WHICH ONE IS BETTER-WHETHER LLP OR PARTNERSHIP ?

 

Understanding Partnership and the Indian Partnership Act, 1932

Partnership is a type of business entity in which two or more individuals or entities agree to share the profits and losses of a business venture. The Indian Partnership Act, 1932 is the governing legislation that regulates partnerships in India. The Act defines the rights, duties, and liabilities of partners in a partnership.

According to Section 4 of the Indian Partnership Act, 1932, a partnership is defined as "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."

The Act also provides for the following essential elements of a partnership:

1. Agreement: A partnership must be formed by an agreement between two or more persons to carry on a business.
2. Business: The partnership must be formed to carry on a business.
3. Sharing of Profits: The partners must have agreed to share the profits of the business.
4. Mutual Agency: The partners must act as agents for the partnership and for each other.

The Indian Partnership Act, 1932 also provides for the following aspects of partnerships:

1. Registration of Partnership: According to Section 58 of the Act, a partnership may be registered with the Registrar of Firms.
2. Rights of Partners: The Act specifies the rights of partners, including the right to participate in the management of the business, to receive a share of the profits, and to have access to the books of accounts.
3. Duties of Partners: The Act also specifies the duties of partners, including the duty to act in good faith, to be just and faithful to each other, and to render true accounts.
4. Liability of Partners: Each partner is personally liable for the debts and obligations of the partnership, and the liability extends to his personal assets.
5. Dissolution of Partnership: The partnership may be dissolved either by mutual agreement of the partners or by order of the court.

The Indian Partnership Act, 1932 provides a legal framework for the formation and operation of partnerships in India. It is essential for partners to understand the provisions of the Act to ensure the smooth functioning of their partnership.

 

Understanding Limited Liability Partnership and the Limited Liability Partnership Act, 2008

An LLP is a legal entity that combines the features of a partnership and a limited liability company. It provides the benefits of limited liability to its owners and allows them to manage the business directly. LLPs are governed by the Limited Liability Partnership Act, 2008 in India.

The key features of an LLP are:

1. Separate Legal Entity: An LLP is a separate legal entity from its partners. It can own assets, incur debts, and sue or be sued in its own name.
2. Limited Liability: The liability of partners in an LLP is limited to their contribution to the LLP. Their personal assets are not at risk in case of any legal action against the LLP.
3. Perpetual Existence: An LLP has perpetual existence, which means that its existence is not affected by changes in its partners.
4. Flexibility in Management: The partners of an LLP can manage the business directly without interference from outside parties.
5. Taxation: LLPs are taxed as partnerships, and their partners are taxed individually on their share of the profits.

Some of the key sections of the Limited Liability Partnership Act, 2008 are:

1. Section 3: Formation of LLP: This section specifies the requirements for forming an LLP, including the need for at least two partners.
2. Section 7: Designated Partners: Every LLP must have at least two designated partners who are responsible for complying with the provisions of the Act.
3. Section 16: Liability of Partners: The liability of partners in an LLP is limited to the extent of their contribution to the LLP.
4. Section 23: Taxation: LLPs are taxed as partnerships, and the income of the LLP is taxed at the individual partner level.
5. Section 37: Winding up: An LLP can be wound up voluntarily or by an order of the National Company Law Tribunal.

 

Difference between Partnership and Limited Liability Partnership

Partnership and Limited Liability Partnership (LLP) are both types of business entities in India. While partnership is governed by the Indian Partnership Act, 1932, LLP is governed by the Limited Liability Partnership Act, 2008. Here are some key differences between the two:

1. Separate legal entity: An LLP is a separate legal entity from its partners, while a partnership firm is not a separate legal entity. In a partnership, the partners and the firm are considered to be one and the same, and the partners are personally liable for the debts and obligations of the partnership. In an LLP, the partners are not personally liable for the debts and obligations of the LLP, and their liability is limited to the extent of their contribution to the LLP.

 

2. Formation: A partnership can be formed by an oral or written agreement between two or more persons, while an LLP can only be formed by registration with the Registrar of LLPs.

