Difference Between LLP and Partnership Firm

Difference between LLP and partnership firm

A Limited Liability Partnership (LLP) and a partnership firm are two distinct forms of business structures in India. An LLP is a relatively new concept introduced under the Limited Liability Partnership Act, 2008, combining the advantages of both a company and a partnership firm. In an LLP, the partners have limited liability, meaning their personal assets are protected from the firm’s debts or liabilities. This structure also offers flexibility in management, with no restriction on the number of partners. A partnership firm, governed by the Indian Partnership Act, 1932, does not provide limited liability protection. The partners in a registered partnership firm are personally liable for the firm’s debts, and their liability is unlimited. Additionally, an LLP is a separate legal entity, whereas a partnership firm is not, meaning that the firm and the partners are considered one and the same under the law.

Limited liability partnership (LLP)

• Separate legal entity: An LLP is recognised as a separate legal entity, distinct from its partners.

• Limited liability: The liability of the partners in an LLP is limited to the extent of their contribution to the LLP.

• No limit on partners: An LLP can have an unlimited number of partners, unlike a partnership firm.

• Perpetual succession: The LLP continues to exist even if the partners change.

• Flexible management: LLPs offer flexibility in their management structure, allowing partners to manage the business as they see fit.

• Taxation: LLPs are taxed like a partnership firm, but they benefit from exemptions available under the Income Tax Act, 1961.

• Less compliance: LLPs have fewer regulatory compliances compared to companies, making them easier to manage.

Partnership firm

A partnership firm is a traditional business structure in India, governed by the Indian Partnership Act, 1932. In a registered partnership firm, two or more individuals come together to form a business and share profits and losses. The partners have unlimited liability, meaning they are personally responsible for the firm’s debts. The firm is not a separate legal entity, so the partners and the firm are legally considered one. Decision-making in a partnership firm is typically straightforward, with all partners having an equal say.

LLP vs Partnership firm

Criteria	LLP	Partnership Firm
Legal entity	Separate legal entity	Not a separate legal entity
Liability	Limited to the extent of contribution	Unlimited, personal assets at risk
Number of partners	No limit	Maximum of 20 partners allowed
Perpetual succession	Yes	No
Management	Flexible management structure	Equal decision-making among partners
Taxation	Similar to partnership firm, with exemptions	Taxed under the Indian Partnership Act, 1932
Compliance requirements	Less compliance compared to other companies	Minimal compliance, but partners have unlimited liability

Both LLPs and partnership firms have their own advantages and limitations. While an LLP offers the benefit of limited liability and a flexible management structure, a partnership firm provides simplicity in decision-making. Choosing the right structure depends on the specific needs and goals of the business. Entrepreneurs seeking to grow their business and access funding may also consider applying for Bajaj Finserv Business Loan to support their ventures.