In this blog, let us examine the primary distinction between limited liability partnership(LLP) and partnership firms , which will help you evaluate the appropriateness of each structure for your company in terms of ownership, management, liability, and essential compliances.
When launching a business, the selection of the appropriate organizational framework ought to be your first priority. The owners’ legal and financial liabilities, as well as the ease with which they can conduct business in the market, are directly related to the structure that they choose for their company.
The Limited Liability Partnership (LLP) and Partnership Firms are two of the most common types of business structures used in India. There are many different types of business structures accessible in India. Both of these structures allow two or more people to form a business together; nevertheless, there are substantial variations between them in terms of ownership, liability, and essential compliances.
This article will help you determine the business structure that is most appropriate for your requirements by comparing and contrasting limited liability partnerships (LLPs) and partnerships (also known as general partnerships).
The typical form of a partnership firm is one in which two or more individuals come together to run a business and share its earnings and liabilities according to terms and conditions that have been voluntarily agreed upon by all parties involved.
On the other hand, a Limited Liability Partnership (LLP) is a more recent form that combines the adaptability of a conventional partnership with the restricted liability of a corporation to produce a hybrid that is superior in terms of its organizational makeup. In order to get a better understanding of the considerable differences that exist between LLPs and Partnership Firms, let’s delve a little more into the concepts that underlie both of them.
What exactly is LLP?
In accordance with the LLP Act of 2008, a Limited Liability Partnership, sometimes known as an LLP, can be created and registered. The registration grants the company its own unique legal identity, which enables it to function as a separate entity from its partners and enables it to conduct business.
The LLP Agreement has a predetermined ratio that details how the partners would divide the firm’s capital, profits, and liabilities. The partners have agreed to abide by this ratio. In addition, their liabilities are restricted or limited to a predetermined amount, which is typically correlated with the proportion of their capital that they contribute. Following are some of the most important aspects of LLP that should help you better comprehend it.
Principal Characteristics of LLP:
The Limited Liability Partnership Act of 2008 serves as the governing law for limited liability partnerships (LLPs). It supplies the necessary legal framework for their establishment, incorporation, governance, and dissolution at the appropriate times.
In India, limited liability partnerships (LLPs) are obliged to undergo compulsory registration as a legal requirement. Because of this, running an unregistered limited liability partnership (LLP) is not just unethical but also against the law.
A Limited Liability Partnership (LLP) has a different legal personality from its partners because it is a registered entity. This means that an LLP is able to possess assets, engage into contracts, sue or be sued in its own name, and bring legal actions in its own name. The ownership and management of the company can be structured in a variety of ways because of this feature’s adaptability.
Limited Liability: A limited liability partnership (LLP) offers its members the protection of limited liability, which means that the partners’ individual assets are not put at risk in the event of any financial losses or legal problems. To the extent that each partner has contributed to the LLP, that sum is the maximum that can be held liable by that partner.
Sharing of Profits and Liabilities: A limited liability partnership (LLP) is a type of partnership structure that enables two or more people to create a business together and share in both the profits and the liabilities of that business. In contrast to working for a corporation, in which one must adhere to a set of regulations, business partners have the freedom to run their venture in accordance with their individual interests.
There is no upper restriction on the number of partners that can be added to an LLP during the normal course of business, but the limited liability partnership (LLP) must have at least two partners before it can be established.
Designated Partners: A limited liability partnership (LLP) is required to have at least two designated partners. These partners are accountable for meeting the LLP’s compliance standards and exercising overall management authority over the LLP. It is required that at least one of the designated partners resides in India.
The phrase “minimum capital requirement” does not apply to limited liability partnerships (LLP), as there is none. Each partner is free to contribute whatever amount of capital they believe is appropriate.
Because an LLP is a product of the law, it has what is known as a “perpetual existence.” This implies that it will continue to exist even if one or more of its partners decide to leave the business or pass away. Only through going through the proper legal channels can the LLP be dissolved.
What exactly is a partnership business?
Traditional forms of partnership enterprises that are active in India are referred to as “Partnership Firms.” These are formed on the basis of a Partnership Deed that is signed by all of the members in the partnership. The registration of partnership firms is voluntary and is carried out by the state government of the jurisdiction in which the firm’s registered office is situated.
If one of the partners who signed the partnership deed passes away or leaves the business, the partnership deed is rendered invalid, which means that the company can no longer exist in its current form. You will have a better understanding of Partnership Firms after reading the important elements that are listed below.
Principal Characteristics of a Partnership Business:
Sharing of Profits among Partners: A Partnership Firm is a sort of company structure in which two or more individuals come together to start a firm with the goal of producing profits. This type of business can be owned by a single individual or by a group of individuals. They have previously decided upon the ratio that would be used to divide up the earnings and losses of the company, and it has been set in stone. The Partnership Agreement that all of the partners have signed should include a section describing the profit sharing ratio.
Partnership Firms are controlled by a partnership agreement that has been drafted by the firm’s partners and signed by all of the firm’s partners. The partnership agreement details all of the terms and circumstances that have been agreed upon by the partners, such as the rights, duties, and responsibilities of each partner, as well as the ratio of profit-sharing and the length of time for which the partnership will be in effect.
limitless Liability: The partners in a Partnership Firm have limitless liability, which means that their personal assets are at risk in the event of any losses or legal issues. This is the case since the partners in a Partnership Firm have unlimited liability. Every partner in the Partnership Firm is individually responsible for paying off the Partnership Firm’s debts and other responsibilities.
Registration Is Voluntary Unlike Limited Liability Partnerships (LLP), in which registration is compulsory by law, a Partnership can choose whether or not to register. This reveals that in India, it is possible to run Partnership firms in either a registered or unregistered capacity.
May or may not Have Its Own Separate Legal Identity: A Partnership Firm, as opposed to a Limited Liability Partnership (LLP), which is a product of law, is formed on the basis of a Partnership Agreement. Therefore, a partnership firm does not have its own distinct legal personality; as a result, it is unable to buy property, enter into contracts, or bring or defend legal actions in its own name.
Forming a Partnership Firm Is generally Simple: Forming a partnership firm is generally simple and does not involve the completion of many legal compliances. Simply creating a partnership deed and registering it with the appropriate authority is all that is required to establish it as a legal entity.
Partnership Act: The Indian Partnership Act of 1932, which provides the legal framework for partnership firms’ incorporation, governance, and dissolution, is the governing law for partnership firms and is referred to as the “Partnership Act.”
Number of Partners: Prior to the foundation of a Partnership Firm, there must be a minimum of two partners in the business. However, after it has been established, the company can take on an additional 20 partners in the normal course of business.
It is crucial to have a solid understanding of the differences between a Limited Liability Partnership (LLP) and a Partnership Firm before making an educated selection regarding the type of business structure to choose. While partnership firms have been common for several decades, limited liability partnerships (LLPs) offer several benefits, including eternal existence and protection from limited liability.
When trying to decide which course of action is going to be best for their company, business owners should discuss their options with a legal or financial advisor. When it comes down to it, making the proper choice for your company’s organisational structure depends on a number of different considerations, and business owners ought to give careful consideration to both the advantages and disadvantages of each option before settling on one.