In India, there are two popular business structures that comprise partners. One of them is the traditional partnership firm governed by colonial era Indian Partnership Act, 1932. The other is the relatively newer limited liability partnership governed by Limited Liability Partnership Act, 2008. While both structures involve partners, they differ in several important ways. One key difference is the document that governs relationship between the partners.
For a partnership firm, this document is partnership deed. In an LLP, it is known as LLP agreement. So, what exactly is difference between a partnership deed and an LLP agreement? In this blog post, we will explore their key differences and understand how each document works.
A partnership deed is an important document for a partnership firm. It is basically a written agreement between partners that sets out terms and conditions of partnership, such as:-
capital contribution of each partner,
profit and loss sharing ratio,
roles and responsibilities of partners,
rights and duties of each partner,
rules for admission or retirement of a partner,
process for resolving disputes,
conditions for dissolution of the partnership firm.
Although a written deed is not mandatory and an oral agreement can also be enough, most business incorporation experts still recommend having a written partnership deed. A partnership deed is specifically for partnership firms and is not meant for LLPs.
The main reason for having a deed is that it is written down, so in case of any confusion or disagreement, the partners can refer to the terms and conditions mentioned in the deed. In legal matters, the deed works as an important reference document for determining the rights, duties and obligations of the partners.
A limited liability partnership agreement, abbreviated as an LLP agreement, is an important legal document for limited liability partnerships in India. It is a mandatory document that every LLP must have. It sets out the terms and conditions of the LLP and defines the rights, duties, and responsibilities of the partners.
The key elements of this agreement include, but are not limited to, the following:-
capital contribution,
profit and loss sharing,
partner rights and duties,
roles and responsibilities,
admission or exit of partners,
decision-making process,
dispute resolution,
changes in partnership,
dissolution of LLP.
In the table below, we have highlighted some of the major differences between a partnership deed and a limited liability partnership agreement. Once you go through the table, you will have a clear understanding of how both the documents differ from each other:-
| Basis | Partnership Deed | LLP Agreement |
|---|---|---|
| Business structure | This document is used for a traditional partnership firm. | This document is used for a limited liability partnership instead. |
| Main purpose | It explains how the partners will run the firm and work together. | It explains how the LLP will be managed and how the partners will deal with each other. |
| Legal requirement/compliance | A written deed is generally not compulsory for a partnership firm. The partners can also have an oral agreement. However, if they choose to register their firm with Registrar of Firms, a written partnership deed is required. | An LLP must have an LLP agreement to clearly set out the rights and duties of its partners. In no case is an LLP agreement an optional choice; it is always mandatory for an LLP to have this document as part of its legal compliance. |
| Liability | Partners generally have unlimited liability for the firm’s obligations and debt. In the deed, this is often mentioned. However, even if this isn’t mentioned, the unlimited liability still exists in general by law. | The LLP structure generally gives partners limited liability, subject to applicable law. This is typically mentioned in the agreement for LLPs. |
| Partner relationship | The written agreement between the partners sets out the understanding between all the partners of the firm. | The agreement for LLP sets out the rights, responsibilities and obligations of all the LLP partners. |
| Profit sharing ratio | The deed clearly states how firm’s profits and losses will be divided among partners. | The agreement for LLP states how exactly profits and losses will be shared among LLP partners. |
| Decision making | The deed can explain who will take business decisions and how important matters pertaining to firm will get handled. | The agreement can set certain rules for voting, approvals and decisions within an LLP. |
| Changes in terms | Partners can make changes in terms of deed as mutually agreed upon and as permitted by law. | Changes to LLP agreement generally need to follow agreed procedure and applicable LLP rules. |
| Applicable law | The deed is mainly governed by Indian Partnership Act 1932 and Indian Contract Act, 1872. | Mainly governed by Limited Liability Partnership Act 2008 and other related rules. |
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A partnership deed is a legal document that defines the rights, responsibilities, profit-sharing ratio and other terms agreed upon by partners of a partnership firm. On the other hand, an LLP agreement sets out rights, duties, responsibilities and terms agreed upon by the partners of a limited liability partnership. We hope this blog post has helped clear your doubts about the partnership deed and LLP agreement.
If you need assistance with Partnership Firm Registration or LLP Registration, you can contact the business incorporation experts at Registrationwala for professional guidance and support throughout the entire registration process.
Q1. Do LLPs require partnership deeds?
A. No. The LLPs do not require partnership deeds. They require LLP agreements.
Q2. Do partnership firms require LLP agreements?
A. No. An LLP Agreement is required for an LLP, not for a partnership firm. A partnership firm can be formed through an oral agreement, although having a written partnership deed is recommended.
Q3. What happens if the partnership deed does not mention anything about a particular matter?
A. In case the partnership deed does not mention anything about a particular matter, the default rules of the Indian Partnership Act, 1932 apply. For example, by default under the Act, if a partner gives a loan to the firm, they are entitled to interest at 6% per year, unless the Partnership Deed provides otherwise.
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