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LLP vs Partnership Firm

Last Update Date : April 29, 2019
Estimated Read Time: 5 min

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 ParameterLLPPartnership
1Governing ActLimited Liability Partnership Act 2008Partnership Act 1932
2Legal Entity StatusLegalNot considered legal
3Name of the firmName should have LLP at the endNo specification
4Number of partners2- infinite2-20
5RegistrationMandatory

Registered under Ministry of Corporate Affairs

Optional

Registered under Registrar of firms

6CreationLawContract
7Formation CostAt least Rs. 800Negligible
8Liability of partnersIn proportion to the amount investedIndefinite
9Chartered DocumentAgreementDeed
10Common SealName and signature of the LLP as per agreement.Unavailable
11Legal ProceedingsCan sue and can be suedCan sue but cannot be sued
12Ownership of assetsOwnership is in the name of the LLP and not in the name of the partnersJointly owned by all the partners or as per mentioned in the contract
13Participation of foreign individualsAllowedNot-allowed
14Transfer of partnershipAs mentioned in the agreementNot-allowed, profit received by the legal heir in case of death
15DIN requirementMandatory for each partner to have designated partner identification numberNo requirement
16DSC RequirementMandatory for at least one partnerNo requirement
17Dissolution of partnershipVoluntary or by LawMutual consent, by order, insolvency, bankruptcy,
18ExistenceRemoval or death of any partner does not lead to termination of the partnershipRemoval or death of any partner leads to termination of the partnership
19Minutes of meetingAs mentioned in the LLP agreementNo requirement
20Remuneration to partnersAs mentioned in the LLP agreementRemuneration can be paid by the firm
21Annual Filing of ReturnMandatory with MCANo requirement
22Share CertificateAs per ownership of partners mentioned in the agreementAs per ownership of partners mentioned in the deed
23Audit of AccountsAs per provisions LLP Act other than firms having turnover less than 40 lacs or contribution of fewer than 25 lacsAs per the provisions of Income Tax Act
24Accounting StandardsNot specifiedNot required
25Merger, Amalgamation, compromisesAllowed to enter into merger, compromises, amalgamationNot allowed to enter into merger, compromises, amalgamation
26Oppression and MismanagementSolutions available except for redressalSolutions not available
27CreditabilityHigh as the firm has to comply with a lot of rulesDepends upon the operations of the partnership firm
28Whistle BlowingSecurity given to the partners for providing information while auditingNot provided
29Minor as a shareholderNo such provisionMinor can be a partner or a share holder
30Tax Rates30% and cess on the income earned30% and cess on the income earned
31DDT/MATTo be paidNot to be paid
32Formalities for IncorporationLLP Agreement, Forms and feesPartnership deed, forms or affidavit as required and fees
33Time required for incorporationAround 10 daysAround 7 days
34Voting RightsAs mentioned in the AgreementAs mentioned in the Deed
35Ceasing the partnerAs mentioned in the agreement or with 30 days’ notice without mention in the agreementAs 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.

The law for different firms is different, including the tax law. Get your taxes filed by the world’s tax filing leader, H&R Block India , who understand that the tax law can be difficult for even the best ones sometimes. Our team of highly qualified tax experts will help you file your taxes and provide year-round assistance for your convenience so that you can get in touch with us in case you face a problem regarding the same.

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CA Ankita Mathur
Ankita, a Big 4 alumna, is a tax expert at H&R Block (India) with vast experience in managing GST-related business services. An avid traveller, Ankita is a regular contributor to the CAclubindia and loves helping people understand about GST and helping companies be GST compliant.

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