Limited Liability Partnership (LLP) vs Partnership

Selection of the correct form of business entity is the most important decision taken by an entrepreneur. To make choices simpler and assist you in taking a well informed decision, here is a basic comparison chart of Limited Liability Partnership (LLP) vs Partnership

Limited Liability Partnership – A corporate form of Partnership

Limited Liability Partnership has been introduced in India by way of Limited Liability Partnership Act, 2008. The basic premise behind the introduction of Limited Liability Partnership (LLP) is to provide a form of business organization that is simple to maintain while at the same time providing limited liability to the owners. It exhibits elements of both partnership and corporation. In LLP, one partner is not responsible or liable for another partner’s misconduct or negligence unlike a traditional partnership in which each partner has joint and several liabilities.

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Limited Liability Partnership (LLP) vs Partnership

Partnership

Partnership is governed by Indian Partnership Act, 1932. It is the relation between two or more partners who have agreed to share the profits of a Business carried on by all or any of them acting for all. The partners can enter into a verbal or written agreement between them as per their discretion. The Registration of partnership firm is not compulsory.

The Comparison chart will give you a clear distinction between all the three forms of business.

Factors of Comparison Limited Liability Partnership Partnership
Legal Identity It has separate Legal entity different from partners No separate legal entity
Minimum Members   Designated Partners – 2 Minimum Partners – 2
Maximum Members No limit 100
Minimum Capital No minimum requirement No minimum requirement
Regulator Registrar of Companies Registrar of Firms
Compliance Requirements Annual Return Filing No mandatory compliances
Taxation Taxed at 30% Taxed at 30%
Cost of compliance As there are no compulsory compliances for a partnership firm, there are no cost of compliance as such
Liability Limited to Capital contribution Unlimited liability of partners
Credibility Medium Low
Investor Preference Medium Low
Statutory Audit Mandatory if Contribution is above 25 lacs or, if Turnover is above Rs. 40 lacs Not Mandatory
Conversion Can be converted into a Company by following the procedures of Companies Act Can be converted into a Company by following the procedures of Companies Act
Procedure
  • Obtain DSC (Digital Signature Certificate)
  • Obtain DPIN (Designated Partner Identification Number)
  • Name Approval
  • Filing for Incorporation
  • File LLP Agreement
 

  • Preparation of Partnership Agreement
  • Stamping and Notarization of the partnership agreement.
  • Registration of Agreement with the Registrar of Firms – Not compulsory, very expensive and time consuming

 

Time Taken for Registration 10 -15 Days 7-10 days
Relation inter se partners Partners are the agent of firm and the partners. One is responsible for the act of other(s) Partners are agents of the firm only.
Ease of closure An LLP can be closed by meeting certain conditions and following the procedures of LLP Act 2008. A Partnership can be closed anytime as per the conditions laid down in the deed or agreement.

Conclusion:

– Partnership firm, even if registered, is not a separate legal entity.

– LLP is comparatively a more organized form of business, hence has more credibility.

– Partners of a partnership are agent of one another, which makes all the partners responsible for any fraudulent act of one of the partners.

– And partners are personally liable to the extent of dues of the partnership. But contrary to this, in LLP, partners are not liable for the act of one another. They are only responsible for their acts and liable to the extent of their contribution.

Foreign Directors in Indian Company

Any public limited or private company needs to have a board of directors constituted for the purpose of managing the day-to-day affairs of the Company. The reason for the existence of the board of directors is that there needs to be a body that is above the management and which can be accountable to the regulators and shareholders for the decisions taken by the management of the company.

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Foreign Directors in Indian Company

Foreign Directors in Indian CompanyDirectors in Indian company: The Companies Act 2013 states that there should be minimum 2 directors in a private company and 3 in a public company. All the directors should be Individual Persons. All the Companies registered under the Act should have at least one Resident Directors (a person who has stayed in India for at least 182 days in the previous year.)

