What is the Difference Between LLP and Partnership Firm?

When starting a business in India, choosing the right legal structure is one of the most critical decisions entrepreneurs make. Among the many options available, partnership firms and Limited Liability Partnerships (LLPs) are two popular choices for small businesses, startups, and professionals. Both structures enable partners to conduct business together, requiring a minimum of two individuals willing to be partners. 

However, while the Indian Partnership Act of 1932 established the concept of a partnership firm, the Limited Liability Partnership Act of 2008 introduced the LLP as a newer business structure. Understanding the difference between a partnership firm and an LLP can save time, money, and legal complications down the road.

This comparison matters particularly for new businesses, small firms, and individual professionals, as it affects liability, compliance requirements, taxation, and overall business flexibility. Whether you plan to start a partnership firm or register an LLP, knowing these differences is essential for making an informed choice.

This article explains the key differences between Partnership Firms and LLPs in India, their pros and cons, and practical aspects such as liability, registration, taxation, and compliance, helping businesses choose the right structure.

Though both LLP and partnership firms are forms of “partnership-type” structures under Indian law, they differ significantly in terms of legal identity, liability protection, and regulatory requirements. First, we will start by understanding what these structures are and which is the right option for your business.

What is a Partnership Firm and Why Choose It?

A Partnership Firm is a form of business organization where two or more individuals manage and operate a business together according to the terms and conditions outlined in their agreement. It’s a popular choice for small-to-medium enterprises and professional practices due to its simplicity.

How Does Indian Law Define a Partnership Firm?

To understand what a partnership firm is, one must first look at its legal basis, which in India is the Indian Partnership Act, 1932.

Section 4 of the Indian Partnership Act, 1932, provides the core definition:

The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

• The individuals involved are called Partners.
• Collectively, they are called a Firm.
• The name under which the business operates is the Firm Name.

Registration: Partners register their firm with the Registrar of Firms under their respective state’s jurisdiction. Although the law does not mandate registration, experts highly recommend it because:

• An unregistered firm cannot sue other firms or partners to enforce rights arising from contracts.
  
• However, others can sue an unregistered firm for any disputes arising from the business.

What are the Key Features of a Partnership Firm?

Several essential elements must be present to establish a valid partnership under Indian law.

1. Agreement: A partnership is born out of a contract (or agreement) between the partners. This agreement is preferably in writing, called a Partnership Deed, which clearly defines the rights, duties, and profit-sharing ratios of partners.
2. Number of Persons: A partnership must have a minimum of two persons. The maximum limit is 50 partners for all business types, as per Rule 10 of the Companies (Miscellaneous) Rules, 2014, which restricts the number of partners in a firm to 50.
3. Profit Sharing: The business’s main motive must be the agreement to share the profits (and typically losses) among the partners in an agreed-upon ratio.
4. Mutual Agency: This is the most crucial test of a partnership. Every partner binds the firm through their actions as an agent and becomes bound by other partners’ actions as a principal. This principle reflects the phrase, “business carried on by all or any of them acting for all.” For example, when one partner signs a contract with a supplier, the entire firm and all its partners become legally bound by that contract.
5. Unlimited Liability: This is the most significant characteristic. Partners hold unlimited liability, meaning creditors can use their personal assets to repay the firm’s debts if the business assets are insufficient.
6. No Separate Legal Entity: The law does not treat the firm as separate from its partners; it considers the partners and the firm as one legal entity.
7. Voluntary Registration: Registration of the partnership firm is optional under the Act but highly advisable, as an unregistered firm faces legal restrictions (e.g., generally unable to sue third parties or other partners).
8. Taxation: The Income Tax Department taxes a registered partnership firm at a flat rate of 30%, plus the applicable surcharge and cess, under the Income Tax Act, 1961.

• The firm files a separate income tax return (Form ITR-5).
  
• The Income Tax Department also taxes partners individually on:
  
  • Their remuneration or interest received from the firm.
    
  • Share of profit, which is exempt from tax in their hands.

