Limited Liabilities Partnership Firms and its comparison with other forms of business organization structure.

 

 

A detailed Article on Limited Liability Partnership Firm & Its comparative analysis with other forms of business organisations

A Limited Liability Partnership (LLP) is a form of business organization that combines the features of a partnership and a company. It is registered under the Limited Liability Partnership Act, 2008 in India and has a separate legal identity from its partners. The liability of each partner is limited to the extent of his or her contribution to the LLP and the actions done by him or her in the course of business. Unlike a partnership, an LLP has perpetual succession and can continue its existence irrespective of changes in its partners.

 

An LLP has several advantages over other forms of business entities, such as:

 

- No minimum capital requirement: An LLP can be formed with any amount of capital and the contribution of each partner can be in cash or kind.

- Ease of formation and management: An LLP can be formed by filing an incorporation document and an LLP agreement with the Registrar of LLPs. The LLP agreement defines the rights and duties of the partners and the management of the LLP. An LLP does not need to hold annual general meetings or file annual returns unless its turnover exceeds Rs. 40 lakhs or its contribution exceeds Rs. 25 lakhs.

- Tax benefits: An LLP is taxed as a partnership firm and not as a separate entity. The profits of an LLP are taxed only in the hands of the partners and there is no dividend distribution tax or minimum alternate tax applicable to an LLP. The partners can also claim deduction for interest, salary, commission or remuneration paid to them by the LLP under section 40(b) of the Income Tax Act, 1961.

- Flexibility: An LLP has the freedom to design its own internal structure and governance as per the LLP agreement. The partners can decide how to share profits, losses, management rights and responsibilities among themselves. An LLP can also admit new partners or change existing partners without affecting its continuity or legal status.

 

However, an LLP also has some disadvantages, such as:

 

- Lack of awareness: Many people are not aware of the concept and benefits of an LLP and may prefer to opt for a more familiar form of business entity like a sole proprietorship, partnership or company.

- Limited access to funds: An LLP may face difficulties in raising funds from external sources like banks, financial institutions or investors as they may not have confidence in the credibility and stability of an LLP. An LLP cannot issue shares or debentures to raise capital from the public.

- Regulatory compliance: An LLP has to comply with various provisions of the LLP Act, 2008 and the rules made thereunder. For instance, an LLP has to maintain proper books of accounts, audit its accounts if its turnover exceeds Rs. 40 lakhs or its contribution exceeds Rs. 25 lakhs, file annual statements of accounts and solvency with the Registrar of LLPs, inform the Registrar of any changes in its partners or registered office, etc.

 

An LLP can be compared with other forms of business entities on various parameters, & Tabulated as given hereunder:

 

 

 

 

 

