LLP vs Company vs Partnership Firm

Limited liability partnerships (LLPs) are growing in number since their introduction in 2008, but they should be more popular than they now are. This is because the LLP offers nearly all the benefits of a private limited company, with none of the downsides of a partnership firm. It offers limited liability, offers tax advantages, can accommodate an unlimited number of partners, and is credible in that it is registered with the Ministry of Corporate Affairs (MCA). At the same time, it has fewer compliances than a private limited company and is also significantly cheaper to start and maintain.

Now, before we run into comparison between LLP, Partnership Firm and Company it is important to understand what each concept means:

1. LLP or Limited Liability Partnership it’s a new concept introduced in Indian scenario in the year 2009 by LLP Act, 2008. A Limited Liability Partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and Company. So basically, LLP is a perfect mixture of Partnership Firm and Company.
2. Partnership Firm: A Partnership Firm, as the name suggest is a partnership between two or more persons having a common interest. As per Section 4 of the Indian Partnership Act:- “Partnership is 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”. Basically, a Partnership Firm is easy to set up and operate as it has very limited compliance requirement. However, this is a downside of a business as well, as the Firms are less regulated, Banks and other stakeholders are not always keen on dealing with them. Also, liability of Partners in partnership firm are unlimited which means that in the event of loss in a business, partners of Firm may ask to pay from their personal resources unlike Company or LLP where liability of owners are limited.
3. Company: It is most popular forms of Business and ideally suited for large scale operations. However, due to its Limited Liability and Separate Legal Identity, it is the most preferred form of Business. Company form of business also enjoys trust of Banks and Lenders as compared to Partnership firms. Companies can be Either Private Company or Public Company depending on the need of the founder/promoter.

Why Private Limited Companies are Popular as compared to Partnership Firms and LLP

Private limited companies have greater applicability. In addition to all an LLP can offer, a private limited company distinguishes between Shareholders and Directors. Raising capital, brining investor or expanding at larger scale is easier for Company as compared to LLP or Partnership firm.

So as a founder, if you willing to raise a Finance from Venture Capitalist or Investor or has a planned ESOP etc for Business promotion, it is advisable to start with Private Company or Public Company. But If you are willing to start a small scale business with limited capital investment from selective sources, LLP form of business can be more suitable. Also, note that many statutory regulators still does not recognise LLP for granting certain license or approval. So it would be advisable to check the business purpose before finalising on your decision.

In fact, even if you are looking to raise funding, but not for a couple of years, you should strongly consider an LLP over a private limited company. As conversion of LLP to Private Company or Public Company is possible and maintenance of LLP is very cheap as compared to Company (be it Private or Public). 

As compared to LLP and Company, Partnership firm has very simple structure and suited for small businesses but with LLP, most of the advantages of Partnership Firm are now available with LLP as well. Further, Partnership Firm has unlimited liability, no separate legal entity status, which makes Partnership firm the least preferred form of business of late.

Cost of starting Partnership Firm/ LLP / Company

While Company incorporation (registration) costs around Rs 25,000 (depending on the Capital and other availability of other necessary documents). LLP would cost around Rs. 15,000 (again depending on Capital contribution and availability of other necessary documents).

While setting up cost of partnership is negligible as registration of Partnership firms are not mandatory except in states like Maharashtra. If a partnership is required to be registered with Registrar of Firms (ROF), the cost of registration would be almost same as LLP.

Regular maintainace cost

Compliance cost of Private Company or Public Company is quite high as compared to LLP or Partnership Firms. Companies are required to hold atleast 4 Board Meeting in a year, 1 AGM any issuance of Shares or Debentures etc need to be followed up with return of allotment etc. as a result compliance of Private Company is quite costly. Also, For Companies, appointment of Auditor is mandatory which will add to the annual cost.

While, LLP does not require to hold any meeting during the year and it is required to file just 2 forms 1 in May every year and 1 form in October every year. Also, appointment of Auditor is not mandatory as per LLP Act and Income Tax act mandates appointment of Auditor only if turnover of LLP crosses Rs. 40 Lakhs during previous financial year. Compliance cost wise LLP is more or less at part with Partnership Firms.

Conclusion:

Considering positives and negatives, a start up or a person starting a new venture can suitable business model. LLP which was still considered as a new business model is gaining popularity due to its unique offerings of benefits of Company at the cost of Partnership Firms.