In businesses, partnership is an association of two or more people, who agree to carry on the business together by combining their financial funds and managerial abilities and skills and share its profits and losses.
The most used partnership types are General Partnership and Limited Liability Partnership (LLP)
A General Partnership firm is registered by two or more persons by executing a partnership deed with each other. Even though this form of business is governed under the Indian Partnership Act 1932, the partners are at free will to decide on various terms pertaining to share of profits and other related matters. In India normally all partnership firms are general partnerships.
Limited Liability Partnership is an alternative business form which provides limited liability to the owners and is comparatively easy to manage and hassle-free. It is allowed under the Limited Liability Partnership Act, 2008. LLP is a unique hybrid combination of a limited and partnership company which provides the advantages of Company and flexibility of a Partnership firm. The rights and duties of designated partners are governed by the LLP agreement.
Head to Head
➤ Number of Partners
A General Partnership firm can have two or more members with a maximum limit of 10 whereas a Limited Liability Partnership must be registered under the Act with a minimum of two partners. There is no limit on the maximum number of partners in LLPs. Both LLP and partnership firms must have a minimum of 2 partners. If the number of partners reduces below 2 in a partnership firm due to any reason the firm would stand dissolved. But, in case of LLPs if the number of partners reduces below 2, the sole partner can find a new partner without actually dissolving the firm.
➤ Legal Status
Partnership firms have no distinct legal status separate from its partners whereas a LLP is a body corporate having a separate legal entity and has perpetual succession.
Since the partner and the firm is not considered as a separate legal entity, liability of partners of a partnership firm is unlimited. They are jointly held liable for the debts and losses of the firm. Whereas in an LLP, Since the partner and the firm is considered as a separate legal entity, the liability of partners is limited to each partner according to their agreed contribution to the business and no partner would be liable on account of any unauthorized or independent actions of other partners.
Shares can be transferred to another person after obtaining the permission of all the Partners in a Partnership. The transferability of a Partnership is unwieldy, whereas the shares of an LLP can be transferred. However, the transferee is not allowed to become a Partner automatically. The share of an LLP can be transferred to another person more easily.
➤ Perpetual succession
Partnership Firm does not have perpetual succession whereas LLP has perpetual succession.
➤ Property Purchase
A partnership firm cannot purchase movable/immovable property in its name. It must be purchased in the name of partners. On the contrary, LLP can purchase movable / immovable property in its name
For LLPs, it is mandatory to file the annual return to the Ministry of Corporate Affairs (MCA) and the ROC annually in the prescribed format . Whereas, a partnership firm requires no annual return filing.
➤ Audit of accounts
Partnership firms are only required to have tax audit of their accounts as per the provisions of the Income Tax Act. In LLP, if the firm’s turnover does not go beyond, in any financial year, Rs. 40 lacs, or whose turnover does not go beyond Rs.25 lakhs contribution is not obliged to get its accounts audited. Except all LLPs are required to get their accounts audited annually as per the provisions of LLP Act 2008.
➤ Agreement between Partners.
The partnership is governed by the Indian Partnership Act, 1932 where Partnership Deed governs the operation, management and decision-making methodologies and other activities. Whereas, Limited Liability Partnership Act, 2008 governs LLP in India. The operation, management and other activities of the LLP are accordance to the LLP Agreement
Partnership firms are difficult to operate or move across India because the Registrar of firms that register the partnership firms are controlled by the state government. But, in case of LLPs, they can open a bank account and shift their registered office anywhere in India and as it is registered under the MCA.
➤ Partners’ Dependency
In a Partnership firm, the resignation or death of any of the partners would have a huge impact and the Partnership would stand dissolved & have to be reconstituted whereas in LLP, the subsistence is not dependent on its partners. The changing of partners of the LLP will not affect the existence or operations of the firm.
Partnership firms can be dissolved by agreement, mutual consent, insolvency, certain contingencies, and by court order. On the other hand LLP can be dissolved voluntarily or by order of the National Company Law Tribunal.
Both LLP and Partnership Firm are a similar form of entities but they differ due to the way of functioning and their terms and conditions and many more.
Since both entities are governed under different regulations by the government, they both enjoy different types of liabilities, advantages/disadvantages and freedom in their domain. It is important to know the minute differences between the both before choosing the constitution.