What is the Difference Between LLP and a Partnership Firm
When two or more individuals come together to start a business, one of the first decisions that they must make is to choose the right business structure. In India, you can either choose to set up a Traditional Partnership Firm or a Limited Liability Partnership (LLP). While both business structures involve partners running the business jointly, the legal nature, liability, compliance, and taxation associated with each structure are fundamentally different. In the partnership firm, the liability of the partners is unlimited. The LLP offers the benefits of a company as well as a partnership firm, allowing the liability of the partners to be limited to the extent of their capital contribution.
If you are starting a business in Chennai or anywhere in Tamil Nadu, this guide will help you understand the differences between an LLP and a Partnership Firm so you can make the right choice for your venture.
What is a Partnership Firm?
A Partnership Firm is an unregistered or optionally registered business structure governed by the Indian Partnership Act, 1932. When two or more people, called the partners, agree to share the profits and responsibilities of a business as defined in a partnership deed.
Features:
- Registration of a partnership firm is optional
- It is not a separate legal identity from partners
- The liability of the partners is unlimited
- Suitable for small or low-risk businesses
- The relationship between the partners is governed by the Partnership Deed
What is a Limited Liability Partnership (LLP)?
An LLP is a modern business structure introduced under the Limited Liability Partnership Act, 2008. It combines the flexibility of a partnership with the limited liability protection of a company.
Features:
- It is registered with the Ministry of Corporate Affairs (MCA)
- It is recognized as a separate legal entity in the eyes of the law
- Partners have limited liability to the firm to the extent of their capital contribution
- It offers perpetual succession
- It is suitable for growing businesses, professionals, and service providers
Differences Between LLP and Partnership Firm
Aspect | Partnership Firm | Limited Liability Partnership (LLP) |
Governing Law | Indian Partnership Act, 1932 | Limited Liability Partnership Act, 2008 |
Legal Identity | No separate legal entity | A separate legal entity in the eyes of the law |
Registration | Optional | Mandatory with the Ministry of Corporate Affairs |
Liability of Partners | Unlimited | Limited to the extent of capital contribution |
Perpetual Succession | A partnership firm does not enjoy the benefit of perpetual succession, and the firm dissolves on the death/retirement of partners of the firm. | Yes, a limited liability will continue to exist irrespective of partner changes. |
Number of Partners | Minimum 2, maximum 20 | Minimum 2, there is no limit on the maximum number of partners in an LLP. |
Transfer of Ownership | Restricted by the Partnership deed | It is allowed as per the LLP Agreement |
Foreign Investment (FDI) | Not allowed | Allowed under automatic route (non-restricted sectors) |
Compliance Comparison: LLP vs Partnership Firm
Compliance Area | Partnership Firm | Limited Liability Partnership (LLP) |
Annual ROC Filing | Not applicable | The annual RoC filing is due. The LLP is mandated to file LLP Form 8 and LLP Form 11 |
Statutory Audit | Not mandatory unless turnover exceeds limits | Mandatory if turnover exceeds ₹40 lakhs or contribution exceeds ₹25 lakhs |
Maintenance of Books | Optional unless under audit | Mandatory under the LLP Act, 2008 |
Income Tax Return Filing | ITR-5 | ITR-5 |
Deed/Agreement Filing | Not Required | The LLP Agreement must be filed with the ROC within 30 days |
Admission/Retirement of Partners | Done through the Partnership Deed | Requires ROC update through proper filing |
Legal Protection and Risk
One of the major differences between the two structures lies in liability and asset protection.
- Partnership Firm: All partners are personally liable for the firm’s debts and obligations. Personal assets can be seized in the event of business default.
- LLP: Partners are only liable to the extent of their agreed contribution. Their personal assets are legally protected, except in cases of fraud or wrongful acts.
This makes LLP a safer option for entrepreneurs who are concerned about financial risk or external liabilities.
Conversion Flexibility
An unregistered partnership cannot be converted into a company or LLP without dissolution.
However, a registered Partnership Firm can be converted into an LLP by following the prescribed procedures under the LLP Act, 2008. It is pertinent to note that the LLPs also have the flexibility to be converted into Private Limited Companies, allowing scalability and restructuring as needed.
Choose a Partnership Firm if:
- You want to start a low-investment or traditional business
- You’re operating locally with trusted partners
- You prefer minimal compliance
- Risk exposure is limited and manageable
Choose an LLP if:
- You are building a professional services firm or a startup
- You want legal protection and corporate credibility
- You plan to deal with the government, banks, or large clients
- You want the option to scale or convert to a company later
Why Register with Chennai Filings?
At Chennai Filings, we help you make informed decisions while starting your business. Whether you are setting up a traditional partnership or a modern LLP, we provide
- Assistance with drafting and registering partnership deeds or LLP agreements
- End-to-end ROC filing and compliance services
- Advisory on tax obligations, licenses, and restructuring
- Transparent support tailored to Tamil Nadu’s legal landscape
Frequently Asked Questions (FAQs)
1. Is it mandatory to register a Partnership Firm?
No, registration of a partnership firm is optional under the Partnership Act, 1932. However, only registered firms can sue third parties in court.
2. Can a Partnership Firm be converted into an LLP?
Yes, a registered firm can be converted into an LLP.
3. Can LLPs raise foreign investment (FDI)?
Yes, FDI is allowed in LLPs under the automatic route in most sectors.
4. Are LLPs required to get audited every year?
Only if its annual turnover exceeds ₹40 lakh or its contribution exceeds ₹25 lakh.
5. What documents are required to register an LLP in India?
To register an LLP, you will need:
- Identity and address proof of all partners
- Digital Signature Certificates (DSC)
- Director Identification Numbers (DIN or DPIN)
- LLP agreement
- Address proof of the registered office
- Utility bills and NOC from the premises owner
6. Is there any capital requirement for forming a Partnership or LLP?
No, there is no minimum capital requirement for either structure. You can start an LLP or partnership firm with any amount, as agreed among the partners.
7. Can a Partnership Firm or LLP open a bank account?
Yes, they can open a current account in the firm or LLP’s name by submitting their registration documents, partnership deed or LLP agreement, and KYC of partners.
8. Can a partner in an LLP be removed?
Yes, the LLP agreement mainly contains clauses regarding a partner’s removal or resignation. Any change in partners must be updated with the Registrar of Companies (ROC).
9. What is the validity of a registered Partnership Deed or LLP?
Both continue to exist until dissolved. An LLP enjoys perpetual succession by law, while a partnership firm may dissolve upon death, insolvency, or retirement of a partner, unless agreed otherwise in the deed.
10. Can a minor be a partner in an LLP or Partnership Firm?
No, a minor cannot be a partner in a Partnership Firm or an LLP. In a traditional partnership firm, a minor can be admitted only for the benefit of the partnership but cannot be made liable or act as a full partner.