What are the Pros and Cons of a Partnership Firm?

Like any business structure, a partnership firm presents a set of advantages and disadvantages that prospective partners must weigh carefully.

Advantages (Pros)	Disadvantages (Cons)
Easy & Low-Cost Formation: Can be started quickly with minimal formalities (mainly the Partnership Deed).	Unlimited Liability: Exposes the personal wealth of the partners to business risk.
Pooling of Resources: Multiple partners mean a larger pool of capital, skills, and expertise compared to a sole proprietorship.	Lack of Continuity (Instability): The death, retirement, or insolvency of a partner can lead to the dissolution of the firm.
Flexible Operations: Decision-making is often quick and simple, as it requires only mutual consent, not complex board resolutions.	Limited Growth Potential: Restricted number of partners (max 50) limits the ability to raise very large capital sums.
Confidentiality: Accounts and business secrets are not required to be publicly disclosed, unlike a company.	Risk of Conflict: Disagreements among partners regarding management, strategy, or profit-sharing can easily lead to disputes.

You can read more about the advantages of a partnership business to make an informed decision.

DDY: Partners can include a clause in the Partnership Deed allowing the firm to continue in the event of a partner’s death or retirement.

Who Typically Uses a Partnership Firm in India? 

Businesses do not always benefit from the partnership structure; entrepreneurs typically choose it when they want a simple, flexible setup and share a high level of mutual trust.

Organizations benefit most from the partnership structure when they prioritize personal trust, shared expertise, and a low-cost setup over limited liability protection.

1. Professional Service Providers: Firms of Chartered Accountants (CAs), Lawyers, Doctors, and Architects commonly use this structure due to the importance of individual professional liability and trust.
2. Small-to-Medium Trading and Retail Businesses: Two or more co-founders starting a local retail store, wholesale business, or service agency.
3. Consultancy and Advisory Practices: Where the key asset is the specialized knowledge and network of the partners.
4. Family-Owned Businesses: Used to manage a business across family members, often due to the simplicity of formation and operational flexibility.

Setting up a partnership firm is relatively straightforward and cost-effective, making it ideal for small teams. You can read more about the key considerations in setting up a partnership firm.

What is an LLP and Why Consider It Over a Partnership?

A Limited Liability Partnership (LLP) is a hybrid business structure that combines the flexibility of a partnership with the limited liability protection of a company.

How Does Indian Law Define an LLP?

To provide a clear legal framework for this structure, India introduced the Limited Liability Partnership Act, 2008, which governs the formation, operation, and regulation of LLPs.

An LLP functions as a legal entity, limiting each partner’s liability to their agreed contribution. It stands separate from its partners, enabling it to own assets, enter into contracts, and sue or be sued in its own name. This definition is provided under Section 3(1) of the Limited Liability Partnership Act, 2008.

The Limited Liability Partnership Act, 2008, governs the LLP structure in India. This Act establishes the LLP as a body corporate with perpetual succession. Unlike a traditional partnership, the provisions of the Indian Partnership Act, 1932, do not apply to an LLP.

What are the Key Features of an LLP?

The LLP structure is defined by its core features, which grant it unique advantages over a traditional partnership.

1. Separate Legal Entity (Body Corporate): The LLP is distinct from its partners. It has a separate legal existence, meaning the LLP is the entity liable for its debts, not the individual partners.
2. Limited Liability: A partner’s liability is limited to the amount of capital they agreed to contribute to the LLP. Critically, one partner is not liable for the unauthorized or negligent acts of another partner.
3. Perpetual Succession: The LLP’s existence is not affected by the death, retirement, insolvency, or insanity of any partner. The business continues uninterrupted.
4. Minimum Partners: A minimum of two partners is required to incorporate an LLP. There is no upper limit on the maximum number of partners.
5. Designated Partners (DPs): Every LLP must have at least two Designated Partners, who are individuals, and at least one of them must be a resident in India. DPs are responsible for regulatory compliance and filings.
6. LLP Agreement: The mutual rights and duties of the partners are governed by a flexible, contractual agreement (the LLP Agreement), offering operational freedom not available in a company structure.
7. No Minimum Capital: There is no requirement for a minimum capital contribution to start an LLP.

