What is a Partnership Firm? Difference Between Partnership and LLP

Those individuals who enter into some sort of partnership with each other are called partners and when these partners are addressed collectively by the same name under which their business is registered, it is called a partnership firm. A partnership firm is the visible form of a partnership between two individuals who have a legal relationship between them.

The laws that help in the regulation of partnership firms in India are present under the Indian Partnership Act, 1932. This act contains the rights availed to the partners and their duties and some other legal relations between partners and any third person. Hence, this act creates a position of the partnership firm with the third parties either in contractual and legal relations that arise during the course of business of a partnership firm.

Partnership firms and Limited Liability Partnership firms (LLPs) are two quite different types of business forms with some definite differences. It is very crucial for entrepreneurs to understand the differences between Partnership firms and Limited Liability Partnership firms in order to start any sort of new business or to make changes in an existing business. In this blog, we will go through some of the main differences between partnership firms and limited liability firms along with taxation, legal status, liability, management and compliance.

Partnership Firm:  In partnership firm business, two or more people own the business together and are collectively responsible for operating it as well. In a partnership firm, both profits and losses are shared by the partners and they are equally liable for its obligations and debts.

Limited Liability Partnership Firm: If we talk about a limited liability partnership firm, it is the kind of partnership where the partners do not have complete liability for the debts and obligations of the business. In case of incurring any sort of debt or legal action, the assets of the partners are risk-free. LLPs are generally used in professional sectors like accounting, consulting and law.

Striking differences between Partnership Firm and LLPs

Partnership Firm

The points listed below are the key features of a partnership firm:

• The registration of a partnership firm is performed under the Indian Partnership Act and is voluntary. If someone does not want to register themselves under the Act, then they are obligated to do it.
• The registering authority for the registration of a partnership firm is the registrar of Firms. The partnership firm registration form and all other related forms are submitted to this authority,
• A partnership does not require to file any sort of annual returns with the Registrar of Firms.
• The governing law for a partnership firm is the Indian Partnership Act, 1932.
• The partners are allowed to have unlimited liability. This means that in case of any debts or obligations or legal actions of the business, the partners will be personally liable.
• A partnership firm does not fall under an incorporated business structure. This means that its legal entity is not different from the ones possessed by the owners.
• The taxation on partnership firms is not separate. Each partner of the partnership firm is responsible for the payment of taxes of their share of the profit gained from the business.
• Partnership firms do not have that much compliance as compared to an LLP.
• A partnership firm is usually managed by its partners.
• The name of the partnership firm may be anything and it is not mandatory that it should include any words.
• The number of partners that a partnership firm can possess is 100.
• The assets that belong to a partnership firm are combinedly owned by the partners.
• The administration of a partnership firm is done jointly by the partners of that firm.
• A partnership firm can not be formed by any foreign nationals
• A partnership firm must get its accounts audited by the income Tax Act.

Limited Liability Partnership Firm

• The registration of an LLP is mandatory.
• The registering authority for an LLP is the Registrar of Companies(ROC). All the documents related to the registration of an LLP need to be submitted here.
• An LLP must file for annual returns and annual statements of the firm to the Registrar of Companies on an annual basis.
• The governing law for an LLp is the Limited Liability Partnership Act which was issued in 2008.
• The liability of a partner depends on the amount of money they have invested in the limited liability partnership firm.
• An LLp is a registered entity and is corporated in nature and has a legal existence that is separate from its partners.
• These are taxed being distinct legal entities while the partners are only taxed on their income.
• LLPs have to file regulatory and compliance requirements and have to maintain extensive records.
• The designated partners are responsible for the managing of a limited liability partnership firm.
• The name of an LLP must contain ‘LLP’ at the end.
• There is no limit on the maximum number of partners that an LLP can possess.
• The LLP is not owned by any of the partners and LLP has the ownership of the independent assets of the partners.
• There are a few designated partners who are responsible for the management of the business.
• An LLP can also be formed by a Foreign national and an Indian resident combinedly.

According to the LLP Act, a limited liability partnership firm needs to get its accounts audited every single year.