Partnership vs LLP

Last Updated at: Oct 30, 2020
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Partnership Vs LLP
As per a recent communication, the MCA has decriminalised various provisions of the LLP Act as a part of efforts to improve the ‘ease of doing business’. These will include norms regarding the filing of annual return, eligibility and appointment of designated partners, registration of changes in partners, maintenance of books of account and so on.

 

A Partnership Firm or a Limited Liability Partnership are the two options available when the number of founders of business is two or more. Each has its own pros and cons. In this short and concise article, we illuminate the benefits and the drawback of each to help you select the right choice.

If you are two or more founders, you may have a hard time deciding between a partnership and LLP. But the two have different reasons entirely. The LLP is meant for professional and advisory firms with no need for equity funding. If this applies to your business, pick the LLP; it’s been gaining in popularity since 2008 because it combines some of the better aspects of partnership firm and private limited company. However, if you’re running a small business that will have no debts or liabilities, pick the partnership firm. Let’s examine the features of both structures:

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Features of an LLP

For Non-Scalable Businesses: If you’re running a business that’s unlikely to require equity funding, you may want to register an LLP as it combines several benefits of the private limited company and general partnership. It has limited liability, like a private limited company, and has a simpler structure, like a general partnership.

Fewer Compliances: The MCA has made given some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than Rs. 40 lakh or paid-up capital is more than Rs. 25 lakh. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs.

Tax Advantages: Particularly if your business is earning over Rs. 1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies on companies with profits over Rs. 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income.

Number of Partners: There is no limit to the number of partners there may be in an LLP. So if you’re building a large advertising agency, for example, you needn’t worry about any cap on the number of partners.

Start-up Cost: Much cheaper than starting a private limited company, with government fees of Rs. 5000, no paid-up capital and low compliance costs.

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Features of a Partnership Firm

Unlimited Liability: On account of unlimited liability, the partners in the business are liable for all of its debts. This means that if, for whatever reason, you’re unable to repay a bank loan or are liable to pay a fine, this can be recovered from your personal possessions. So the bank, institution or supplier would have right to your jewellery, house or car. Furthermore, aside from ease of set-up and minimal compliance, the partnership offers no benefits over the LLP.

If you opt to register it, which is optional, it may not even be cheaper. Therefore, unless you’re running a very tiny business (let’s say you offer a lunch dabba service in your area and would like to set a profit ratio with your partner), you should not opt for a partnership.

Easy to Start: If you choose not to register your partnership firm, all you need to get started is a partnership deed. This you can have ready in just two to four days. Even registration, for that matter, can be completed in a day, once you have the appointment with the registrar. As compared with a private limited company or LLP, therefore, the procedure for starting-up is much simpler.

Winding the article down, there are two elements which are essential. A partnership company should be registered if it is a small business that will have no debts or liabilities. An LLP should be registered if the business is professional and advisory and has no requirement for equity funding.