In this blog, we will examine the primary distinctions between Limited Liability Partnerships (LLPs) and Partnership Firms. Understanding these differences will help you evaluate the suitability of each structure for your company in terms of ownership, management, liability, and essential compliance. When launching a business, selecting the appropriate organizational framework should be your top priority. The structure you choose will impact your legal and financial liabilities as well as the ease with which you can operate in the market. In India, Limited Liability Partnerships (LLPs) and Partnership Firms are two common business structures. Although both structures allow for the formation of a business with two or more people, there are significant differences in ownership, liability, and compliance requirements. This article will help you determine the most appropriate business structure for your needs by comparing and contrasting LLPs and Partnership Firms.
What is an LLP?
A Limited Liability Partnership (LLP) is created and registered under the LLP Act of 2008. This registration grants the LLP its own unique legal identity, enabling it to operate as a separate entity from its partners. The LLP Agreement outlines the ratio for dividing the firm’s capital, profits, and liabilities among the partners. Partners’ liabilities are limited to a predetermined amount, generally related to their capital contribution. Here are some key characteristics of an LLP:
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Governing Law: LLPs are governed by the Limited Liability Partnership Act of 2008, which provides the legal framework for their establishment, incorporation, governance, and dissolution. Running an unregistered LLP is not only unethical but also illegal in India.
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Legal Personality: An LLP has a distinct legal personality separate from its partners. It can own assets, enter into contracts, sue, or be sued in its own name. This feature allows for flexible ownership and management structures.
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Limited Liability: LLP members enjoy limited liability protection, meaning their personal assets are not at risk for the LLP’s financial losses or legal issues. Liability is limited to the amount of their capital contribution.
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Sharing of Profits and Liabilities: LLPs allow for the formation of a business where profits and liabilities are shared according to the LLP Agreement. There is no maximum limit on the number of partners, though at least two are required for establishment.
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Designated Partners: An LLP must have at least two designated partners, one of whom must reside in India. These partners are responsible for compliance and overall management. There is no minimum capital requirement for LLPs.
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Perpetual Existence: LLPs have perpetual existence, meaning they continue to exist even if one or more partners leave or pass away. Dissolution requires legal procedures.
What is a Partnership Business?
Partnership Firms are traditional business structures in India, established based on a Partnership Deed signed by all members. Registration of a Partnership Firm is voluntary and carried out by the state government where the firm is based. The partnership becomes invalid if a partner dies or leaves, leading to the dissolution of the firm. Key characteristics of a Partnership Firm include:
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Sharing of Profits: Partnership Firms involve two or more individuals starting a business with the aim of making a profit. The profit-sharing ratio is predefined in the Partnership Agreement, which also outlines the terms and conditions agreed upon by the partners.
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Unlimited Liability: Partners in a Partnership Firm have unlimited liability, meaning their personal assets are at risk for the firm’s debts and obligations. Each partner is individually responsible for the firm’s liabilities.
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Voluntary Registration: Unlike LLPs, registration of Partnership Firms is not mandatory. Therefore, Partnership Firms can operate as either registered or unregistered entities in India.
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Legal Identity: Partnership Firms do not have a distinct legal identity like LLPs. They cannot own property, enter into contracts, or engage in legal actions in their own name.
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Formation Simplicity: Forming a Partnership Firm is relatively straightforward and involves creating a Partnership Deed and registering it with the relevant authority. The governing law is the Indian Partnership Act of 1932.
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Number of Partners: A minimum of two partners is required to start a Partnership Firm, with a maximum of 20 partners allowed.
Conclusion
Understanding the differences between Limited Liability Partnerships (LLPs) and Partnership Firms is crucial for making an informed decision about your business structure. While Partnership Firms have been common for many years, LLPs offer advantages such as limited liability and perpetual existence. Business owners should consult with legal or financial advisors to determine the best option for their company. Ultimately, the choice of business structure depends on various factors, and careful consideration of the benefits and drawbacks of each option is essential.
