Choosing a business structure can be hard. So, if you are at a crossroads and can’t decide whether to start as a partnership or an LLP, this article is for you.

A Partnership vs LLP (Limited Liability Partnership) is a confusion that many people face while starting their business. Each has its own pros and cons. In this article, we highlight the benefits and drawbacks of each to help you make the right choice.

While both structures might seem similar except for minor differences, they vary vastly. Based on what your business is about, you need to choose the right one for you. 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 the benefits of partnership firms and private limited companies. However, if you’re running a small business that will have no debts or liabilities, pick the partnership firm.  Now let’s see Partnership Vs LLP (Limited Liability Partnership).

Partnership Vs LLP (Limited Liability Partnership)

Partnership Vs Limited Liability Partnership, Let’s examine the features of both structures:

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 get LLP registration 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: https://www.mca.gov.in/content/mca/global/en/home.html has given some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than ₹40 lakh or paid-up capital is more than ₹25 lakh. Furthermore, all structural changes need to be communicated to the RoC in the case of private limited companies, that requirement is minimal for LLPs.

Tax Advantages: Particularly if your business is earning over ₹1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies to companies with profits over ₹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 ₹5000, no paid-up capital and low compliance costs.

Features of a Partnership Firm

Easy to Start: 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 Limited Liability Partnership, therefore, the procedure for starting up is much simpler.

Low Compliance: There is no burden of compliance for partnership firm. This saves you a ton of time and effort in terms of formalities.

Unlimited Liability: On account of unlimited liability, the partners in the business are liable for all of their 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 the right to your jewellery, house, or car. 

While this might seem like a big deal, small businesses like lunch box services to the locality or low investment and low-risk businesses need not worry too much about it as you might not be incurring too much debt. 

To sum up, a partnership company should be registered if it is a small business that will have no debts or liabilities. An LLP company incorporation should be done if the business is professional and advisory and has no requirement for equity funding.

Hope this blog related to Partnership Vs LLP (Limited Liability Partnership) was helpful.

Conclusion

Both partnerships and Limited Liability Partnerships (LLPs) offer distinct advantages and disadvantages depending on the business’s needs and goals. Partnerships are relatively simple to form and operate, but they expose partners to unlimited liability. On the other hand, LLPs provide partners with limited liability protection while maintaining the flexibility and tax benefits of a partnership. Choosing between the two structures requires careful consideration of factors such as liability, management structure, and regulatory requirements. Ultimately, the decision should align with the business’s objectives and the partners’ risk tolerance. Consulting with legal and financial advisors can help entrepreneurs make informed choices that best suit their circumstances and aspirations.

FAQs

What is the difference between partnership and public limited liability?

Partnerships involve joint ownership and management by partners, while public limited liability companies are corporate entities with shares traded publicly, typically involving a larger number of shareholders.

Can LLP be a startup?

Yes, Limited Liability Partnerships (LLPs) can be chosen as a business structure for startups, offering limited liability protection to its partners while maintaining the flexibility of a partnership.

Is LLP a sole proprietorship?

No, an LLP is not a sole proprietorship. It is a distinct legal entity where multiple partners share ownership and management responsibilities, unlike a sole proprietorship where there is only one owner.

What are 5 disadvantages of a partnership?

Disadvantages of partnerships include unlimited liability for partners, potential conflicts among partners, shared profits, lack of perpetual existence, and dependence on partner contributions and decisions.

Is partnership limited or unlimited?

Partnerships can be either limited or unlimited. In a limited partnership, at least one partner has limited liability, while in an unlimited partnership, all partners have unlimited liability for the business's debts and obligations.

Is limited partnership risky?

Limited partnerships can be risky for general partners who have unlimited liability for partnership debts. However, limited partners have limited liability, reducing their risk exposure to the extent of their investment in the partnership.

Why is limited partnership better?

Limited partnerships offer the advantage of limited liability for some partners, making them attractive for investors seeking to limit personal risk while participating in the business's profits and losses.

Who owns a limited partnership?

A limited partnership typically consists of general partners who manage the business and have unlimited liability, and limited partners who invest capital but have limited liability, usually to the extent of their investment.

Who controls a limited liability partnership?

In an LLP, management and control are typically shared among the partners, although specific partners or committees may be designated to handle certain aspects of the business based on the partnership agreement.

How do limited partners get paid?

Limited partners typically receive returns on their investment through profit distributions, which are allocated based on the partnership agreement and the business's performance.

What is the legal status of LLP?

An LLP is a separate legal entity from its partners, offering limited liability protection while allowing partners to participate in the management of the business, subject to compliance with LLP regulations and requirements.