Difference between LLP and Partnership

Particulars Limited Liability Partnership Partnership

Registration under Act It is registered under LLP Act, 2008 It is registered under Partnership Act, 1932
LLP registration is done with to Ministry of
Registered to Partnership registration is done with to Registrar of firms.
Corporate Affairs

One of the main difference between LLP and Partnership is

about the liability of Partners. Since the partner and the Since the partner and the firm is not considered as a separate
Liability firm is considered as a separate legal entity. Hence, the legal entity. Hence, Partners are personally liable for
liability of the partners is limited to the amount invested in the unlimited amount of liabilities of the partnership
the company.

•Minimum 2 and no upper limit for maximum number of •Minimum 2 and maximum 20 partners can be the member
A number of partners and
partners in LLP. of the partnership firm.
requirements
• No minor can be partner •Minor can be a partner.
LLP Agreement governs the operation, management and Partnership Deed governs the operation, management and
Agreement between partners decision-making methodologies and other activities of the decision-making methodologies and other activities of the
LLP. partnership.

•Shares can be easily transferred to another person after

obtaining the required consent from all the Partners in an •Shares can be transferred to another person after obtaining
LLP. the required consent from all the Partners in a Partnership.
Transferability /Conversion •The transferee cannot become partner automatically. •Transferability of the partnership a is a lengthy process.
•LLP cannot be converted back to the partnership but can •Conversion of partnership to LLP or Private
be converted to Private Limited Company or Limited Limited Company is a burdensome process.
Company easily.

Mandatory to file the annual return to Ministry of

Compliance No requirement of annual return filing
Corporate Affairs.
 Comparison between partnership firm and company
BASIS FOR COMPARISON PARTNERSHIP FIRM COMPANY
Meaning When two or more persons agree to carry on a A company is an association of persons who invests
business and share the profits & losses mutually, it is money towards a common stock, for carrying on a
known as a Partnership firm. business and shares the profits & losses of the
business.
Governing Act Indian Partnership Act, 1932 Indian Companies Act, 2013
How it is created? Partnership firm is created by mutual agreement The company is created by incorporation under the
between the partners. Companies Act.
Registration Voluntary Obligatory
Minimum number of persons Two Two in case of private company and Seven in case of
public company.
Maximum number of persons 100 partners 200 in case of a private company and a public
company can have unlimited number of members.

Audit Not Mandatory Mandatory

Management of the concern Partners itself. Directors

Liability Unlimited Limited
Contractual capacity A partnership firm cannot enter into contracts in its A company can sue and be sued in its own name.
own name
Minimum capital No such requirement 1 lakh in case of private company and 5 lakhs in case
of public company.
Use of word limited No such requirement. Must use the word 'limited' or 'private limited' as
the case may be.
Legal formalities in dissolution / winding up No Yes