Foreign Directors in Indian Companies: The Companies Act 2013 doesn’t bar a foreign individual from being a director in an Indian company. However there are additional requirements to be fulfilled by the foreigner before he/she is appointed.

Every person should have a DSC in his name and a DIN allotted by the MCA before being appointed as a director. The list of documents required for DSC and DIN is an important factor to be kept in mind. Following are the documents that are required from a Foreign National –

  • Copy of Passport as ID Proof
  • Address proof- Bank statement, DL, Utility bill (not older than two months)
  • Employment/Business Visa (For foreign nationals residing in India)
  • Residence Permit (For foreign nationals residing in India)
  • Passport Size Photograph

All the above documents should be notarized by a Public Notary in the country of residence and should be Consularized /apostille by the concerned authority in the Foreign National’s home country.

How to register Startup in India

Start-up India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Start-ups in the country that will drive sustainable economic growth and generate large scale employment opportunities. This articles explains how to register Startup in India. A startup is a new or existing business, usually small, started by one or a group of individuals. What differentiates it from other businesses is that a startup is:

  • Innovative
  • Aims to improve products or services
  • Is a Scalable business model
  • Leads to employment generation or wealth creation
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How to Register Startup in India

There are 7 Steps to Register Startup in India:

1. Register your Company: The business must be incorporated in any of the three forms: – Private Limited CompanyLimited Liability PartnershipPartnership Firm

2. Check if you fulfill other conditions: If your business is already incorporated, then check if you fulfill all other conditions to be recognized as a Startup:

-Your business must be incorporated in India not before 7 years. (10 years for Biotechnology sector)

– The total turnover of your business must be less than Rupees 25 crores per year.

– Innovation is a must– the business must be working towards innovating something new or significantly improving the existing used technology.

– Your business must not be as a result of splitting up or reconstruction of an existing business.

3. Register in Startup India: Register your entity as a Startup after providing necessary details and documents such as:

– Name and Address of the business entity

– Registration Number of the business entity

– Name, Address, Mobile Number and Email Id of the Authorized Representative

– Name, Address, Mobile Number and Email Id of the Directors/Partners

You can register here

4. Submit documents: The only mandatory document that needs to be submitted for registering as a Startup is the Incorporation Certificate or Registration Certificate of your entity. You may submit any document that adds value to your application and justifies how you are eligible to be recognized as a startup.

5. Provide Brief note on innovativeness/scalability of business model/ potential of employment generation/ wealth creation: This is the most important part of the application and should be carefully drafted with full details and justification of the innovativeness and scalability of your business model. Your idea should be communicated right across in brief and in simple terms.

6. Self Certification: After completing all the above steps, you need to self -certify the application stating that all the conditions stated by the government are fulfilled by your organization and therefore it may be considered as a business covered under the definition of Startup.

7. Submit the application: Submit the self-certified application form. The Certificate of Recognition for Startups will now be issued after examination of the application and documents submitted. If you application is selected, you will be issued a Startup Recognition Certificate issued by the Government of India on an online basis. The Certificate and then be used for availing all the benefits available to a recognized startup.

We hope with the above steps you will be able to register your startup in India. If you need any help, please contact us at [email protected].

LLP Agreement

LLP Act 2008 defines LLP agreement as “Any written agreement between the partners of the Limited Liability Partnership or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP”. Hence, in simple terms, it is an agreement inter-se between the partners of the LLP, which forms the bylaws of the LLP.

The LLP Act, 2008 requires every LLP to draft and execute a LLP agreement and file it with the registrar within 30 days of incorporation in form in Form 3.

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LLP Agreement

Why do we need an LLP agreement?

Doing business in partnership is not as easy as it sounds. Initially, there might not be any complexities in business, but with due course of time they are sure to arise. An absence of a written method to adopt in such scenarios would not only affect the relation between the partners but also hamper the business to a great deal.