What are the Pros and Cons of LLP

The LLP structure offers a blend of benefits and trade-offs that determine its suitability for a business.

Advantages (Pros)	Disadvantages (Cons)
Limited Liability Protection: Protects the personal assets of partners from the firm’s liabilities.	Limited Fundraising Ability: Cannot issue equity shares, which makes raising capital from VCs, Angel Investors, and the public difficult.
Lower Compliance Burden: Fewer regulatory formalities (e.g., no mandatory board meetings) and annual filings compared to a Private Limited Company.	Higher Penalties: While compliance is lower, non-compliance with statutory filings often attracts very high, per-day penalties.
Flexible Management: Internal management, profit sharing, and partner duties are decided by the flexible LLP Agreement.	Flat Tax Rate: Profits are taxed at a flat rate (currently 30%), which can be higher than the personal income tax slabs for smaller partnerships.
No Mandatory Audit: Audit is only required if annual turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh.	Transfer of Ownership is Complex: Transferring ownership/partnership rights is more cumbersome than simply transferring shares in a company.
No Limit on Maximum Partners: Unlimited partners are allowed, suitable for large professional practices.	Limited FDI: Foreign Direct Investment (FDI) is permitted only in LLPs operating in sectors with a 100% automatic route FDI.

Read more about the advantages and disadvantages of LLP registration before choosing the right business structure.

Who Typically Uses an LLP in India? 

The LLP is ideally suited for service-based organizations that seek protection from liability without the complexity and rigid governance of a company.

• Professional Service Firms: This is the most common use case. Firms of Chartered Accountants (CAs), Lawyers, Consultants, Architects, and Company Secretaries prefer the LLP to protect partners from the professional negligence or misconduct of co-partners.
• Startups and Small/Medium Enterprises (SMEs): Entrepreneurs who need limited liability and a separate legal identity but want to keep the compliance costs and administrative overhead low choose LLPs.
• Joint Ventures (JVs) and Multi-Disciplinary Practices: Where different professionals or entities collaborate for a project, the LLP provides a legally robust framework that shields each entity from the liabilities of the others.
• Bootstrapped Ventures: Businesses that do not intend to raise capital through equity funding (Venture Capital, Angel Investors) find the LLP the most cost-effective and flexible structure.

You can explore the step-by-step process to register an LLP company in India for your business.

What are the Key Differences Between LLP and Partnership Firm?

The comparison between LLPs and partnership firms is as follows:

Particulars	LLP	Partnership Firm
Governing Law	Limited Liability Partnership Act, 2008	Indian Partnership Act, 1932
Registration	Mandatory	Optional
Creation	By the partners’ agreement	As per the Income Tax Act
Legal Entity	Separate from partners	No separate legal identity
Liability	Limited to capital contribution	Unlimited personal liability
Contracts	Can enter contracts in LLP’s name	Contracts in partners’ names
Ownership of Assets	Owned by LLP	Jointly owned by partners
Perpetual Succession	Yes	No
Maximum Partners	No limit	100
Agency	Partners act as agents of LLP	Partners act as agents of firm and each other
Annual Filing	Required with the Registrar of Companies (RoC).	Not mandatory
Audit	Required if turnover > ₹40L or contribution > ₹25L	Allowed with an Indian partner
Foreign Nationals	Allowed with Indian partner	Not allowed
Dissolution	Voluntary or NCLT order	By agreement, court, consent, or insolvency
Name Requirement	Must include “LLP”	No special requirement
Administration	Managed by designated partners	Managed by all partners collectively
Taxation	Flat 30% on profits; partners exempt on profit share	Flat 30% on firm; partners taxed individually on salary/interest

How are LLPs and Partnership Firms Taxed in India?

Both Partnership Firms and LLPs are treated as separate taxable entities under the Income Tax Act, 1961, with the same tax treatment.

