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LLP vs Partnership Firm

Last Update Date : October 30, 2018

Why is the conversion of start-ups so less? The answer lies in the execution of the idea. The ideas are easy to get but difficult to implement. For proper implementation of a start-up, you need to perform a lot of iterations. And of-course for the iterations you need to have a lot of capital. Raising capital for your business is always tough and requires a lot of patience and time. After so much contribution and hard work, there is a possibility that the idea does not work. The odds of getting from launch to liquidity without some disaster happening are one in a thousand. In that case, can we have partners while developing the idea? Will the partners be able to share the debt that we incur? Let us find out.

Methods of Raising Capital for Business

For a business to work, two or more individuals or entities can come together for raising the capital required. The profits earned from the business are shared with the persons contributing to the business. Similarly, the losses are also shared by them. There are various methods of raising capital for the business. Some of them are:

  1. Limited Liability Partnership
  2. Partnership
  3. IPOs
  4. Bank Loans

This article concentrates on the Limited Liability Partnership and the Partnership firm.

Limited Liability Partnership (LLP)

The limited liability partnership act was introduced in 2008. According to this act, the partners who participate are liable for liabilities in proportion to their contribution to the business.

For example, three people, Tony Stark, Natasha Romanoff and Dr Bruce Banner, get into an LLP where the ratio of contribution is 3:1:2. Now their business suffers a loss of 60 crores. Therefore, Tony Stark will have a liability of 30 crores, Natasha Romanoff will have a liability of 10 crores, and Dr Bruce Banner will have a liability of 20 crores.

Partnership Firm

The Partnership Act was introduced in 1932. According to this act, the partners in the partnership earn profits as per their contributing ratio, but the liabilities are indefinite.

For example, three people, Tony Stark, Natasha Romanoff and Dr Bruce Banner, get into a partnership where the ratio of contribution is 3:1:2. Now their business suffers a loss of 240 crores. Therefore, Tony Stark can pay only 75 crores, Natasha Romanoff can pay only 50 crores. Therefore, Dr Bruce Banner will have to pay 115 crores which are higher than the proportion of his contribution to the partnership.

Differentiation between LLP and Partnership Firm

Sr. No. Differentiating Parameter LLP Partnership
1 Governing Act Limited Liability Partnership Act 2008 Partnership Act 1932
2 Legal Entity Status Legal Not considered legal
3 Name of the firm Name should have LLP at the end No specification
4 Number of partners 2- infinite 2-20
5 Registration Mandatory

Registered under Ministry of Corporate Affairs

Optional

Registered under Registrar of firms

6 Creation Law Contract
7 Formation Cost At least Rs. 800 Negligible
8 Liability of partners In proportion to the amount invested Indefinite
9 Chartered Document Agreement Deed
10 Common Seal Name and signature of the LLP as per agreement. Unavailable
11 Legal Proceedings Can sue and can be sued Can sue but cannot be sued
12 Ownership of assets Ownership is in the name of the LLP and not in the name of the partners Jointly owned by all the partners or as per mentioned in the contract
13 Participation of foreign individuals Allowed Not-allowed
14 Transfer of partnership As mentioned in the agreement Not-allowed, profit received by the legal heir in case of death
15 DIN requirement Mandatory for each partner to have designated partner identification number No requirement
16 DSC Requirement Mandatory for at least one partner No requirement
17 Dissolution of partnership Voluntary or by Law Mutual consent, by order, insolvency, bankruptcy,
18 Existence Removal or death of any partner does not lead to termination of the partnership Removal or death of any partner leads to termination of the partnership
19 Minutes of meeting As mentioned in the LLP agreement No requirement
20 Remuneration to partners As mentioned in the LLP agreement Remuneration can be paid by the firm
21 Annual Filing of Return Mandatory with MCA No requirement
22 Share Certificate As per ownership of partners mentioned in the agreement As per ownership of partners mentioned in the deed
23 Audit of Accounts As per provisions LLP Act other than firms having turnover less than 40 lacs or contribution of fewer than 25 lacs As per the provisions of Income Tax Act
24 Accounting Standards Not specified Not required
25 Merger, Amalgamation, compromises Allowed to enter into merger, compromises, amalgamation Not allowed to enter into merger, compromises, amalgamation
26 Oppression and Mismanagement Solutions available except for redressal Solutions not available
27 Creditability High as the firm has to comply with a lot of rules Depends upon the operations of the partnership firm
28 Whistle Blowing Security given to the partners for providing information while auditing Not provided
29 Minor as a shareholder No such provision Minor can be a partner or a share holder
30 Tax Rates 30% and cess on the income earned 30% and cess on the income earned
31 DDT/MAT To be paid Not to be paid
32 Formalities for Incorporation LLP Agreement, Forms and fees Partnership deed, forms or affidavit as required and fees
33 Time required for incorporation Around 10 days Around 7 days
34 Voting Rights As mentioned in the Agreement As mentioned in the Deed
35 Ceasing the partner As mentioned in the agreement or with 30 days’ notice without mention in the agreement As mentioned in the deed

Limited liability partnership has strict compliance with the laws whereas the partnership firm has lenient laws. It depends on the requirements of the person who wants to get engaged in either of the two.

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