What Is an LLP and How Is It Different From a Partnership?

In this article, you will read about limited liability partnership with its advantages, disadvantages, and how it differs from a regular partnership.

What Is a Limited Liability Partnership?

A limited liability partnership (LLP) is an amalgamation of features of both a partnership as well as that of a company. Unlike a partnership, LLP has its own existence as a separate legal entity.

As the name says, LLP is a partnership business with limited liability imposed on the partners of the firm. The essentials of partnership are required here also, but rather than governed by the Partnership Act of 1986, it is governed by a separate Act known as the Limited Liability Partnership Act of 2008.

The Advantages of a Limited Liability Partnership

Here are some of the benefits of an LLP:

1. Limited Liability on Partners

Partners’ personal properties are not ceased in the situation of insolvency or huge debts. The debts are recovered only through the assets of the company.

2. No Requirement for Capital

The contribution of capital by each partner is not required like in a partnership.

3. Separate Legal Entity

The LLP exists by its own name. It has its own identity, its own name, and logo of the company, and all assets of the company are registered under its name.

The Disadvantages of a Limited Liability Partnership

LLPs also have some drawbacks, and here are a few of them:

1. High Income Tax Rate

The income tax rate for other companies is kept at a rate of 25% with a turnover of up to Rs. 250 crores, whereas for LLPs, it is kept at a rate of 30% regardless of their turnover.

2. No Investment in Equity

The concept of investing/buying shares of a company does not exist in LLPs, so the companies have to rely on the funds. This drawback pulls the company back from having enough shares.

3. Non-Compliance Penalty

If the company is not in the run (not operating), it is still supposed to file an income tax return each year along with the Ministry of Corporate Affairs (MCA) annual return report. If the company fails to do so, a penalty of 100 rupees per day per form is imposed on the company. (Form 8 or Form 11 (LLP annual filing form))

Differences Between Partnership and Limited Liability Partnership

There are a few distinctions between a regular partnership and an LLP. Here are some of the important ones:

1. Liability

Liability in a partnership is unlimited, whereas it is limited in an LLP.

2. Filing

Filing annual returns is not necessary for partnerships, whereas it is mandatory for LLPs to do so.

3. Ownership of Assets

Assets are owned by the partnership firm, but in the case of dissolution of the firm, assets get distributed amongst the partners as per their capital ratio. On the other hand, LLPs own assets, but during the time of dissolution, no partner gets anything.

4. Perpetual Succession

A partnership gets affected by the decision of the partners, whether they want to continue or not, but an LLP is not affected by the admission or retirement of the partner.

5. Dissolution

A partnership can get dissolved by the agreement between the partners, by an order granted by the court, by the insolvency of the partners, and for many more reasons. In comparison, LLP gets dissolved either by an order granted by the National Company Law Tribunal (NCLT) or by the own decision of the firm.

6. Authority

Authority amongst the partners is divided as per their partnership deed, but in the LLP, every partner has sole authority to perform in the organisation.

7. Number of Partners

The number of partners in a partnership firm extends from a minimum of two partners to fifty partners. In LLPs, there is no prescribed limit of partners.

Furthermore, for a small group of people, LLP is preferred to opt, regardless of the advantages and disadvantages. However, before opting for any, all the pros and cons should be weighed.

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Suhani Gandhi

Ex-Writer at WritingLaw

Suhani has written this article. She is pursuing B.B.A.LL.B. (Hons.) from Narsee Moonjee Institute of Management Studies, Bangalore. She is enthusiastic and a curious learner with a keen interest in the legal field.