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Introduction
It is a common practice for people to start their business as a partnership and in some cases, they diversify their businesses by changing the structure of their businesses from partnership to Limited Liability Partnership (“LLP”). For this reason, it is necessary to understand what LLPs are and how they are different from partnerships.
What is Partnership?
In simple words, a partnership is an association of 2 or more individuals for the purpose of making business. The word ‘partnership’ itself stands for equal contribution by the partners and sharing profit in proportion to their share.
What is LLP?
LLP stands for Limited Liability Partnership, which is a type of business entity formed by 2 or more persons. It is registered under the Limited Liability Partnership Act, 2008 and governed under that Act. An LLP has a distinct feature that it provides limited liability to its members. It is a partnership of a new kind, which is registered and governed by a special law.
LLP VS Partnership
There is some fundamental difference between LLP and partnership. LLP and partnership differences are discussed below:
a. The concept of equal contribution by the partners is not present in LLP (The principle “Share and Share alike” is not applicable to an LLP), whereas, it is applicable in partnership.
b. LLP does not need to include a partnership agreement as mentioned above; whereas, a Partnership needs to have a formal agreement of its members.
c. An LLP can be dissolved only by the unanimous decision of all its members; however, it can be dissolved also by introducing a fresh set of partners with fresh contribution and fresh shareholding pattern.
d. A partner in a partnership can not be removed, except when he is shown to be unable to perform his duties or guilty of fraud or misconduct. On the other hand, in LLP the members can be removed from the partnership if they are found to be guilty of serious misconduct, fraud or misrepresentation etc.
e. A member of a partnership can only receive income for the share of the business he contributed and also enjoy any benefits arising out of such contribution. However, in the case of an LLP, a Partner enjoys any income as per his interest in the LLP and also enjoy accrued benefits arising out of contribution by him.
f. In a partnership, a partner has no control over the management of the business, whereas, in an LLP a partner is responsible for the management of the business and he is regarded as an agent for business purpose and liable for any misconduct or omission in the conduct of affairs of the LLP.
g. A partner in a partnership is not entitled to vote at meetings and can only give his consent or dissent in writing to any move taken by other partners (if required), whereas, in the case of LLPs, every member has voting rights irrespective of the contribution made by him.
h. A partner cannot take advantage of limited liability without making a contribution; Whereas, membership in an LLP gives limited liability without making any contribution
i. Partnership firm is governed under Indian Partnership Act, 1932 whereas, LLP is governed under the Indian Limited Liability Partnership Act, 2008.
j. A partner in a partnership can sue on the basis of a contract (agreement) between him and his partners; whereas, an LLP cannot sue on any such basis.
k. In case of dissolution of a partnership, all its partners are liable for contribution, whereas, in case of dissolution of LLP only the partner who has contributed equal share shall be liable for contribution.
l. A partner has no rights over the property or liabilities (liabilities) of the business; whereas, liability arising out of other members’ contributions is limited to their share as per their interests and is referred as ‘limited liability.
Conclusion
In conclusion, it can be said that LLP has a distinct feature due to which it is different from the partnership. It has been noted that there are differences concerning the contribution of partners, voting rights, the liability of a partner, right over property and liabilities and dissolution of LLP. Therefore, if a Partnership is found to be unprofitable or undesirable for business purposes, then converted into an LLP may be considered as an option.
