LLP over Partnership Firm

Partnership firm was a very popular form of business entity owing to the simplicity of formation and ease of management and termination. But now LLP over Partnership is preferred as a business entity. LLP Registration is optional and cost of formation is almost nil. It is registered under the Indian Partnership Act,1932 by filing a partnership deed with a form/affidavit along with compiled fees to the registrar of firms. It is created by contract and has unlimited liability i.e. the liability of the partners may also extend to their personal assets. It is not a separate legal entity and holds property and legal suits under the name of its partners. Partnership firm shall have a minimum number of two partners and a maximum of 20. A minor can become a partner but a foreign national cannot invest in the partnership firm. When a partner wishes to leave the firm he can only transfer his shares to an outsider with the consent of all other partners. All proceedings and functions of the firm shall be carried as per the rules and regulations as mentioned in the partnership deed.

To overcome the shortcomings of the partnership firm such as lack of stability, dependency on the partners, etc. Ministry of Corporate Affairs introduced a concept called LLP i.e. “Limited Liability Partnership” – it is a combined form of an organization having the benefits of both company form of organization and partnership firm. LLP has to be registered mandatory under the Limited Liability Partnership Act,2008. LLP can be formed with a minimum of 2 partners who are Indian citizens residing in India and the number of partners is unlimited. With prior approval of RBI Foreign Direct Investment in Limited Liability Partnership can be allowed. LLP agreement is of fundamental importance since the entire functioning of the firm lies on provisions in it. It states the terms and conditions of relations between partners and their relationship with the firm and also specifies the rules for its operations. Therefore an LLP over Partnership is a better form of business registration.

Advantages of LLP over Partnership

The hybrid structure of the company and partnership form has promoted LLP over partnership due to the flexibility of running a business without being bound by legal norms. Start-ups made it the most desirable form of organization for small to medium scale business. LLPs are free to make their own rules of management, unlike companies.

1. Body Corporate: LLP, over partnership which has no legal status, has a character of being a separate legal entity and can sue and be sued. It bears a seal on its name and the members are considered distinct from the organization. It can also dispose and hold property in its own name.

2.Liability: The unlimited liability of partner has been a noticeable predicament which has been overcome by LLP over partnership. LLP is a distinct identity from its members thus liability lies on the firm and not on its owners. No partner shall be asked to pay from his personal assets after he has paid an amount to the extent of his share in the capital.

3.Freedom of management: The LLP agreement is not largely influenced by the Limited Liability Partnership Act,2008. The act gives the partners the flexibility to choose the way to manage their affairs and regulate their functions.

4.No Audit requirements: LLPs have to comply with audit requirements only when the capital contribution exceeds Rs.25 lakhs and the annual turnover exceeds Rs.40 lakhs. This is a factor of relief for small businessmen.

5. Attracts Investors: Financial institutions and venture capital firms are readily interested in investing in an LLP. This is an advantage contrasting to the difficulty of funding in partnership and sole proprietor firms.

6.A renowned form of business: Though it is a recent concept in India it is well known and successful worldwide especially in the service sector.

7.Easy transferable Ownership: Partnership requires the consent of all partners in transferring shares which are overcome through the liberal provisions of LLP agreement.

8. Partners not agents: Unlike in Partnership, partners in LLP have their individual interests they are not agents of other partners and are not liable for the acts of other partners.

9.Formalities of Incorporation: There is ease of incorporation in LLP as all the forms are available online.

10.Whistleblowing: Partnership Act has no provisions with respect to whistleblowing, however, to protect the interests of employees and for proper investigation provisions for whistleblowing have been made.

The difference of LLP over Partnership

Basis PartnershipLimited Liability Partnership
LiabilityUnlimited Personal LiabilityNo personal liability except in the case of fraud
Written AgreementNot RequiredIncorporation document is essential
RegistrationRegistration under Partnership Act is not mandatoryIncorporation under LLP Act is mandatory.
Legal entityNo separate legal entity.Separate legal entity from its partners.
PropertyProperty cannot be  held in name of Partnership.Property can be held in the name of Partnership.
Verbal agreementVerbal agreement is valid for execution.Incorporation Document is required for execution.
Administrating AuthorityRegistrar of Firms (of respective State)>Registrar of Companies (ROC)
Death of PartnerDeath of partner dissolves the firm.Death of partner does not dissolve the firm
Partners RequiredMinimum: 2

Maximum: 20

Minimum: 2

Maximum: no limit

Admission of minorCan be done with the permission of other partnersNo specific provision

Conclusion

There are many advantages of LLP over Partnership. One has to select an appropriate business configuration according to one’s need.

Also, read the related post: The closing of an LLP

For more info, visit company registration online.

2018-11-05T13:18:50+00:00LLP|