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April 20, 2021

Should you form LLP or Partnership Firm?

by Mahesh Mara in Corporate Law

Should you form LLP or Partnership Firm?

A Limited Liability Partnership means a business where the minimum two members are required and there is no limit on the maximum number of members. The liability of the members of an LLP is limited. LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its name. The LLP is a separate legal entity, liable to the full extent of its assets but liability of the partners is limited to their agreed contribution to the LLP.

This growing structure has been emerging as a popular form of business organization for many licensed professionals like lawyers, doctors, accountants, etc. This concept of business has been accepted in countries like U.S.A., U.K., Australia, and Germany. In the United Kingdom, LLP Act was enacted in 2000, in India, the LLP act was passed in 2008 for smooth conduction of LLPs, and in the United States of America, LLPs became part of the Uniform Partnership Act in 1996.

On the other hand a Partnership is one of the most important forms of a business organization, where two or more people come together to form a business and divide the profits thereof in an agreed ratio. A Partnership is easy to form, and the compliance is minimal as compared to companies.

A significant benefit of an LLP is that it allows the individual partners to be restricted from the joint liability of partners in a partnership firm. Where there are other business structures to choose from, it is necessary to discuss the advantages of choosing LLP as your business structure. Some of the key points to keep in mind as to whether you should select LLP or partnership firm as your business entity.

Whether to form a LLP or Partnership firm?

The following points must be considered before formation of LLP or Partnership firm:

a. Procedure of Formation

Formation of LLP

LLP registration procedure is the easiest and transparent process as it has a blend of the benefits of a company and partnership firm namely, limited liability feature of a company and the flexibility of a Partnership firm.

LLP registration process includes following steps

  • Get a digital signature (DSC)
  • Apply for the Director Identification Number (DIN)
  • Get the name of the company approved through ‘Reserve your Unique Name’ service (RUN)
  • Incorporation of LLP
  • File ‘Limited Liability Partnership Agreement’

Formation of Partnership firm

Partnership firm can be just by preparation of a partnership deed. Partnership deed can be written or oral, although it is always advisable to write a partnership deed to avoid any conflicts in the future.

Following details are required in a partnership deed: 

i. General Details:

1. Name and address of the firm and all the partners

2. Nature of business

3. Date of starting of business Capital to be contributed by each partner

4. Capital to be contributed by each partner

5. Profit/loss sharing ratio among the partners

ii. Specific Details:

Apart from above, certain specific clauses may also be mentioned to avoid any conflict at a later stage:

1. Interest on capital invested, drawings by partners or any loans provided by partners to firm

2. Salaries, commissions or any other amount to be payable to partners

3. Rights of each partner, including additional rights to be enjoyed by the active partners

4. Duties and obligations of all partners

5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm

6. Other clauses as partners may decide by mutual discussion

Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is optional and at the discretion of the partners. Registration of partnership firm may be done at any time – before starting a business or anytime during the continuation of partnership. It is always advisable to register the firm since a registered firm enjoy special rights which aren’t available to the unregistered firms.

b. Liability of partners

A. Liability of Partners of LLP: Limited Liability Partnership exists as distinct legal structures from the partners. All the obligations either for repayment of debts or lawsuits incurred by Limited Liability Partnership, lie on the firm and not on the partners. 

B. Liability of Partners of Partnership firm: Every partner is jointly liable with all the other partners and also individually, for all acts/activities of the firm, during the course of business while he/she is a partner. This means that if a loss or injury is caused to any third party or a penalty is levied during the course of business all partners will be held liable even if the injury or loss was caused by one of the partners.

c. Cost of registration

The registration cost of an LLP is relatively low as compared to formation of any other company (Public or Private).  The Cost of registration of LLP may range from Rs. 10000 to 15000 depending upon the professional handling the assignment.

While there are no statutory fees to register a partnership firm, you will need to pay professional fees and stamp duty for drafting of Partnership deed on a stamp paper indicating the consent of partner to enter into a partnership deed. The Cost of formation of partnership firm may range from Rs. 4000 to 6000 depending upon the professional handling the assignment.

d. Taxation of entity

The taxation aspects of LLP and partnership firm are one and the same. Income of firm is taxable at flat 30%. Others rates of taxes are as follows:

1. Long term capital gain: 20%

2. Short term capital gain on sale of shares: 15%

3. Long term capital gain on sale of shares: 10%

4. If Net taxable income is more than Rs. 1 crore than surcharge of 12% shall be applicable

5. Health and Education cess of 4% shall be applicable on the amount of tax arising above

Share of Partners in the total income of firm and LLP is exempt in hands of partner under section 10(2A)

e. Number of members

No of partners in LLP: LLP can be formed through minimum two partners. No cap of a maximum number of its partners

No of partners in partnership firm: Partnership firmcan be formed through Minimum two partners. Maximum no of partners shall be 10 for banking business and 20 for other businesses.

f. Others Compliance requirement

Limited liability is required to file Form 8 and form 11 annually every year after the end of financial year.

No compliance is to be fulfilled by a partnership firm after the end of the financial year.

g. Timeline for formation

In order to form a Limited Liability Partnership it will take approximately 20 days to incorporate (inclusive of time taken to obtain DPIN). In order to form a Partnership firm it will take approximately 7 days to incorporate.

h. Legal aspects

Limited Liability Partnership exists as distinct legal structures from the owners. All the obligations either for repayment of debts or lawsuits incurred by LLP, lie on the firm and not on the owners.  LLP can also file a suit and suit can be filed against LLP.

Only registered partnership can file a case.

i. Ownership of the assets

The LLP has ownership of assets and Partners only have a capital contribution in the LLP. Partners have joint ownership of all the assets

You can form both LLP and Partnership Firm Virtually :

Click here to Form LLP

Click here to Form Partnership Firm

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