• Flat Tax Rate: Both entities are taxed at a flat rate of 30% on their net taxable income, regardless of the firm’s total income (unlike individual slab rates).
  
• Surcharge and Cess: A surcharge of 12% applies if the total income exceeds ₹1 Crore, along with the standard health and education cess.
  
• Partners’ Taxation: The tax is levied at the firm/LLP level; partners are not directly taxed on the firm’s total profits.
  
• Alternative Minimum Tax (AMT) for LLPs: LLPs are also subject to AMT at 18.5% plus surcharge and cess under Section 115JC, if their adjusted total income exceeds the specified threshold.

Tax on Profit Distribution (Dividend / Profit Share)

A significant fiscal advantage of both business structures is the principle of single-level taxation, which eliminates a second layer of tax on distributed profits.

After the Partnership Firm or LLP pays the flat 30% tax on its profits, it can distribute the remaining profits to the partners, who treat their share as exempt income under Section 10(2A) of the Income Tax Act. This means partners do not pay any additional tax on the profit share they receive from the firm or LLP. 

This contrasts with a company, which first pays Corporate Tax on its profits and then taxes shareholders again on dividends through Dividend Distribution Tax or as income in their hands.

Deductibility of Remuneration, Interest, etc.

The firm or LLP can generally deduct payments made to its working partners, such as salary, bonus, commission, or interest, as business expenses, subject to strict limits.

• Remuneration to Working Partners: Payments like salary or commission are deductible from the firm’s income, but only if explicitly authorized by the Partnership/LLP Deed. The law caps the deduction at a percentage of the book profit, for example, 90% of the book profit up to ₹3 Lakh and 60% on the remaining amount. This deduction reduces the firm’s overall taxable income.
• Interest on Capital: Partners can also deduct interest paid on their capital contributions, but the deduction cannot exceed a simple interest rate of 12% per annum.
• Taxation in Partner’s Hand: The tax authorities treat the amount a partner receives, such as salary, bonus, or interest, as their personal “Income from Business or Profession” and tax it according to their individual income tax slab rates.

When Audit Becomes Mandatory

The requirement for an audit differs slightly between the LLP Act and the Income Tax Act.

• Tax Audit (Both Firms and LLPs): Both structures must undergo a mandatory Tax Audit under Section 44AB of the Income Tax Act if their total sales, turnover, or gross receipts exceed ₹1 Crore in any financial year.
• Statutory Audit (LLP Specific): An LLP must undergo a compulsory audit under the LLP Act, 2008, if its:
  1. Annual Turnover exceeds ₹40 Lakh, OR
  2. Total Contribution (Capital) exceeds ₹25 Lakh.

A traditional Partnership Firm only faces the tax audit threshold of ₹1 Crore.

Effect on Carrying Forward Losses, Depreciation, etc.

Both structures provide good continuity for utilizing tax benefits.

• Unabsorbed Depreciation and Business Losses: Both the Firm and the LLP can carry forward any unabsorbed depreciation indefinitely and business losses for up to 8 assessment years to set off against future profits.
• Continuity: Since the LLP has perpetual succession and is a separate legal entity, changes in partners (like retirement or death) generally do not affect its ability to carry forward losses. Similarly, a partnership firm can still carry forward losses even if its constitution changes, unlike a company, which has stricter rules.

Cash Flow / Capital Contribution Implications

Both partnership structures offer high flexibility with minimal statutory capital requirements.

• Minimum Capital: There is no minimum capital requirement specified by law for forming either a traditional Partnership Firm or an LLP. Partners are free to contribute capital based solely on their mutual agreement and business needs.
• Flexibility in Funds: The LLP Agreement or Partnership Deed dictates how capital is contributed, utilized, and withdrawn. This operational flexibility allows for better internal cash flow management without the rigid regulatory constraints imposed on public or private limited companies. Funds introduced as capital or loans are non-taxable events for the firm/LLP.

How to Choose Between LLP vs Partnership in India?