 

3. Number of partners: A partnership can have a minimum of 2 partners, while an LLP must have at least 2 designated partners and there is no upper limit on the number of  designated partner but the maximum number of partner in partnership firm is 50 prescribed in Rule 10 of the Companies (Miscellaneous) Rules, 2014         

 

4. Liability: In a partnership, all partners have unlimited liability, while in an LLP, only the designated partners have unlimited liability, and the liability of other partners is limited to their contribution to the LLP.

 

5. Management: In a partnership, all partners have an equal say in the management of the business, unless otherwise specified in the partnership deed. In an LLP, the designated partners have greater responsibility and control over the management of the LLP.

 

6. Perpetual existence: An LLP has perpetual existence, meaning that its existence is not affected by changes in its partners. In a partnership, the death, retirement, or insolvency of a partner can lead to the dissolution of the partnership.

 

7. Taxation: A partnership is taxed as a separate entity, while an LLP is taxed as a partnership. In an LLP, the income is taxed at the individual partner level.

 

8. Registration: A partnership firm is not required to be registered with any authority, while an LLP must be registered with the Registrar of LLPs.

 

9. Name: A partnership can be named after its partners or a fictitious name, while an LLP must have LLP as a part of its name.

 

10. Audit requirement: The Indian Partnership Act, 1932 does not require a partnership to get its accounts audited by a chartered accountant or any other qualified auditor. However, if the partnership firm's turnover or gross receipts exceed a certain threshold, it is required to get its accounts audited under the Income Tax Act, 1961. Currently, for a partnership firm, the threshold limit for compulsory audit under the Income Tax Act is Rs. 1 crore.

              Under the Limited Liability Partnership Act, 2008, all LLPs are required to maintain proper books of accounts and get their accounts audited by a practicing Chartered Accountant or a practicing Cost Accountant, regardless of their turnover. The audit report must be submitted to the Registrar of Companies along with the LLP's annual return. However, LLPs meeting  certain criteria are exempted from the requirement of audit of their financial statements, as per Rule 24 of the LLP Rules, 2009. LLPs with a turnover of less than Rs. 40 lakhs or a capital contribution of less than Rs. 25 lakhs are not required to get their accounts audited by a Chartered Accountant or a Cost Accountant.

 

11. Legal formalities: A partnership is relatively simple to form and operate, with no requirement for filing annual returns or conducting formal meetings. In contrast, an LLP must file annual returns with the Registrar of LLPs and hold at least one meeting of partners every year.

 

12. Transferability of ownership: In a partnership, the ownership interest of a partner cannot be transferred without the consent of all other partners. In an LLP, ownership interest can be transferred as per the provisions of the LLP agreement.

 

13. Liability in case of fraud: In a partnership, if a partner commits fraud, all the partners are jointly and severally liable. In an LLP, only the partner who committed the fraud is liable.

 

14. Conversion: A partnership can be converted to an LLP, subject to certain conditions, while an LLP can be converted to a company under the Companies Act, 2013.

 

15. Compliance: LLPs have to comply with more regulatory requirements as compared to partnerships, such as mandatory annual filings, statutory audit, and maintaining books of accounts as per the prescribed format.

 

16. Professional services: LLPs are often preferred for professional services firms such as law, accountancy, or consultancy, as these firms have specific regulatory requirements that are better suited to the LLP structure. In contrast, partnerships are more commonly used for general trading or service businesses.

 

17. Minority protection: LLPs offer greater protection to minority partners compared to partnerships. In an LLP, the rights of minority partners are protected by the LLP agreement, and they cannot be overruled by the majority partners. However, in a partnership, the majority partners have the power to overrule the minority partners, which can sometimes result in unfair treatment of minority partners.

(As per section 30 of  Indian Partnership Act, 1932, A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Additionally, the Limited Liability Partnership Act, 2008 provides certain statutory protections to minority partners in an LLP. For example, Section 24 of the Act requires that all partners have equal rights to access and inspect the LLP's books and records. The Act also provides that certain decisions, such as changes to the LLP agreement or admission or expulsion of partners, require the consent of all partners, rather than just the majority).

