Both Limited Liability Partnerships and Partnerships are two of the various ways of incorporating a business provided under the Indian Law. LLPs are governed under the Limited Liability Partnership Act, 2008 and Partnerships are governed under the Indian Partnership Act, 1932. Although new in introduction, LLPs have made their mark and have successfully replaced the prominence of partnerships to an extent. To conclude which of the two is better for a small-sized company, first of all, it is required to have a comparison between the two.
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About the entities
Partnerships- Partnerships are registered under the Indian Partnership Act, 1932. The main aspect of a partnership is the unlimited personal liability of the partners for the partnership liabilities. This essentially means that Partnerships and partners don’t have independent legal presence. Partnerships are not perpetual in existence.
LLPs are registered and governed under the Limited Liability Partnership Act, 2008. The most important facet of LLPs is that Partners of an LLP are not personally liable for LLP liabilities, the liability of the partner is according to his capital contribution in it. Meaning whereby that LLPs and its partners are separate legal entities. LLPs are perpetual in existence unless dissolved by the promoters.Partner Requirement
Partnership- An Indian Citizen residing in India can be a partner of a Partnership(including minors).The minimum partner threshold is 2 and maximum is 20. The management of the partnership is defined in the partnership deed where one or more partners can be designated as managers.
LLP- An Indian Citizen residing in India can be a partner of a LLP(excluding minors). Foreign Direct Investment with prior RBI approval is allowed. The minimum threshold of partners is 2 and maximum threshold is unlimited. The managerial aspects of a LLP are governed by an LLP agreement and designated partner/s for the management.
Transferability and Convertibility
Partnership- To transfer the share a partner has to obtain the consent of all the partners. Also, to convert a partnership into a Pvt. Ltd. Company or LLP is a lengthy and cumbersome process.
LLP- The share in an LLP can be transferred easily, but it is not necessary that the transferee automatically attains a partner's status. The conversion process of LLP into a Pvt. Ltd. company is very easy.
Partnership- The tax slab on profits of a Partnership is 30% + educational cess but there is no annual return filing requirement for a partnership firm.
LLP- The tax slab on profits of an LLP is 30% + educational cess. An LLP has to file annual return with the ministry of corporate affairs.
Most important in the registration of partnerships is that registration is not compulsory but voluntary as under the Partnership Act, 1932. So, it can be registered at the time of its incorporation or a later stage. But it is highly recommended that the partners get the firm registered. The procedure is as follows-
- Partnerships are registered with the registrar of firms
- Submission of application to the registrar of firms
- Name Selection
- Drafting of Partnership Deed
- Obtaining the certificate of Registration
Processing Time- 10 days (Approx.)
The process of registration of LLPs is very similar to that of a Pvt. Ltd. Company and is given in the steps below-
1. Obtaining Digital Signature Certificate for the Proposed Partners
2. Obtaining Director Identification Number for the proposed Partners
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation
5. Filing Limited Liability Partnership Agreement (within 30 days from the date of
incorporation of the LLP)
Processing Time- 20 days (Approx.)
Which is better for a small sized business?
The talk about something being ‘better’ totally depends on personal requirements of business owners. For example, there are far less compliances in partnerships as compared to the LLP, there is no requirement of filing annual returns in partnerships.
If minors are also involved in the activity, certainly partnership will be better. In traditional partnerships, minors can also be made the partners, which is not the case in LLPs.
On the other hand, LLP is a mix of a partnership and company, it saves partners form unlimited liability as it has its legal presence which makes it easy for the partners as they can hold property and take loans and enter into contracts for the business in the name of the business only, LLP certainly has less legal compliances but higher penalties in case they are missed.
If seen generally, the concept of LLPs has rapidly gained traction and more and more people are incorporating their businesses as LLPs. It is cheap and easy in its formation and management due to which it has been the popular choice of the small business owners. In Traditional partnerships, a Partnership agreement is not required and partners can work on consensus which can lead to disputes proving it to be a big detriment to the business owners. So, an LLP is good for a small business because it provides limited liability like a private company and flexibility like a partnership that gives synergized output to the business.
Also read Limited Liability Partnership (LLP).