Separate legal entity No Yes

Difference between private limited Company and LLP
• Act of a firm: In order to support an adjudication against a firm, there must be
proof that each of the partners has committed some act of insolvency.
• A partner-1 of the firm, made a gift to his son was not partnership property and
there was no collective act of insolvency alleged on behalf of the firm and
therefore, it could not be held that the act of insolvency committed by partner-
1 should be attributed to the other partner.
• In a case, where one of the partners in a firm consisting of two partners
departed from the usual place of business with intent to delay and defeat the
creditors of the firm, it was held that an adjudication order could not be made
against the firm in such a case, unless the other partner also departed with like
intent.
• In a case, whether the act of one partner in closing the business of the firm and
thus committing an act of insolvency so far as he is concerned was imputable to
another partner, so as to entitle the creditors of the firm, to get the other also
adjudicated an insolvent.
• It was held that the mere fact of closing the firm by one partner, without more
evidence to show that the other either expressly or impliedly authorized the
same, was insufficient to lead to such imputation.
• In a case circumstances show that the expression contained in a letter written
by one of the partners stating that the firm was suspending or was going to
suspend payment to all creditors, should be taken as an act on behalf of all the
partners, then the consequences that follow should have application to all the
partners.
• The failure to pay rent where the premises were taken on lease on behalf of the
firm was held to be an act of the firm.
• “Business” connotes organized course of activity or conduct with a set purpose
of earning profit or exploit property purchased in order that one should get the
highest amount.
• The word ‘business’ is one of wide import and it means an activity carried on
continuously and systematically by a person by the application of his labor or
skill with a view to earning an income.
• Its perceptions differ from private to public sector or from institutional
financing or commercial banking.
• A land owner does not carry on a business, although the management of his
estate and collection of his rents may be his only serious occupation.
• Mere collection of rent of properties by co-owners does not amount to
business being carried out in partnership.
• In such a case, the proper suit that would lie was one for partition and accounts
and not a suit for dissolution of the firm and accounts.
• A single snap act even if done by certain persons together unless it involves
some continuity cannot be regarded as business.
• However, under the Act, by virtue of S.8, one can enter into a partnership for a
single transaction or adventure (PPP model).
• Road building activity under a government contract even in a single venture
was found to be a business activity.
• An isolated act of money lending on a joint security cannot be regarded as
constituting a business within the meaning of that definition.
• “Trade”, in its primary meaning, is the exchanging of goods for goods or goods
for money;
• In its secondary meaning, it is repeated activity in the nature of business
carried on with a profit motive, the activity being manual or mercantile, as
distinguished from the liberal arts or learned professions or agriculture.
• Occupation: it is an activity of a person undertaken as a means of livelihood or
a mission in life.
• Education fall within the meaning of this expression and partnership firms can
run educational institutions held in T.M.A.Pai foundation case.
• Profession: In Indian Medical Association Case the SC held that
1. The nature of the work which is skilled and specialized and a substantial part
is mental rather than manual;
2. Commitment to moral principles which go beyond the general duty of
honesty and a wider duty to community which may transcend the duty to a
particular client or patient;
3. Professional association which regulates admissions and seeks to uphold the
standards of profession through professional codes on matters of conduct
and ethics; and
4. High status in the community,
• Two medical professionals can form a partnership to treat patients; and
• Two advocates can form a partnership and run a law firm.
• Partnership definition as per the Kent:
• “Partnership is a contract of two or more competent persons to place their
money, effects, labor and skill, some or all of them, in lawful commerce or
business, and to share the profit and bear the loss in certain proportions”.
• Any person, generally competent to contract, may make a contract of
partnership as well as any other kind of contract, and there is no reason in law
why a corporate body, such as a joint-stock company, should not be a partner
with either natural or corporate fellow-partners, provided that this is not
forbidden by its own particular constitution.
• Partnership agreement – oral, written or by conduct.
• The partners may be different and yet the nature of the business may be the
same, the business may be different and yet the partners may be the same.
• An agreement between the partners to carry on a business and share its profits
may be followed by a separate agreement between the same partners to carry
on another business and share the profits therein.
• The intention of the partners will have to be decided with reference to the