 

18. Charter Document: The charter document for a partnership is the partnership agreement, which is a written agreement between partners that governs the operations, management, and financial aspects of the partnership. While it is not legally required, it is advisable to have a written partnership agreement. The charter document for an LLP is the LLP agreement, which is a written agreement between designated partners that must be filed with the Registrar of Companies at the time of registration, and any changes must also be filed within 30 days. The LLP agreement governs the operations, management, and financial aspects of the LLP.

 

Registeration of Partnership Firm In India-Step By Step Guide

 

Step 1: Choose a name for the partnership firm. There are no specific provisions under the Indian Partnership Act, 1932 for the name of the partnership firm.

 

Step 2: Create a partnership agreement. A partnership agreement is a written agreement between the partners of a partnership firm that governs the operations, management, and financial aspects of the firm. The partnership agreement typically includes details such as the nature of the business, the roles and responsibilities of each partner, the capital contributions of each partner, the sharing of profits and losses, and the procedures for admitting or removing partners.

 

Step 3: Register the partnership. Partnership registration is optional in India, but it is advisable to register the partnership with the Registrar of Firms to enjoy the benefits of registration. To register the partnership, the partners need to submit the following documents to the Registrar of Firms:

 

- Application for registration of the partnership (Form 1)

- Partnership agreement

- Proof of ownership or rental agreement of the office premises

- Identity proof and address proof of all partners

- Partnership registration fee

- The partnership registration fee varies from state to state and is based on the capital contribution of the

    partnership firm.

 

Step 4: Obtain a PAN card for the partnership firm. All partnership firms in India are required to obtain a PAN card (Permanent Account Number) from the Income Tax Department.

 

Step 5: Obtain any other licenses and permits required to operate the business. Depending on the nature of the business, the partnership firm may need to obtain other licenses and permits, such as a GST registration, professional tax registration, and trade license.

Relevant sections of the Indian Partnership Act, 1932: Section 4: Definition of partnership Section 58: Registration of partnership Section 59: Effects of non-registration Section 61: Changes in the constitution of a registered firm

Forms and fees:

- Form 1: Application for registration of the partnership

- Partnership registration fee varies from state to state and is based on the capital contribution of the partnership firm.

- PAN card application fee: Rs. 107 (excluding GST)

- Other licenses and permits may have varying fees based on the nature of the business and the state of operation.

 

Incorporation of Limited Liability Partnership (LLP)  In India-Step By Step Guide

 

Step 1: Obtain Digital Signature Certificate (DSC) and Designated Partner Identification Number (DPIN)

Section: Section 7 of LLP Act, 2008

Forms: Form DIR-3 and Form DIN-1

Attachments: Photograph, PAN card, ID proof, and address proof

 

Step 2: Name Reservation

Section: Section 15 of LLP Act, 2008

Form: RUN LLP

Attachments: Proof of address and identity of partners, proof of ownership or right to use the proposed name of the LLP

 

Step 3: Incorporation

Section: Section 11 of LLP Act, 2008

Form: Fllip

Attachments: Subscription sheet, LLP agreement, proof of registered office address, and details of LLP designated partners

 

Step 4: Filing of LLP agreement

Section: Section 23 of LLP Act, 2008

Form: Form 3

Attachments: LLP agreement

 

Step 5: Certificate of Incorporation

Section: Section 12 of LLP Act, 2008

Form: Form 16

Attachments: Proof of registered office address

 

Note: All forms need to be filed with the Registrar of Companies (RoC).

 

Note:- If false information is given at the time of incorporation of  LLP then imprisonment upto 2 Year and FineRs 10,000 and may extend to 5 Lac.

 

Conclusion

If one wishes to go forward with partnership firms, the advantage is that the partner of the firm has equal responsibilities and shares as the other partner. There are certain perks on choosing LLP as well like less compliance costs, limited partner liability and so on. One can choose the business model as per their requirements. For better guidance, talk to our experts at LegalMantra.net

 

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.

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