Sr No	Basis	LLP	Sole Proprietorship	Partnership	Private Limited
01	Governing Law	An LLP is governed by the LLP Act, 2008 and the rules made thereunder.	A sole proprietorship is governed by the general laws applicable to contracts and torts.	A partnership is governed by the Indian Partnership Act, 1932 and the common law principles.	A private limited company is governed by the Companies Act, 2013 and the rules made thereunder.
02	Registration	An LLP has to be registered with the Registrar of LLPs by filing an incorporation document and an LLP agreement.	A sole proprietorship does not need any registration unless it is required by any specific law.	A partnership has to be registered with the Registrar of Firms if it wants to sue or be sued by third parties.	A private limited company has to be registered with the Registrar of Companies by filing a memorandum and articles of association.
03	Number of partners/member	An LLP requires a minimum of two partners and there is no maximum limit on the number of partners.	A sole proprietorship can have only one owner.	A partnership can have a minimum of two partners and a maximum of twenty partners (ten in case of banking business)	A private limited company can have a minimum of two members and a maximum of two hundred members.
04	Minimum capital	An LLP does not have any minimum capital requirement.	A sole proprietorship does not have any minimum capital requirement.	A partnership does not have any minimum capital requirement unless it is specified by any law or agreement.	A private limited company has to have a minimum paid-up share capital of Rs. 1 lakh.
05	Suffix used in name	An LLP has to use the suffix 'Limited Liability Partnership' or 'LLP' at the end of its name.	A sole proprietorship can use any name as long as it is not misleading or identical to any existing business name.	A partnership can use any name as long as it is not misleading or identical to any existing business name.	A private limited company has to use the suffix 'Private Limited' or 'Pvt. Ltd.' at the end of its name.
06	Perpetual succession	An LLP has perpetual succession and can continue its existence irrespective of changes in its partners.	A sole proprietorship ceases to exist on the death or insolvency of the owner.	A partnership dissolves on the death, retirement, insolvency or expulsion of any partner unless the partnership agreement provides otherwise.	A private limited company has perpetual succession and can continue its existence irrespective of changes in its members.
07	Legal identity	An LLP has a separate legal identity from its partners and can own property, enter into contracts, sue and be sued in its own name.	A sole proprietorship does not have a separate legal identity from its owner and the owner is personally liable for all the debts and obligations of the business.	A partnership does not have a separate legal identity from its partners and the partners are jointly and severally liable for all the debts and obligations of the firm.	A private limited company has a separate legal identity from its members and can own property, enter into contracts, sue and be sued in its own name.
08	Common seal	An LLP may have a common seal if it decides to do so by a resolution of the partners.	A sole proprietorship does not have a common seal.	A partnership does not have a common seal.	A private limited company has to have a common seal and affix it on all its documents.
09	Liability of partners/members:	The liability of each partner in an LLP is limited to the extent of his or her contribution to the LLP and the actions done by him or her in the course of business.	The liability of the owner in a sole proprietorship is unlimited and he or she is personally liable for all the debts and obligations of the business.	The liability of each partner in a partnership is unlimited and he or she is jointly and severally liable for all the debts and obligations of the firm.	The liability of each member in a private limited company is limited to the extent of his or her shareholding in the company.
10	Agreement	An LLP is governed by an LLP agreement which defines the rights and duties of the partners and the management of the LLP. An LLP agreement can be oral or written but it is advisable to have a written agreement to avoid disputes.	A sole proprietorship does not have any agreement as there is only one owner.	A partnership is governed by a partnership deed which defines the rights and duties of the partners and the management of the firm. A partnership deed can be oral or written but it is advisable to have a written deed to avoid disputes.	A private limited company is governed by a memorandum and articles of association which define
11	Ownership of assets	An LLP owns all the assets acquired in its name and can dispose them as per its discretion.	The owner of a sole proprietorship owns all the assets acquired in his or her name and can dispose them as per his or her discretion.	The partners of a partnership own all the assets acquired in the name of the firm and can dispose them as per their consent.	The members of a private limited company do not own the assets acquired in the name of the company and cannot dispose them without the approval of the board of directors.
12	Principal/agent relationship	Each partner in an LLP is an agent of the LLP and can bind it by his or her acts done in the course of business unless he or she has no authority to do so or exceeds his or her authority.	The owner of a sole proprietorship is both the principal and agent of his or her business and can bind it by his or her acts done in the course of business.	Each partner in a partnership is an agent of the firm and can bind it by his or her acts done in the course of business unless he or she has no authority to do so or exceeds his or her authority.	The members of a private limited company are neither agents nor principals of the company and cannot bind it by their acts.

 

Conclusion: Each of the forms of business organization has its own relative merits and demerits. What is best of these, shall depend on case to case basis and choice shall depend on subjective factors. Having said that, while the sole proprietorship gives absolute control over the management of the business, it may not be suitable for the medium to large businesses, it might be most appropriate for micro level businesses. Partnership forms of business organization, might be best suited for small to mid level businesses, as it brings larger and capital and diverse experience from the partners. However, these two form of forms of business organisations bring higher risk due to the fact that liability is unlimited. The other two LLP and Limited companies reduces risk but increases the compliance.