terms of the agreement and all the surrounding circumstances, including
evidence as to the interlacing or interlocking of management, finance and,
other incidents of the respective businesses.
• If, the parties to an agreement have not agreed on the date of the
commencement of the partnership, it cannot be said that they have become
partners from that date but subsequently when they agreed for such formation.
• There is no partnership until the business is in existence.
• Whether a partnership exists or not is a question of fact but may become a
mixed question of law and fact if wrong principles are followed.
• A Benamidar can be a mere trustee of the real owner and has no beneficial
interest in the property or the business of the real owner.
• But in law, just as in the case of a trustee, he can also enter into a partnership
with others.
• If A,B and C enter into a partnership and B later agrees with D to share his
proportion of the profits and liabilities, B may thereby become a member of
two partnerships but the rights of A and C will remain unaffected by such a
parasitic partnership.
• In such cases , the maxim ‘Socii mei Socius meu Socius non est’ (my partners’
partner is not necessarily my partner) applies.
• In the era of electronic commerce and infusion of IT in day-to-day working of
the commercial world, electronic agreements have assumed a significant role.
• One can very well enter into a partnership agreement through the electronic
medium.
• The provisions of the IT Act, 2000, particularly Ss 4, 5, 11, 12 and 13, provide
legal sanctity to such electronic agreements.
• The joint venture can be time bound, can be work specific and it would involve
partners’ contribution of finances, knowledge, technical know-how, mutual
control of management, expectation of profit, sharing of profit.
• One of the exmaple PPP (public-private partnership) model.
• It is settled canon of construction that a contract of partnership must be read as
a whole and the intention of the parties must be gathered from the language
used in the contract by adopting harmonious construction of all the clauses
contained therein.
• It is seldom that any technical or pedantic rule of construction can be brought
to bear on their construction.
• A partnership deed must be construed reasonably.
• There is no partnership without the intention to carry on a business, and
therefore, the mere fact that persons own something in common which
produces returns and they divide those returns according to their respective
interests, does not make them partners.
• As to ships it has been settled that part-owners of a ship are not necessarily
partners, but if they employ the ship in trade or adventure on their joint
account, they are partners as to that employment and the profit thereby made.
• Co-ownership does not imply a business or a partnership.
• Differences between partnership and co-ownership compared in Champaran
Cane Concern v. State of Bihar, are:
1. Co-ownership is not necessarily the result of an agreement, whereas
partnership is;
2. Co-ownership does not necessarily involve community of profit or of loss, but
partnership does;
3. One co-owner can, without the consent of the other, transfer his interest etc,
to a stranger, a partner cannot do this; and
4. While in a partnership each partner acts for all, in a co-ownership one co-
owner is not as such the agent, real or implied of the other.
• Where the terms of dissolution are that one or more of the partners shares will
be purchased by the other partners, then any deed or document effecting the
dissolution will amount to conveyance or transfer on sale in respect of such
shares and stampable on that basis.
• A deed of dissolution between partners was a deed or instrument of partition,
therefore, chargeable with stamp duty as a deed of dissolution.
• Once it is found that a partner has acted and his express or implied authority
on behalf of the firm, all partners except the minor admitted to the benefits of
the firm shall be bound and shall accordingly be liable to be judged as insolvent
even though they may not have themselves done any act of insolvency.
• It was held that in Wise v. Perpetual Trustee Co., that members of a non-profit
making club are not to be viewed as partners.
• The same is for non-profit making association such as a trade protection
society.
• However, a partnership can arise between the members of an association,
which is set up with a view to the making of financial gain for its members.
• By the current usage, affairs of a firm are distinct from its members.
• The firm is treated very much as if it were a corporation; it is an artificial or
‘moral’ person for business purposes, and in some systems of law this
personality receives formal acknowledgment.
• In English jurisprudence the firm is only a compendious name for certain
persons who carry on business, or have authorized one or more of their
number to carry it on in such a way that they are jointly entitled to the profits
and jointly liable for the debts and losses of the undertaking.
• If a partner dies, the surviving partners may carry on the business by forming
another partnership.
• In such a case, they will have to account for the share of the deceased partner
to his legal representatives.
• But if a partner dies, his legal representative may be admitted to a new
partnership by the surviving partners.
• There can be no legal bar to a personal representative of the deceased partner
being admitted to the partnership by the surviving partners.
