The Legal Difference Between a Partnership and An LLP in India

The Indian business environment encompasses a range of legal structures for companies, each with its own unique liability, taxation, and governance issues. The Partnership and Limited Liability Partnership (LLP) are generally the two options for cooperative business. As it relates to a Partnership and an LLP, both involve more than one individual offering collaborative services, and both are legal structures of cooperation, but the legal structures of the two are very different. This article aims to unpack these legal differences for individuals wanting to decide on the proper business structure in India.

1. Understanding a Partnership

In India, partnerships are governed under the Indian Partnership Act, 1932. "The relationship between individuals who have agreed to share profits of a business carried on by all or any of them acting for all" is its definition.

• Formation and Registration: A partnership may arise under an agreement (oral or written) between two or more people. Registration is not required or mandatory, but a partnership that is not registered does face some legal disadvantages; under some circumstances, it would not be able to sue third parties or its partners to enforce rights arising from the agreement above. The Registration of the firm is done with the Registrar of Firms.

• Legal Status: A partnership firm and its partners are the same legal entity. For legal reasons, the firm and its partners are considered to be the same.

• Liability: This is most likely the biggest distinction. Partners in a traditional partnership have unlimited personal liability. This implies that each partner bears joint and several liabilities for all of the company's debts and commitments. In cases where the firm's assets are insufficient to cover its debts, the partner's assets may be utilised to settle the debt.

• Perpetual Succession: Perpetual succession is not a feature of partnerships. Therefore, unless the partnership deed expressly specifies otherwise, the firm may dissolve upon the death, insolvency, or retirement of a partner.

• Mutual Agency: Every partner acts as the principal and agent of the other partners. Essentially, the act of a partner within the enterprise is bound to the firm and bound to all other similarly situated partners.

• Taxation: The firm is taxed as a separate entity, and partners are taxed on their share of profits.

2. Understanding a Limited Liability Partnership (LLP)

The Limited Liability Partnership Act of 2008 brought it to India. It is a hybrid form of business organization that includes the advantages of a company along with the flexible nature of a Partnership.

• Formation and Registration: An LLP is legally required to register with the Ministry of Corporate Affairs (MCA) via the Registrar of Companies (RoC). This means obtaining a Designated Partner Identification Number (DPIN) and a Digital Signature Certificate (DSC) for the designated partners, reserving a name, and filing the incorporation document.

• Legal Status: An LLP is a body corporate and separate legal entity from its partners, unlike a traditional partnership, which is an agglomeration of individual joint ventures or conventional partnerships. An LLP may additionally hold assets, incur debts, and sue or be sued in its name.

• Liability: The main attraction of an LLP is that the liability of partners is limited, meaning the amount the partners can be liable for will be limited to the amount that each partner has agreed to invest in the LLP, except for fraud or wrongful acts. Usually, this means that partners’ assets would not be exposed to the liabilities of the LLP.

• Perpetual Succession: An LLP has unlimited existence. It does not change depending on its partners. An LLP is unaffected by the death, retirement, insolvency, or insanity of a partner.

• Management: The idea of mutual agency is limited, as it applies to LLP partners in the way that partners manage the LLP. A partner, however, is not liable for the wrongful acts or omissions of any other partner, except in the instance where they are directly involved or they know of those acts.

• Compliance Requirements: Compared to a partnership, an LLP has much more stringent compliance-related obligations, as an LLP is required to prepare certain documents and have annual filings with the RoC (Form 8 and Form 11); maintain the books of accounts; and, subject to turnover or contribution, be audited.

• Taxation: Treated similarly to a partnership firm under the Income Tax Act, 1961.

3. Legal Differences between Partnership vs. LLP

In India, Partnership Firms and Limited Liability Partnerships (LLPs) differ significantly in their legal structure and implications. The Indian Partnership Act, 1932, governs a Partnership Firm1932, whereas the Limited Liability Partnership Act, 2008, governs an LLP. A Partnership Firm is not considered a separate legal entity, while an LLP enjoys the status of a distinct legal entity, separate from its partners.

One of the most critical differences lies in the liability of partners. In a Partnership Firm, the liability of partners is unlimited, making them personally liable for the debts of the business. In contrast, LLP partners have limited liability, restricted to their agreed contribution.

Registration of a Partnership is optional, though advisable for legal recognition, whereas registration of an LLP is mandatory with the Registrar of LLPs. The naming of an LLP must include the suffix “LLP”, a requirement not applicable to Partnership Firms.

In terms of the number of partners, a Partnership must have a minimum of 2 and a maximum of 50 partners, whereas an LLP must have at least 2 partners, with no upper limit on the number. A Partnership does not enjoy perpetual succession, meaning it may dissolve upon the death or retirement of a partner. However, an LLP has perpetual succession, continuing its existence irrespective of partner changes.

Compliance requirements for LLPs are higher than those for Partnerships. LLPs must file annual returns and financial statements with the Ministry of Corporate Affairs (MCA). While audits are not mandatory for Partnerships unless their turnover exceeds ₹1 crore, an LLP must undergo an audit if its turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh.

Lastly, Foreign Direct Investment (FDI) is not allowed in Partnership Firms, but it is permitted in LLPs under the automatic route, subject to sectoral restrictions and compliance with FDI regulations.

These distinctions make LLPs more suitable for businesses seeking limited liability protection and formal structure, while Partnership Firms may be preferred for smaller, less-regulated operations.

In Conclusion, the legal differences between a traditional Partnership and a Limited Liability Partnership in India are extensive and have significant consequences on business operations, exposure to risk, and long-term contracts. On one hand, a partnership has the advantage of simplicity and minimal compliance and is an ideal format for small start-ups or informal ventures, but, however, the unlimited liability that comes with being in a partnership makes it a risky means to operate a growing business. And when dealing with unlimited liability, there is often the thought that one wrong move may mean the depletion of personal assets. On the other hand, an LLP has the main advantage of limited liability, protects the personal assets of the partners, and can also enable ease of formal partnership and improved business continuity with perpetual succession.

For entrepreneurs requiring an appropriately formal and scalable business structure that can limit risk and allow the partners to work collaboratively without risking their wealth, there is no question that the LLP will be favourable over a traditional partnership as it is not only the better format to be legally protected but also potentially the better business format.

In the overall assessment of the cost of registration of an LLP and the increased requirement for compliance, this is a small price to pay for the legal protections and business viability that an LLP can provide to entrepreneurs as compared to a traditional partnership for the modern entrepreneur in India.