Choosing between a partnership firm and an LLP
Liability, compliance cost and what happens when a partner leaves — the three differences that actually decide the choice between a partnership firm and an LLP.
CA Rahul Yadav 2 min read
Two or more people going into business together in India usually choose between a partnership firm and a limited liability partnership. The comparison tables online list a dozen differences; in practice three of them decide it.
One: who pays when it goes wrong
In a partnership firm, partners are jointly and severally liable for the debts of the firm, without limit. A creditor can recover the entire amount from whichever partner is easiest to recover from, irrespective of the profit-sharing ratio, and that partner is left to seek contribution from the others.
In an LLP, a partner's liability is limited to their agreed contribution, and one partner is not liable for another's wrongful acts. For a business that takes on credit or carries a risk of claims, this is usually the deciding factor on its own.
Two: what it costs to keep alive
A partnership firm has no annual filing obligation with the Registrar of Companies. Its compliance is the income tax return, and GST and TDS filings where they apply.
An LLP must file an annual return and a statement of account and solvency every year, whether or not it has traded. Late filing penalties accrue daily. A dormant LLP that nobody files for becomes surprisingly expensive, and we see this regularly.
Three: what happens when someone leaves
A partnership firm has no perpetual succession. On the death or retirement of a partner, the firm is reconstituted, and unless the deed provides for it, matters can become complicated at exactly the moment nobody wants complication.
An LLP continues irrespective of changes among its partners. It owns its assets in its own name, so a partner leaving does not require property or contracts to be transferred.
What does not differ much
Taxation is broadly similar — both are taxed at the firm level, with remuneration and interest to partners deductible within the limits prescribed, and the share of profit exempt in the partners' hands.
Neither can issue shares. If you expect to raise equity investment, the question is not partnership versus LLP but whether you should be incorporating a company instead.
Whichever you choose, put the arrangement in writing and settle the difficult questions at the start — contributions, remuneration, who can commit the business, how someone exits and how they are paid out. Most disputes we see arise from matters the agreement did not address at all.