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Difference Between LLP and Partnership Firm

Updated on :  

08 min read.

A Limited Liability Partnership (LLP) and a partnership firm are two types of business structures through which partners can carry out their business. A minimum of two persons willing to be partners are required to establish an LLP or a partnership firm. LLP is a new concept, while a partnership firm is an old concept.

The concept of LLP was introduced in 2008 through the Limited Liability Partnership (LLP) Act. However, partnerships in India have been established under the Indian Partnership Act since 1932. Though an LLP and partnership firm requires a partnership between two parties for its establishment, it has many differences.

Limited Liability Partnership (LLP)

An LLP is a corporate business form that provides the benefits of a partnership firm and a company. It is a hybrid between a company and a partnership firm as it incorporates properties of both structures.

An LLP has a separate legal entity in the eyes of the law, and it is liable for the full extent of its assets. Partner’s liability is limited to their contribution to the LLP. Partners of an LLP are responsible only for their own actions.

The LLP enables professionals, entrepreneurs, and enterprises engaged in scientific and technical disciplines or providing services of any kind to form commercially efficient vehicles suited to their requirements. Establishing an LLP is suitable for small and medium enterprises due to its structural and operational flexibility and obtaining investment from venture capitalists.

Partnership Firm

A partnership firm is very popular in India and is one of the oldest forms of business structure. It is easy to establish a partnership firm as it needs to comply with a minimum set of rules and regulations.

A partnership means an agreement between two or more persons who pool their capital and resources to contribute to the business and agree to share the business profits. The partnership firm is established when all the partners/individuals enter into a partnership agreement/deed and run business under the partnership firm name.

The registration of a partnership firm is not mandatory. The law recognises the partnership firm even when it is not formally registered, and all the firm partners are responsible for any loss caused to third parties by the firm.

LLP Vs Partnership Firm

The differences between LLP and partnership firms in India are as follows:

ParticularsLLPPartnership Firm
Governing lawThe Limited Liability Partnership Act, 2008 governs LLPs.The Indian Partnership Act, 1932 governs partnership firms.
RegistrationThe registration of an LLP as per the LLP Act is mandatory.The registration of a partnership firm under the Indian Partnership Act is voluntary.
Registering authorityAn LLP should submit the registration form and all the subsequent e-forms with the Registrar of Companies.The firm must submit the partnership firm registration form and other subsequent forms with the Registrar of Firms. 
CreationAn LLP is created by law.A partnership firm is created by contract.
Binding documentThe LLP agreement is the charter document of an LLP.The partnership deed is the charter document of a partnership firm.
Annual form filingThe LLP must file its annual statement of accounts and solvency and annual return with the Registrar of Companies every year.A partnership firm need not file any annual returns with the Registrar of Firms.
Power to enter into contractAn LLP can enter into a contract in its name.A partnership firm cannot enter into a contract in its name.
Separate legal entityAn LLP has a separate legal entity under the law.A partnership firm has no separate legal status apart from its partners.
Liability of partnersThe partner’s liability of an LLP is limited to the extent of their capital contribution to the LLP. The partner’s liability of a partnership firm has unlimited liability.
NameThe name of an LLP must contain the word ‘LLP’ at the end of its name.The partnership firm can have any name, and it need not mention any word in its name.
Perpetual successionAn LLP has perpetual succession, which means its existence is not affected when a partner joins or leaves.A partnership firm does not have perpetual succession, and its existence depends upon the will of its partners.
Maximum partnersThere is no limit on maximum partners in an LLP.The maximum number of partners in a partnership firm is limited to 100 partners.
Ownership of assetsThe LLP has the ownership of assets which are independent of the partners. No partner owns the assets of the LLP.The partners have joint ownership of all the assets belonging to the partnership firm. The firm cannot own the assets.
Power to own property The LLP can hold property in its name.The partnership firm cannot hold property in its name. It must be in the names of all partners or the authorised partner as per the partnership deed.
Agency relationshipThe partners are agents of the LLP and not other partners.The partners act as an agent of the partners and the firm.
Common sealAn LLP has a common seal which denotes the signature of an LLP. The common seal is used to sign documents.There is no concept of a common seal in a partnership firm. The authorised partner must sign the documents.
Designated Partner Identification Number (DPIN) and Digital Signature Certificate (DSC)Each designated partner of an LLP is required to have a DPIN before being appointed as a designated partner. They also need to have a DSC for signing documents digitally.The designated partners of a partnership firm are not required to obtain DPIN or DSC. 
AdministrationThe designated partners are responsible for administering and managing the day-to-day business and other statutory compliances of an LLP.The partners themselves administer the business of the partnership firm. There is no requirement to appoint managerial personnel.
Foreign NationalThe foreign national can form an LLP along with an Indian resident as a partner. Foreign nationals cannot form a partnership firm in India.
Audit of accountsAll LLPs (except those having a turnover below Rs.40 lakh or contribution below Rs.25 lakh) in a financial year are required to get their accounts audited annually according to the provisions of the LLP Act.All partnership firms must get their accounts audited as per the provisions of the Income Tax Act.
DissolutionAn LLP can be dissolved voluntarily or by order of the National Company Law Tribunal (NCLT).A partnership firm can be dissolved by an agreement between partners, court order, mutual consent of partners, insolvency of partners, etc.
Arrangement, compromise and amalgamationAn LLP can enter into a compromise with its creditors or partners. It can also amalgamate with another LLP. A partnership firm cannot enter into any arrangement or compromise with its creditors or partners. It also cannot amalgamate with any other firm.

An LLP and a partnership firm are similar forms of entities but differ in their functioning, maintenance of accounts, method of dissolution, etc. They are governed by different Acts and Rules. Knowing their differences will help an entrepreneur select the right form of partnership structure for his/her business.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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