A partnership firm is one of the most important forms of a business organization. It is a popular form of business structure in India. A minimum of two persons are required to establish a partnership firm.
The key advantage of registering as a Limited Liability Partnership as opposed to a Partnership Firm is that it counts for a separate legal identity. Hence, LLP provides a limited liability benefit to the partners. In case of a business loss or insolvency, the liability of the partners is restricted to the capital contribution as per the LLP agreement. Further, one partner is not held responsible for the actions of negligence or misconduct of any other partner.
LLP Agreement, deed among partners of an LLP, clarifies operating structure including rights and responsibilities of the partners. Typically, LLP has a “Designated Member” who would control day-to-day operations. It can have individuals or existing businesses as members. Further, this structure allows to clearly define the roles and responsibilities of the partners. It could also help in protecting the partner’s interest in case of loss because of an unlawful act of any other partner.
Limited Liability Partnership Registration creates a separate legal identity from its partners. Governed by the LLP Act of 2008, it allows the business to contract with other entities, take legal action, own assets, and borrow funds in the name of the LLP itself. It provides flexibility to the business to function independently and in perpetuity, irrespective of change or death of partners..
Compliance requirements for an LLP are lesser as compared to Private Limited Companies. It doesn’t have a mandatory audit requirement until a certain level of turnover or contribution. Unlike companies, compliances related to board meetings, statutory meetings, etc. do not apply to LLPs. Professional services for compliance are typically available at cheaper rates than that for companies, making it a cost-effective formation type to maintain. Capitalists, Private Equity Firms, and HNIs choose to invest in private limited companies.
| Private Limited Company | One Person Company | Limited Liability Partnership | Partnership Firm | Proprietorship Firm | |
|---|---|---|---|---|---|
| Applicable Law | Companies Act, 2013 | Companies Act, 2013 | Limited Liability Partnership Act, 2008 | Indian Partnership Act, 1932 | No specified Act |
| Registration | Mandatory | Mandatory | Mandatory | Optional | no |
| Number of Owners | 2-200 | Only 1 | 2 – Unlimited | 2-50 | Only 1 |
| Separate Legal Entity | Yes | Yes | Yes | No | No |
| Liability Protection | Limited | Limited | Limited | Unlimited | Unlimited |
| Statutory Audit | Mandatory | Mandatory | As Applicable | Not Mandatory | Not Mandatory |
| Ownership Transfer | Yes | Yes (Restricted) | Yes | Yes (Restricted) | No |
| Perpetual Existence | Yes | Yes | Yes | No | No |
| Foreign Ownership | Allowed | Not Allowed | Allowed | Allowed | Not Allowed |
| Taxation Liability | Moderate | Moderate | High | High | Low |
| Compliance Requirement | High | High | Moderate | Low | Low |