Choosing the right structure, a traditional Partnership Firm or an LLP, is a strategic decision that depends primarily on your risk tolerance, growth plans, and funding strategy. Experts generally recommend the LLP because it offers modern legal protection while maintaining the operational flexibility of a partnership.

Decision Criteria / Checklist

To make an informed choice, prospective partners should weigh their business goals against the legal and financial trade-offs of each entity.

1. Risk Tolerance (Liability Exposure)

This is the most critical factor, determining whether your personal assets are shielded from business liabilities.

• Partnership Firm: If you choose a partnership, you must accept unlimited liability. This means creditors can hold each partner personally liable for all firm debts and attach their personal assets, such as houses and savings. This structure is only viable for low-risk businesses where all partners share a high level of mutual trust.
• LLP: An LLP provides limited liability. A partner limits their financial risk to the capital they invested, protecting their personal wealth from business debts and, importantly, from a co-partner’s misconduct or negligence.

2. Scale / Plans to Expand

Consider how large you expect the business to become and how important business continuity is.

• Partnership Firm: Suitable for a very small, local venture with minimal growth ambition and a high risk of dissolution upon a partner’s departure.
• LLP: Ideal for SMEs, startups, and rapidly growing businesses. The perpetual succession feature ensures the business continues regardless of changes in partnership, providing a stable platform for expansion.

3. Funding / Investment Plans

If you plan to raise capital from outside investors, your structure must support equity financing.

• Partnership Firm & LLP: Both structures are not suitable if your plan involves raising equity capital from Venture Capital (VC) or Angel Investors, as neither can issue shares.
• Recommendation: If you plan to rely on self-funding, bank loans, or loans from partners, the LLP works well. If you need equity funding, you must choose a Private Limited Company.

4. Number & Type of Partners

The number of individuals involved and their professional background can dictate the choice of structure.

• Partnership Firm: The number of partners is restricted to a maximum of 50.
• LLP: There is no maximum limit on the number of partners, making it highly suitable for large-scale professional practices (like big consulting firms) that frequently induct new members.

5. Compliance Capability / Cost Budget

Determine how much time and money you are willing to spend on annual legal and accounting requirements.

• Partnership Firm: Offers the absolute lowest cost and compliance burden. Registration is optional, and annual filings are minimal. An unregistered firm cannot enforce contracts or sue in court under Section 69 of the Partnership Act, 1932.
• LLP: Compliance is slightly higher than a partnership but significantly lower than a company. It is cost-effective, as the mandatory statutory audit threshold is relatively high (₹40 Lakh turnover or ₹25 Lakh capital contribution). Every LLP must file Form 8 (Statement of Accounts & Solvency) and Form 11 (Annual Return) annually with the MCA, regardless of turnover.

6. Credibility / Client Contracts / Legal Expectations

A business’s legal identity affects how it is perceived by clients, banks, and other corporations.

• Partnership Firm: Has lower market credibility because it is not a separate legal entity. This can create hurdles in securing large contracts or institutional dealings.
• LLP: Its status as a “Body Corporate” and a separate legal entity gives it far greater credibility and legal standing, which is essential when dealing with large clients or seeking loans.

7. Exit / Succession Planning

Consider how easily the business ownership can be transferred or how it handles a partner’s exit.

• Partnership Firm: Poor continuity. The firm may legally dissolve upon the death, retirement, or insolvency of any partner, requiring complex restructuring.
• LLP: Excellent continuity due to perpetual succession. Change in partners does not affect the LLP’s existence, simplifying succession and exit procedures.

Conditions for Converting a Partnership Firm to LLP

To convert a Partnership Firm into a Limited Liability Partnership (LLP), partners must fulfill specific legal requirements to ensure a smooth and valid transition. Section 55 of the Limited Liability Partnership Act, 2008, along with Schedule II of the Act, outlines these conditions.

• Same Partners: All existing partners of the partnership firm must become partners in the LLP. No new partners can be added, and none of the existing partners can exit during the conversion process.
  
