Limited Liability Partnership Vs Partnership Firm

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Limited Liability Partnership Vs Partnership Firm

Young entrepreneurs and readers are always confused about these two terms, i.e. LLP and Partnership firm. The main reason for the confusion is the owner of these two entities. The owners of these types of entities are called partners. Therefore, people understand that there is no difference.

Being a consultant, I usually come across such basic questions that how LLP is different from Partnership firm. If I were not a company secretary, maybe I also used to ask the same question, but fortunately being an expert on incorporation laws, I will take you to the tour from unknown to known about LLP and Partnership so that this nagging issue can be removed from the hard disk of your mind.

Firstly, we need to understand their meanings. LLP is Limited Liability Partnerships; LLP is a unique and new form of business that combines the advantages of both 'Company' and 'Partnership' in a single business entity, whereas partnership firm as the name signifies an entity which has at least 2 persons who are called as partners of that entity.

The definitions of these two terms itself do not clear the mist of confusion. So, let's dig a little deeper to know exactly how one is different from the other. If you carefully observe the word "Limited Liability Partnership" then you find that there are two extra words which are limited and liability attached to the partnership to conceive of developing a new entity in the form of LLP.

It is time to understand how limited liability makes such a big difference. Liability means liable for debts and obligations of the business. So, limited liability means that in case of losses or an entity goes bankrupt, then the liability of the owner is limited only to the amount of capital which he contributes to the business, not more than that.

This is a thin line of demarcation which distinguishes LLP from the partnership; otherwise, there is no other major difference between the two. The workings of these two entities hardly make any difference. But, there are differences with respect to the compliance part.

Following are a few points of difference between an LLP and Partnership firm:

1. Governing Laws: Limited Liability Partnership Act, 2008 applies to LLPs whereas Partnership Act, 1932 applies to partnership firms.
2. Formation Process: LLP formation is a long process as compared to partnership firm. Registration of an LLP requires the following steps:
   1. Submit form 1 for approval of name of the company.
   2. Submit form 2 with incorporation details.
   3. File LLP agreement on Form 3. Whereas registration of partnership firm requires only registration of partnership deed at the registrar office which must be duly stamped.

3. Annual Compliance: There are few compliances which are prescribed under LLP Act, 2008, such as filing of annual return in form 11 and Statement of accounts and Insolvency whereas Partnership Act, 1932 does not mandate any such requirement to comply.

As far as taxation is concerned, there is no difference. Tax law does not make any difference between these two entities.

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