LLP over Partnership Firm Registration


Partnership firm once has been a very popular form of business entity owing to the simplicity of formation and ease of management and termination. Registration of partnership firms 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 complied 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 which creates difficulty. All proceedings and functions of the firm shall be carried on as per the rules and regulations as mentioned in the partnership deed.

With time the lack of stability and harmony of a partnership firm have been greatly realized by people and for them who are not very much willing to form a partnership firm due to its shortcomings and who cannot afford to comply with the requirements of registration of company, The Ministry of Corporate Affairs introduced a concept called LLP i.e. “Limited Liability Partnership” – it is a combined form of 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 LLP 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 of its operations.

Advantages of a Limited Liability Partnership

The hybrid structure of company and partnership form has enabled LLP flexibility of running a business without being bound by legal norms, made it the most desirable form of organization for small to medium scale businesses and start-ups. LLPs are free to make their own rules of management, unlike companies. Also, the registration process of LLP in India is quite easy.

1. Body Corporate: Unlike no legal status of a partnership firm, LLP has the 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 a partnership firm has been a noticeable predicament which has been overcome by LLP. 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 is 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.

Related Article– Table of difference – LLP vs Company vs Partnership vs Proprietorship