a guardian, for the advantage of the partnership.

Agreement

Within 30 days of incorporation of a LLP, the LLP Agreement must be executed and filed with the MCA. In case a LLP fails to file the LLP agreement or there is no LLP agreement, then the provisions of the First Schedule to the LLP Act will administrate relationship between the partners and LLP. Even if there is a written agreement, but there is no detailed declaration about any of the matters dealt with in the first schedule, such matters will be administered by the first schedule.

In case of a registered or unregistered Partnership Firm, the Partnership Deed will provide for the rights and responsibilities of all Partners involved.

Which one is right for my business?

What is the right type of structure for your business will depend on a variety of factors. These factors are likely to include taxation treatment, market sector, management and ownership structure, whether your business will need to raise debt or equity finance privacy and risks of personal liability.