• Digital Signature Certificate (DSC) and DPIN: It is mandatory for all partners to hold a valid DSC, and at least two partners must have a Designated Partner Identification Number (DPIN) before filing the conversion application.
  
• Registered Partnership Firm: The partnership firm must be registered under the Indian Partnership Act, 1932, to be eligible for conversion.
  
• Consent of Partners: All partners must provide their consent for the conversion. Any partner wishing to leave can do so after the LLP is formed.
  
• Designated Partner Requirements: Every designated partner in the LLP must obtain a Director Identification Number (DIN) or DPIN as required under the LLP Act.

These conditions ensure that partners legally comply during the conversion process of a partnership to LLP with proper registration, consent, and identification of all partners.

Conclusion

Choosing between a Partnership Firm and an LLP depends on your business goals, risk tolerance, and growth plans. While partnership firms are simpler and cost-effective for small, low-risk ventures, LLPs offer advantages like limited liability, perpetual succession, and better credibility, making them suitable for scaling or risk-sensitive businesses.

There is no one-size-fits-all solution. Carefully consider factors such as liability exposure, number of partners, funding plans, and long-term succession when making your choice. Applying a structured decision framework can help you select the right structure for your business.

If you are ready to form an LLP or need expert guidance on conversion, you can get in touch with RegisterKaro for a smooth and compliant registration process.

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Frequently Asked Questions (FAQs)

1. Is an LLP safer than a partnership in India?

LLPs provide limited liability, protecting partners’ personal assets, while partnership firms expose partners to unlimited liability. LLPs also have perpetual succession, meaning the business continues despite partner changes. This makes LLPs a safer choice for risk-conscious entrepreneurs.

2. How do registration rules differ between an LLP and a partnership firm in India?

LLPs must be registered under the LLP Act, 2008, and filings are done with the Registrar of Companies. Partnership firms can operate without registration, though registering under the Partnership Act, 1932 provides legal benefits. Registration ensures credibility and compliance.

3. What is the main legal difference between an LLP and a partnership firm?

An LLP is a separate legal entity, meaning it can own property and enter contracts independently of its partners. A partnership firm has no separate legal identity; partners act on behalf of the firm and are personally liable for debts.

4. How does liability differ between an LLP and a partnership firm?

In an LLP, each partner limits their liability to their capital contribution. In a partnership firm, partners are jointly and severally liable for all business debts. This distinction protects personal assets in LLPs while partnership firm partners bear higher risk.

5. Do LLPs have more compliance obligations than partnership firms in India?

LLPs require annual filings with the RoC, including accounts and statements of solvency. Partnership firms have minimal legal reporting requirements, mainly for tax purposes. LLP compliance ensures transparency and strengthens business credibility.

6. Does an LLP continue if a partner leaves or passes away?

LLPs enjoy perpetual succession, so business operations continue despite retirement, death, or insolvency of a partner. Partnership firms may dissolve if a partner exits, unless the partnership deed specifies otherwise. Continuity is a major advantage of LLPs.

7. How is capital contribution and ownership handled in an LLP versus a partnership?

In an LLP, partners contribute capital as agreed in the LLP agreement, and assets belong to the LLP itself. In a partnership firm, partners jointly own the assets, which can create disputes or complicate management.

8. How are LLPs and partnership firms taxed under Indian law?

Both LLPs and partnership firms pay a flat 30% tax on net profits. Profit shares distributed to partners are exempt under Section 10(2A). Remuneration or interest paid to partners is deductible within specified limits, reducing taxable income.

9. Are LLPs more attractive to investors than partnership firms?

Investors and venture capitalists prefer LLPs because they offer a structured, corporate framework. Partnership firms are less attractive due to unlimited liability and lack of separate legal status. LLPs are better for scaling businesses.

10. Why might professionals choose an LLP over a partnership firm?

LLPs allow multidisciplinary professionals to work together under one entity with limited liability. Partnerships are simpler but expose partners to personal risk and may not provide the same credibility with clients or banks. LLPs combine flexibility with protection.