When you decide to Register your company, you are faced with an internal debate of Partnership vs LLP, which is better? Well, you’re at the right place. Today we want to settle this once and for all.
What happens when you want to register your new company? The very first step is to incorporate your business. Now you can incorporate your business as a Partnership form or an LLP (Limited Liability Partnership). You can incorporate as a Private Limited Company, but let's keep it out of our discussion for now. Here, we only focus on, Partnership or LLP?
What is a Partnership?
A Partnership is where two (or more) people join hands to carry out a business for profit. The partners become joint business owners and carry out operations governed by the partnership deed. This type of incorporation has least regulations so it makes it lucrative for businesses that have multiple owners.
However, in a partnership firm the partners are jointly and individually liable for debts of the firm. Partnership is ideal for businesses that have no or little requirement for external funds and the risk for bad debts is low. So, if you have a tech start-up then sorry this type of Incorporation is not for you. On the other hand if you have a consultancy firm, then you can for a Partnership.
What is an LLP (Limited Liability Partnership)?
A Limited Liability Partnership (LLP) is a hybrid structure between a partnership & a private limited company where the business is carried out in a corporate framework, guided by terms of the mutually adopted partnership deed. The concept of Limited Liability Partnership has been brought into by way of enforcing Limited Liability Act, 2008.
Now that you have a rough idea about both LLP and Partnership, let’s look at why one is better than the other and which to choose for your business.
See this also: Importance of Partnership Deed
Partnership vs LLP and Why LLP is Better?
Here are some of the advantages of choosing an LLP,
- LLP is a separate legal entity. That means, it can hold assets in its own name. Partnership on the other hand cannot be separate from its partners.
- The liability of Partners is limited and is based on their contribution in LLP. Moreover, one Partner is not affected or not held liable for the actions of another Partner. In case of Partnership, an action of a partner can hold another liable! It extends to the personal assets of a partner.
- Minimum two partners are required to register as an LLP and there is no limit on the maximum number of partners. Whereas, a Partnership having more than 50 partners is deemed illegal.
- Existence of an LLP is not affected by the change in the partners of the LLP. Whereas, a partnership dissolves in case of death/removal of a partner as per the Partnership Deed.
- It is mandatory under the law to register an LLP and it is a centralized registration. On the other hand, it is not required to register a Partnership, if it is registered, then it is done so on a local level.
- Apart from income tac compliance an LLP has other legal compliances as well, thus ensuring the transparency of operations. A Partnership has no additional compliances other than the income tax compliance.
- To ensure further transparency, Ministry of Corporate Affairs maintain a public record of an LLP registration except the agreement between the partners. In case of a Partnership no data record is disclosed to the public.
- The name of the LLP has to be unique, whereas in case of Partnership there is no need for a unique name.
The above points make it clear that getting an LLP is a good idea, still let’s cover some of it disadvantages so that we can have a broader overview.
Who cannot be a partner in LLP?
- An individual, if:
- he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
- he is an undischarged insolvent; or
- he applied to be adjudicated as an insolvent and his application is pending.
- A minor
- A HUF
- A Partnership Firm
- An Association of Persons (AOP) or Body of Individuals (BOI)
- An Artificial Judicial Person
- A Corporate Sole
- A Co-operative Society registered under any law for the time being in force
- A body corporate which the Central Government may, by notification in the Official Gazette, specify in this behalf.
Disadvantages of LLP (Limited Liability Partnership)
- LLP is not allowed in everywhere. Some states do not recognize an LLP registered in other state, it may recognize it as a traditional Partnership.
- Tax filling for an LLP entity can get extremely complex.
- Some states impose heavy tax limit on LLP, both on creating the LLP and during its operations.
Despite few disadvantages LLP is the the better out of the two. I hope this blog helped you in making your decision to incorporate your company easier. I would encourage you to be a part of the discussion by commenting down below.
At the end, whichever type of incorporation you choose you would need a partnership deed. You can get it easily by clicking on the generate now button below.
Fastest Limited Liability Partnership Registration
The above comparision between Partnership vs LLP make a solid case for getting an LLP incorporation for a new business. If you want your company to be immune to deceit, then go for an LLP.