DIFFERENCE AMONG PARTNERSHIP, LIMITED LIABILITY PARTNERSHIP, AND COMPANY
Author: Kkanika Sharma, a student at the Army Institute of Law
Abstract
This article discusses the legal structures for business associations in India, with a focus on Partnerships, Companies, and Limited Liability Partnerships (LLPs). It delves into the fundamental nature, governing acts, membership requirements, liability, and other distinguishing features of these entities. The distinctions in governance, registration, liability, perpetual succession, auditing, merger, and other matters are highlighted in the article. Notably, it emphasizes the unique characteristics of LLPs, which act as a hybrid between a traditional partnership and a company, offering flexibility, limited liability, and a balance of professional competence and financial risk. The article continues with a landmark case, Jayamma Xavier v. Registrar of Firms, which clarifies the legal status of LLPs as partners in partnership firms.
Overall, the article provides a comprehensive examination of these business models, highlighting their respective benefits and drawbacks in the Indian context.
Keywords: LLP, Partnership, Company, Liability, Flexibility, Hybrid, Registration, Members.
Introduction
Commercially and professionally, for business reasons, a group of people may come together and form an association so as to attain certain professional goals towards the ends of which the stakeholders contribute and share in the gains eventually.
These associations broadly can be of three types- a Partnership, a Limited Liability Partnership or a Company. In India, all three are subject to the provisions given under their respective statutes.
A Partnership Firm refers to an association of two or more members, bound by an agreement, to share the profits of their business, which could be carried on by all of them or any one member acting for all.
A Partnership is formed under the Indian Partnership Act, 1932, which defines a Partnership under Section 4 as:
“An agreement between persons who have agreed to share profits of the business carried on by all or any one of them acting for all.”
A Company refers to an association of a group of people who operate a business together. While some members do all the work to run a company- known as Directors, are merely stockholders or Shareholders.
A Company is formed under the Indian Companies Act, 2013, where it defines a Company under Section 2(20) as:
“A company incorporated under the Companies Act 2013 or any previous company law.”
A Limited Liability Partnership (LLP) refers to an association of people who are also bound by an agreement to share the profits of their business, but one member cannot act for another members or be liable for the entire LLP or any other partners, apart from himself. Thus, it grants limited liability to each partner. It is an amalgamation of both the characteristics of a Partnership and a Company.
An LLP is governed by the Limited Liability Act, 2008, which defines Limited Liability Partnership under Section 2(n) as:
“Limited liability partnership means a partnership formed and registered under this Act.”
Differences between a Partnership, a Company, and a Limited Liability Partnership
- Fundamental Nature
Partnership is an arrangement via agreement between two or more people to operate the business and share profits and losses mutually.
Company is an association of persons who work collectively for a shared profit motive but each member would not be liable for the company’s or any other member’s losses.
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership (Ministry of Corporate Affairs, n.d.).
- Governing Act
Partnership: Indian Partnership Act, 1932
Company: Indian Companies Act, 2013
LLP: Limited Liability Act, 2008
- Minimum Number of Members
For a Partnership firm to come into existence a minimum of two members is required.
In a Private Limited Company, there must be not less than two members, and in a Public Limited Company, not less than seven.
In an LLP, a minimum of two members is required.
- Maximum Number of Members
A Partnership firm can have up to 50 members, maximum.
In a Private Limited Company, there must be not more than 200 members, and in a Public Limited Company, there is no upper limit as to the number of members allowed.
Similarly, in an LLP there is no limit to the maximum number of members allowed.
- What are the Members Called?
Partnership firm members are called Partners.
Members of a Company are called Shareholders.
Members of an LLP are called Partners as well.
- Managerial Personnel
In a Partnership firm, all partners themselves operate the day-to-day business activities.
In a Company, Directors are appointed for the day-to-day business operations.
In an LLP, Designated Partners are appointed for the same.
- Registration
It is optional and not mandatory to get a Partnership registered.
It is mandatory to register a Company with the Registrar of Companies.
Similarly, it is mandatory to register an LLP with the Registrar of LLPs.
- Creation
A Partnership is created via contract between the different partners.
A Company and LLP are both created by law, i.e. by registration.
- Governing Document Containing Rules, Regulations, Etc.
A Partnership is governed via the Partnership deed/ agreement.
A Company is governed via its Memorandum of Association and Articles of Association.
Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be (Ministry of Corporate Affairs, n.d.).
- Liability
Partners have unlimited liability as they are personally liable for the actions and losses of each other as well as the Partnership’s losses.
In a Company, liability of members is limited to the value of their shares, and they will be liable for their misconduct but not for any other member’s or the Company’s.
In an LLP, a partner’s liability is limited to their investment in the LLP, but similar to a Company, they cannot be made liable for the misconduct of the LLP or any other partner.
“Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct (Ministry of Corporate Affairs, n.d.)”.
- Separate Legal Entity
A Partnership is not a separate legal entity. If the partnership is liable for losses, so are all the members, and vice-versa. It cannot enter into contracts or hold property in its own name, it does that under the Partners’ names.
A Company is separate from its members legally, the members cannot be made personally liable for the losses of the company or any other members.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP (Ministry of Corporate Affairs, n.d.). Both Company and LLP are capable of entering into contracts and holding property in their own names, they have the power to sue or be sued as a body corporate.
- Perpetual Succession
There is no perpetual succession in a Partnership. If a member leaves the Partnership, the Partnership dissolves and a new agreement has to be created upon the introduction of a new partner to the firm, or to keep the remaining partners in a partnership.