• If the personal representative of the deceased is also one of the surviving
partners, he can agree to join the new partnership as a nominee of the legal
heirs of the deceased partner.
• A partner may be the karta of a joint Hindu family; he may, under an
agreement, express or implied, be the representative of a group of persons; he
may be a benamidar for another.
• In all such cases he occupies a dual position. Qua the partnership, he functions
in his personal capacity; qua the third parties, in his representative capacity.
• A person cannot contract with himself.
• But where a person has different capacities, he may have power to contract in
his representative capacity with himself as an individual, eg, as an executor, a
trustee and administrator or an agent.
• A person cannot however enter into a partner with himself in his own capacity
and in the capacity of a karta of a joint Hindu family since the family as a unit
does not become a partner.
• However, another partnership where the deed was signed by one of the
partners in two capacities – as an individual and as the karta of the HUF – along
with 9 other partners was found to be valid since a contract was between a
person in 2 capacities and 9 other persons.
• A firm name is merely an expression, only a compendious mode of designating
the persons who have agreed to carry on business in partnership.
• When the firm becomes the tenant of a shop, its partners also become tenants
since a firm is only a compendious name of the partners.
• Therefore, when such shop is allotted to one of the partners on dissolution of
the firm there will be no-subletting.
• Question have arisen as to whether past experience of any of the partners can
be taken as the experience of the firm making it eligible for participating in the
tender.
• The SC held in New Horizons Ltd case that the earlier experience of one of the
partners of the firm can be taken into consideration.
• It is settled law that when the manager of a joint family becomes a partner in a
firm, the other members of the family do not thereby become partners therein
although they might have interest in his share in the partnership.
• There is no privity of contract between the other partners and stranger.
• Order XXX of the CPC, permits suits to be brought against firms, and the
summons may be issued against the firm or against persons who are alleged to
be partners individually, however, the suit proceeds only against the firm.
• Any persons who is summoned can appear, and prove that he is not a partner
and never was; but if he raises that defense, he cannot defend the firm.
• When the decree is passed, it is against the firm and such decree is capable of
being executed against the property of the partnership and also against the
individuals.
• In regard to firm name, there are no prescribed forms for the style of a firm,
and the liberty of partners, to assume any firm-name they please, is bound only
by the general rules as to goodwill and trade names.
• In absence of a provision like S.20 of Companies Act, 1956 in the Partnership
Act, a firm can be registered with a name similar or identical to the name of a
firm already registered, however these are subject to Intellectual Property
Rights such as domain name etc.,
• S.23 of the ICA provides that every agreement of which the object or
consideration is unlawful is void and it lays down that the consideration of an
agreement is lawful unless, inter alia, it is opposed to public policy.
• A partnership is presumed to be legal unless the object is proved to be illegal or
the object necessarily involved something illegal.
• The illegality of a partnership affords no reason why it should not be sued.
• It cannot indeed be effectually sued by any person who, being aware of all
facts, seeks to enforce a demand arising out of a transaction tainted with the
illegality which affects the firm;
• But the illegality of the firm does not per se afford any answer to a demand
against it, arising out of a transaction, legal in itself, to which it is a party.
• It has been, however, consistently held that no suit can be filed for recovery of
the capital invested in an illegal partnership and/or for the accounts of the
partnership.
• A sleeping partner to provides finances to the partnership firm and the other
partners managed the affairs, it was held that he was entitled to accounts, as
he was not pari delicto.
• An illegal partnership can be taxed, it is certainly bound to be taxed either as an
unregistered partnership firm or an association of persons.
• If a person, by the fraudulent misrepresentation of another, is induced to enter
into an illegal contract while himself unaware of illegality, he may recover
damages from the person deceiving him.
• An illegal partnership can prosecute a person for theft of its property.
• Risk of criminal prosecution may be a consequence of an illegal partnership.
• ‘Persons engaged in an illegal business, whether partners or not, and whether
incorporated or not, are liable to suffer the sanctions of the criminal law.
• Sleeping partner is bound by contracts made by the ostensible partners in the
ordinary course of the partnership business.
• Sometimes partners are absolutely inactive or deliberately choose to be
inactive, for instance, in some cases where a partner is a government servant or
person with similar status who is, by service rules, prohibited from engaging in
any trade or business.
• Some confusion continues to persist in this regard.