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Difference Between LLP and Partnership Know More

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difference between llp and partnership

LLP vs. Partnership: Understanding the Key Differences in Business Structures

Introduction
Choosing the right business structure is crucial for entrepreneurs as it affects everything from operational flexibility to tax obligations and liability. In India, Limited Liability Partnerships (LLP) and traditional partnerships are popular choices for small and medium-sized enterprises. Understanding the differences between these two can help in making an informed decision.

What is a Partnership?

A partnership is a traditional business structure where two or more individuals manage and operate a business in accordance with the terms and conditions set in the Partnership Deed. It’s governed by the Indian Partnership Act, 1932, and partners have unlimited liability, which means they are personally responsible for the debts of the business.

What is an LLP?

An LLP is a newer form of business structure that combines the flexibility of a partnership with the benefits of limited liability for its partners. It is governed by the Limited Liability Partnership Act, 2008. In an LLP, partners are not personally liable for the debts of the business or the negligence of other partners.

Key Differences Between LLP and Partnership

Liability: In a partnership, partners have unlimited liability. In contrast, LLPs provide limited liability protection to partners.

Legal Status: An LLP has a separate legal entity from its partners, which means it can own assets in its name, sue or be sued. Partnerships do not have this feature.

Registration: Registration is optional for partnerships but mandatory for LLPs.

Perpetual Succession: LLPs enjoy perpetual succession, meaning the LLP can continue its existence irrespective of changes in partners. Partnerships, however, may dissolve with the exit or death of a partner.

Compliance and Disclosure: LLPs are required to maintain annual accounts and file them with the Ministry of Corporate Affairs. Partnerships have less stringent compliance requirements.

Taxation: Both structures are typically taxed as pass-through entities, meaning the profits and losses are passed through to partners who then report it on their personal tax returns. However, LLPs may be subject to additional taxes depending on the jurisdiction.

Transfer of Interest: In an LLP, a partner can transfer their interest without the consent of others, which is not possible in a traditional partnership.

Foreign Ownership: LLPs can have foreign nationals or entities as partners, subject to compliance with the Foreign Direct Investment (FDI) policy. Traditional partnerships in India do not allow this.

Conclusion

The choice between an LLP and a traditional partnership depends on various factors including the scale of operations, the degree of liability protection required, compliance willingness, and investment needs. Entrepreneurs should carefully consider these differences when deciding on the business structure that best suits their venture’s goals and operations.,
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This article is only published for informational purposes. Please consult your Chartered Accountant or Financial Advisor before making any important financial decisions.

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