The concept of perpetual succession applies in both a Company and an LLP. There is no effect of entry or quittance of existing shareholders/ partners on succession or the structure of the association. They can continue their existence irrespective of changes in members.
- Capital Requirement
There is no capital amount required to start up a Partnership.
However, a minimum sum of Rupees 1 Lakh is required for a Private Limited Company to be incorporated, and Rupees 5 Lakh for a Public Limited Company.
There is no minimum capital requirement for an LLP either.
- Requirement of Audit
A Partnership and an LLP are required to undergo audit as per the Income Tax Act, but not the Partnership or LLP Acts.
For a Company, auditing every year is mandatory.
For an LLP exceeding a turnover of Rs. 1 Crore in a financial year, auditing is also mandatory under the Income Tax Act, 1961. This is in the case of business, in case of profession audit is necessary if the turnover exceeds Rupees Twenty Five Lakhs.
- Annual Filing
It is not necessary for a Partnership firm to file any returns with the Registrar of Firms.
It is obligatory for a Company to file the Annual Financial Statement and the Annual Return with the Registrar of Companies.
Similarly, it is obligatory for an LLP to file the Annual Statement of Accounts, Solvency and the Annual Return with the Registrar of LLPs.
- Common Seal
A Partnership does not have a common seal, but a Company and an LLP do. Their seals contain their signatures.
- Ownership and Transferability of Assets
Partners in a firm jointly own the assets, and transfer of assets can be made upon the approval/consent of all partners.
Company’s assets are separate from members’ assets. The members can transfer their individual shares as they please. Transfer of shares is unrestricted.
LLPs also provide for independent ownership of assets by both the LLP and its partners, separate from each other. Transfer can be made as per the provisions of the LLP agreement.
- Transfer of Assets in Case of Death
In a Partnership, upon the death of a partner, his legal heir gets the payment of his capital amount and the accumulated profits, but the heir cannot take his place in the firm.
In a Company, upon the death of a member, the shares get transferred to the legal heir, and he becomes the shareholder.
LLP follows the same rule as Partnership in this regard.
- Merger
There cannot be a merger of two Partnership firms or more. The firms have to dissolve completely and then form a new firm via new agreement, which is not a merger.
A company can merge into another company, just like an LLP.
- Name of the Entity
Any name may be provided to a Partnership. It can be changed easily through the procedure given in Section 60 of the Act.
In a Company, the words “Private Limited” or “Public Limited” have to be added at the end of the name to signify its public or private status. The name cannot be changed easily, prior approval of the Central Government is requirement. (Parbhakar, n.d.)
In an LLP, the words “Limited Liability Partnership” or simply “LLP” are added to the end of the name.
- Right to Sue or be Sued
Only a registered Partnership has the right to sue or be sued as an entity in itself, otherwise the partners take the prerogative.
Both a Company and an LLP can sue or be sued, as they are legal entities separate from their members/partners.
- Foreign Participation
A foreigner cannot be a partner in a Partnership firm but he can be the member of a company or a partner in an LLP.
- Relationship of Members with the Entity
In a partnership, every partner is an agent of the firm as well as other partners.
In a Company, Directors are the Company’s agents and not the members’.
In an LLP, every partner is an agent of the LLP and not of other partners.
- Meetings
There is no provision for meetings under the Partnership Act or the LLP Act, however, the Company Act provides for the organisation and scheduling of several types of meetings.
- Identity Number
Partners are not required to get an identity number.
It is mandatory for a Company Director to get a Director Identity Number (DIN) before becoming a Director.
Similarly, it is obligatory for a Designated Partner of an LLP to get a Designated Partner Identity Number (DPIN) before becoming a Designated Partner.
- Digital Signatures
There is no need for a digital signature in a Partnership.
In a Company, at least one of the Directors’ signatures must be in the Digital form before filling up e-forms.
An LLP follows the same rule as a company but with regards to a Designated Partner.
- Termination of Partnership or Membership
A partner in a Partnership can cease to be one as per the provisions of the partnership agreement with respect to cessation or termination of partnership.
A member of a Company may cease to be a shareholder if he disposes of his shares.
A partner in an LLP can cease to be one as per the LLP Agreement. In the absence of such a clause in the agreement, he can give a 30-days prior notice and have his cessation following that.
Landmark Case Law
Jayamma Xavier v. Registrar of Firms
Facts: An LLP entered into a partnership with an individual but the Registrar of Firms refused to register the partnership, as based on precedent an LLP cannot be a partner as it frustrated Sections 25 and 49 of the Partnership Act.
Judgment: The Supreme Court held that an LLP is a body corporate and a body corporate is considered to be a person in the eyes of law. Therefore, an LLP can be a partner in a partnership firm, and when it does so it will be governed by the Partnership Act, rendering the liability considerations in the LLP Act irrelevant in this context.
Conclusion
A Limited Liability Partnership is a relatively newer concept than a Partnership or a Company in India. It is a body corporate and a legal entity separate from its partners, having perpetual succession. It contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ which is why it is referred to as a hybrid between a company and a partnership. Usually, professional firms composed of Advocates, Medical Practitioners, Accounting Personnel, Wealth Managers, etc. go for LLPs as the structure is conducive for both flexibility, limited liability, as well as maximum profit output, whilst keeping their status in the firm intact. An LLP provides flexibility without imposing detailed legal and procedural requirements and enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner (Ministry of Corporate Affairs, n.d.).
While an LLP has lesser liability and no joint liability as opposed to a traditional Partnership structure, it also has lesser compliance requirements and no management-ownership divide in contrast to a Joint Stock Company Structure. Thus, it can be said that an LLP combines the best of both worlds and sheds away the inconvenience of the two as well.