As of July 2024, there were 3,47,301 active LLPs in India. This speaks volumes for the conducive startup ecosystem in India. Similar to LLPs, there is a much more traditional yet flexible business model: Partnership Firms.
Being an entrepreneur, you can either opt for Partnership Firm or LLP registration to establish your firm. Let’s take a look at what they entail and how to choose a business deign that suits you.
Partnership Firms: The Simplest of Business Designs
A business entity that has two stakeholders in charge of the operations, who share the responsibilities, liabilities, and profits is termed as a partnership firm. These are registered under the Indian Partnership Act of 1932.
To apply for a partnership firm registration, all you need are the following:
- Exactly two partners and their KYC documents.
- A partnership deed that lays out the terms, roles, and responsibilities.
- A unique name for the firm.
- The registered address for the firm and proof of the same (lease, property tax receipt, utility, etc.).
- Form 1, available with the Registrar of Firms.
While not mandatory, opting for the partnership firm registration offers the below benefits:
- Legal recognition for the firm as an entity.
- Availing formal dispute resolution in case of any issues between the partners.
- Gaining credibility and, thus, being able to access formal lines of credit.
- Having the right to claim any outstanding dues (set-off).
- Makes it easy to convert the business to any other, more formal structure.
With partnership firm registration, you can enjoy a flexible, semi-formal setup that is also a legal entity. Thus, it calls for far fewer compliance guidelines and regulations.
Limited Liability Partnership: Flexible Setup for New Businesses
LLPs combine the flexible structure of partnership firms with the limited liability structure that Private Limited Companies enjoy. Falling under the purview of the Ministry of Corporate Affairs, LLP registration takes place under the Limited Liability Partnership Act of 2008.
To undergo the LLP registration process, the below are essential:
- A Digital Signature Certificate (DSC).
- A name for the Company that is in line with the MCA guidelines.
- KYC documents like PAN, Aadhaar, Voter ID, etc for all the partners.
- The signed LLP Agreement.
- Proof of address (NOC if the address is a rental).
- Forms needed for filing yearly returns.
By opting for LLP registration, businesses can enjoy the below benefits:
- Low costs of initial registration.
- Any liabilities like debts belong to just the business and are not transferred to the partners.
- Legal recognition of the business as a separate entity.
- Easy transfer of ownership by introducing a person as a partner.
- Perpetual succession in the event of death or retirement of the partners.
Key Differences Between Partnership Firms and LLPs
To understand this better, let’s take a look at the below points of distinction:
- Financial Liability
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- Partnership Firms: All partners are personally responsible for the debts the business acquires and any issues that come.
- LLPs: Partners are only responsible in proportion to their financial contribution.
- Recognition as a Legal Entity
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- Partnership Firms: Any legal issues with the firm passes on to the partners since they are legally the same.
- LLPs: The firm is a separate legal entity and as such any cases against the firm do not automatically become a case against the partners.
- Registration Process
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- Partnership Firms: The partnership firm registration is an option that may or may not be adopted by the partners.
- LLPs: To form an LLP, the partners are legally bound to draft a formal agreement and apply for LLP registration.
- Flexibility in Management
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- Partnership Firms: Management decisions are usually a joint activity between partners.
- LLPs: In the partnership, each member has a set role as outlined in the agreement.
Factors That Influence Business Structure and Design
To draft a partnership agreement that is in line with the plans for the business, it is important to understand the affecting factors. These include:
- The size and scale of operations.
- Strategies to follow for growth.
- Stage of the life cycle for the business.
- Roles and responsibilities assigned to the partners.
- Targeted turnover and scope for the company.
For a niche business that caters to a small, particular clientele, a flexible partnership firm registration can be sufficient. This is doubly true if the annual turnover or targeted turnover is low and ranging into a few lakhs.
If you intend to grow and expand your business rapidly and on a national or even global scale, LLP registration will offer you better scope.
Selecting Between Partnership Firms and LLPs
To make the right choice for your business, evaluate the below:
● Whether or not you want to protect your personal assets.
The liability of the owners in LLPs is as per their investment. Further, recognition as a separate entity protects the personal assets of the stakeholders. In a stark opposite, for partnership firms, the firm and the owner are one and the same. Thus, any legal action or debt of the firm is the direct responsibility of the owner.
● Compliance and regulatory norms you want to be subject to.
LLPs are bound by strict regulatory standards and any deviations can result in fines. In contrast, partnership firms have to keep up with the bare minimum of industry standards.
● Whether you want to invest or own funds or raise capital via investors.
In partnerships, people who form the firm raise capital usually via personal investments. For LLPs, the firm can seek investments through venture capitalists and angel investors.
● The amount you wish to pay towards incorporation and maintenance.
LLPs have to pay more than partnership firms to get the business formally registered plus pay annual charges to maintain the company’s status.
● The management structure you wish to adopt.
When compared with partnership firms, LLPs are more structured.
To Conclude: The Right Structure for Your Business
Establishment as an LLP or Partnership acts as the building block for a business, each with its own merits. Thus, it is important to evaluate the nuances of both LLP and Partnership Firm registration and select a design that is best suited to your business.