Table of Contents
Introduction
Before starting any business, the first thing that rings a bell in the mind of a businessman is what kind of business he wants to start. An important decision has to be taken by the individual regarding the selection of the type of business organization that he wants to do. There are various forms of Business creation that one can choose. Some of the most well-known are Joint-stock Company, Partnership, Sole proprietorship, LLP and some other common forms. This article deals with the two major forms of business, i.e., LLP and Partnership, which a person mostly prefers to do.
Limited Liability Partnership Agreement
Section 2 of the Limited Liability Partnership Act states that the Limited Liability Partnership (LLP) is a type of partnership registered under this act. Also, the LLP agreement refers to the written agreement between either the LLP partners or the LLP itself and its partners. This agreement tends to define the duties, liabilities, rights and powers of the partners in the LLP.[1]
An LLP agreement is a contract written between the LLP partners or sometimes the LLP and its authorized partners. It establishes the rights and duties of such partners to each other as well as to the limited liability partnership. It is compulsory to follow and file an LLP agreement with the Ministry of Corporate Affairs within 30 days of the formation of the LLP. It forms the basis for the smooth working of the limited liability partnership. It characterizes the approach and sets out the clear-cut assumptions necessary for making the correct decisions, joining a new partner and exiting existing partners, or changing roles. Hence, a complete and streamlined LLP agreement establishes the understructure and acts as a strong foundation to accelerate the strength of the firm. This is the guide that paves the way for LLP registration.
On 13 December 2008, the Lok Sabha had passed the Limited Liability Partnership Bill. Later, on 7 January 2009, it received the assent of the President and got legal status in the form of the Limited Liability Partnership Act 2008. The Act also regulates explicitly the provisions relating to the LLP agreement.
Partnership Agreement
When it comes to the type of business organization,the most popular is a partnership, as it is a very popular entity to do business, particularly in India. The Indian Partnership Act of 1932 prescribed the laws regarding partnership firm in India. The Act establishes the status of a partnership firm along with third parties in legal and contractual relations arising during the partnership business.
“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.[2]
A ‘Partnership Agreement’ is a contract between two or more persons who manage and conduct business together to earn some profit. All the partners share a part of the profits and losses of the Partnership and are individually liable for the debts and obligations of the partnership. The partnership agreement outlines the partner’s responsibilities, sketches out the ownership interest in the partnership, ascertains each partner’s profit and loss distribution, consolidates the partnership to common business conditions, and encompasses other necessary and relevant rules regarding how the partnership will be managed.
Partnership agreements are subject to the laws of individual states. No particular federal law covers the requirements of a partnership agreement as each state regulates the businesses formed within that state.
Difference between LLP and Partnership Agreement
A major point of difference between LLP and partnership agreement is discussed below:
- Registration of LLP is done under LLP Act, 2008, while the registration of Partnership is done under The Partnership Act, 1932.
- LLP is registered to the Ministry of Corporate Affairs, whereas Partnership is registered to the registrar of firms.
- In LLP, partners will have limited liability, i.e., they will not be responsible for more than the money contributed by them, whereas, in a partnership firm, they will have unlimited liability.
- The LLP agreement governs the manner in which the LLP operates, manages and makes decisions and other activities. In contrast, the Partnership agreement governs the way the partnership operates, manages and makes decisions and other activities.
- LLP can have a minimum of two, and there is no limit for the maximum number of partners as prescribed by the Act,whereas a partnership firm cannot have more than 20 partners.
- In LLP, a minor cannot become a partner, while in Partnership, a minor can become a partner.
- LLP is a different legal entity and can be prosecuted, or it can prosecute others without engaging the partners. A partnership firm is no different from the many individuals who form it.
- An LLP has perpetual succession, i.e., the demise or insolvency of a shareholder or both of them does not affect the life of the LLP. In contrast, the demise or insolvency of a partner dissolves the firm, until in any case, stated.
- An individual partner of a firm will not be able to do business with the partnership firm. In contrast, a partner of an LLP can do business with the LLP in his separate capacity as a legal person as the LLP is a separate legal entity in itself.
- In LLP, it comes under the LLP and not the individuals involved. In a partnership, the assets of the firm are the property of the persons involved.
- LLP will not be dissolved on the retirement or death of a partner, but on the other hand, the partnership firm will dissolve on the death or retirement of a partner.
- LLP online registration cost is Rs. 7999/- only while Partnership registration cost is Rs. 2199/-.
Operations of both the LLP and partnership firm are regulated by an agreement signed between the partners of the entity.
Final Words
LLP and Partnership Firm are a similar type of entities but differ in the mode of functioning, method of dissolution of the firm, terms and conditions and many other reasons. Also, two kinds of firms are governed by the government under different rules. The above differences make it clear concerning why LLP is more preferable over the partnership firm as it represents the advantages of the partnership with higher inclination.
Hence, both entities enjoy different types of benefits, liabilities and freedom to start the business. Thus, it is essential to know the minute difference between the two so that the entrepreneur can accordingly decide which organization will be beneficial to start his/her start-up.
REFERENCES
- Limited Liability Partnership (LLP): https://www.vedantu.com/commerce/limited-liability-partnership-llp
- Section 4 of The Partnership Act, 1932.
This article is authored by Alisha Maheshwari, Student at Law College Dehradun.
FAQs
Is it necessary to register a partnership firm?
No. However, the rights of the partners against each other or against strangers cannot be enforced in the court of law in the absence of a registered partnership.
Is it possible to convert a partnership firm into a LLP?
Section 55 and 58 of the LLP Act, 2008, read along with the Second Schedule provides the conditions for converting a single partnership firm into a single LLP firm. Nevertheless, the LLP Act, 2008 does not allow for conversion of multiple partnership firms into a LLP
Do the partners of a Partnership Firm share the same relation as the partners of a LLP Firm?
No, under the partnership form of business, partners are agents of the firms as well as the other partners but under the LLP, partners are agents of only the firm.
Is it mandatory to use the word LLP at the end of a firm's name?
Yes, Section 15(1) of the LLP Act, 2008, provides that the name of the firm must end with either the words, “limited liability partnership” or the acronym LLP. No such obligation is specified under the Partnership Act 1932.
Why is there a separate legislation for LLP?
LLP Act 2008, was structured in order to facilitate the Indian entrepreneurs with the benefits of limited liability of a company and to encourage flexibility of a partnership coupled with entrepreneurial initiative . Thus, LLP is a body corporate unlike the traditional partnership form of business.
What are the advantages of LLP when compared with a Partnership?
A LLP primarily enjoys the status of being a separate legal entity, limited liability and a greater flexibility.
