What is the difference between an LLP and a traditional partnership firm?
GradeHunt_TeamGradeHunt Team · · CS Executive
I'm studying the LLP Act, 2008 for CS Executive SUBIL. My family runs a partnership firm and my father asked me whether they should convert it into an LLP. What are the real differences in liability, registration and number of partners?
Main differences, with the law behind each:
1. Legal status: an LLP is a body corporate with a legal entity separate from its partners and has perpetual succession (Sections 3 and 14, LLP Act, 2008). A partnership firm is not a separate legal person; the firm is just the collective name of the partners.
2. Liability: in a firm, every partner is jointly and severally liable for all acts of the firm, without limit (Section 25, Indian Partnership Act, 1932). In an LLP, a partner is not personally liable for the LLP's obligations just because he is a partner (Section 28). He remains liable for his own wrongful acts.
3. Agency: in a firm, each partner is an agent of the firm and of the other partners. In an LLP, each partner is an agent of the LLP only, not of the other partners (Section 26).
4. Registration: an LLP must be incorporated with the Registrar. Registering a firm is optional, though an unregistered firm cannot sue third parties to enforce a contract (Section 69, Partnership Act).
5. Number of partners: an LLP needs at least 2 partners (Section 6) and no maximum. At least 2 designated partners must be individuals, and at least one of them must be resident in India (Section 7). A firm can have at most 50 partners under the Companies Act, 2013 and its rules.
6. Compliance: an LLP files an annual return and a statement of account and solvency with the Registrar every year. A firm has no such filing with the Registrar.
Example: a firm of three partners owes a supplier Rs 40 lakh and the firm's assets cover only Rs 25 lakh. The supplier can recover the remaining Rs 15 lakh from the partners' personal assets. If the same business were an LLP, the supplier could recover only from the LLP's assets (unless a partner had acted fraudulently or given a personal guarantee).
On your father's question: an existing firm can convert into an LLP under Section 55 and the Second Schedule. Weigh the limited liability against the yearly filing work and costs before deciding.
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