Difference between Limited Liability Partnership (LLP) and Partnership

Both Limited Liability Partnership (LLP) and General partnership in business function under the general premises of two or more individuals or organisations coming together to operate a mutually beneficial business entity. The parties involved enter into an agreement at the time of entering into a partnership and the operations of the business entity are administered on the basis of the said agreement. The partners invest their resources, reaps the profits from the success of the business and sustains losses if incurred. While LLPs are a type of partnership, the constituting factors differ from that of a general partnership. This article outlines 5 major differences between a general partnership and LLP.

As a legal entity

As a legal entity the difference between a partnership and LLP is that the former doesn’t differentiate the business from the partners. The business is not a separate legal entity, the general partners take operational decisions on the basis of the partnership agreement and share profits as well as liabilities. In case of an LLP, the business is a body corporate and is legally separate from its partners altogether, and can hold assets in its name. They are bound together by a liability agreement.

As a legal entity the difference between a partnership and LLP is that the former doesn’t differentiate the business from the partners. The business is not a separate legal entity, the general partners take operational decisions on the basis of the partnership agreement and share profits as well as liabilities. In case of an LLP, the business is a body corporate and is legally separate from its partners altogether, and can hold assets in its name. They are bound together by a liability agreement.

Liability of Partners

The liability of partners in a general partnership is unlimited. Despite the partnership deed, they are equally liable for the obligations of the partnership and have to bear the responsibilities of another partner’s action as well. The liability can also extend to the personal assets of the active partners. On the other hand, in case of an LLP, liability is limited. One partner cannot be held responsible for the decisions of another partner. They are liable only for their part of the contribution, unless it has been outlined in the LLP agreement.

Number of Partners

Both LLP and partnership firm require a minimum of 2 partners. The maximum number of partners in a partnership firm is ceilinged at 50 as per companies Act, 2013. Any general partnership with more than 50 partners is considered as an illegal association. Although there is no such capping in case of an LLP, it is mandatory that it has 2 designated individual partners with at least one of them being resident of India. A general partnership operates in the threat of dissolution, in case the number of partners reduces below the mandatory requirement irrespective of the cause. In an LLP, the sole partner has the option to fill the position of the lost partner without dissolving the business.

Registration of partnership

Governed by Indian Partnership act, 1932, it is not compulsory for a general partnership firm to register with the Registrar of Companies under the Ministry of Corporate Affairs. A mutual agreement between the partners suffices for the formation of a general partnership. However, governed by Limited Liability Partnership Act, 2008, registration is mandatory for an LLP. As such an LLP enjoys the benefit of shifting the registered office or bank account to another Indian state. For a partnership firm, this becomes a complicated process. Additionally, the registration process ensures uniqueness of the LLP’s name, which in turn helps in establishing a distinct value for itself in the long run. There is no such constraint for partnership firms.

Statutory Compliances

The primary compliance prescribed for an LLP and partnership firm is as laid out by the Income Tax Act, 1961. It states no difference between a partnership and an LLP for taxation purposes. However, the Limited Liability Act mandates other statutory compliances to ensure transparency of operations and financials of an LLP. Additionally, an LLP has to maintain and audit their books of accounts if turnover and capital contribution overreaches 40 lakhs and 25 lakhs respectively. The accounting standards of an LLP help in garnering higher credibility as compared to a partnership firm, making it easier for them to attract funds from financial institutions when required. There are no such mandatory compliances for a partnership firm.