A written agreement would not only help to manage different expectations of the partners and but also give them confidence about the future of the business venture. It acts as a safeguard that protects both the business venture and each partner’s investment.

Drafting of LLP Agreements The aim of an LLP Agreement is to provide a written structure for the business with respect to each partner’s responsibility, rights, profit/liability sharing, and also the terms on which the partnership can be terminated. Four key points should be remembered while drafting an LLP Agreement:

OWNERSHIP: It includes the %of ownership of each partner in the LLP. What will be the profit sharing ratio, voting rights and so.

MANAGEMENT: It includes Partners’ authority to bind the partnership into agreements. What types of decisions a partner may make unilaterally, and which ones require a vote? Who will be the signing authority for any bank accounts or any special agreement.

LIQUIDATION: It includes conditions for liquidation of the LLP. What will be the outcome if any partner(s) dies, ceases, retires or resigns. What will be the procedures for buying out a partner, conditions for adding/removing a partner.

CONFLICT: If a conflict arise, what would be the method of resolving the same?

Keeping in view the above points, an LLP agreement can be drafted containing the following provisions:

  • Name of LLP, Place of Business and Nature of Business
  • Date of agreement
  • Details of the parties to the agreement
  • Capital of LLP
  • Interest on Capital Contribution and Loans
  • Duties and Liabilities of Partners
  • Sharing of Profit or Loss/voting rights/ownership
  • Remuneration to Partners
  • Management of business and fiduciary duties
  • Liability of LLP to Indemnify the Partner
  • Liability of Partners to Indemnity
  • Provisions related to addition/expulsion/resignation/retirement of partner (s)
  • Book Keeping and Management of Bank Account(s)
  • Lending Money or Transacting Business by Partners with LLP
  • Liability on Ceasing Partner whether by Resignation or Retirement
  • Terms for Appointment of new partner
  • Rendition of Accounts /Books of Account, Annual Accounts & Audit
  • Decision making in the LLP
  • Meetings and Recording of Minutes of meetings
  • Non-Compete clause
  • Dispute Resolution
  • Protection of IPR
  • Transfer or Assignment of Interest
  • Extent of Liability of LLP
  • Dissolution / Winding Up
  • Compulsory Cessation of Partnership

One Person Company (OPC) vs Proprietorship

Although the terms “proprietorship” and “one person company” give the same idea of Business being run and managed by one owner but there are major differences between the two.

Proprietorship is a very common and traditional form of business in India. Because of its simple features, it is widely adopted by people to set up their own businesses. It is often confused with “One Person Company”, a concept newly introduced by the Companies Act 2013.

The concept of OPC was introduced to organize the unorganized sector of proprietorship firms and other entities. For those who want to start their own ventures with a structure of organized business, OPC provides a good option as compared to proprietorship. It will not only help Small business persons to grow in Indian entrepreneurship but also give them global recognition.

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One Person Company (OPC) vs Proprietorship

Following are some of the major differences between the two forms of Business-

1. Recognition – An OPC is recognized under Companies Act, 2013. To form an OPC, one has to fulfill all the procedures laid down in the Act. There is no such requirement for Proprietorship.

2. Conditions on the owner – An OPC can be formed only by an adult Individual who is a citizen of India as well as a Resident. There is no such conditions for Proprietors.

3. Management – The owner may appoint director(s) to run manage the business or can run it himself. In Proprietorship the owner himself runs the business.

4. Separate entity – In proprietorship, there is no distinction between the owner and the business. Whereas in OPC, identity of the business and that of owner’s is separate.

5. Liability – The owner of a proprietorship suffers from unlimited liability. He is personally liable if the business suffers a loss. But the owner of an OPC is not personally liable for the losses of the business.

6. Taxation – An OPC is taxed as per the provisions of Income Tax Act as a Private Limited Company. In case of proprietorship, the income of the business is considered as the income of the owner and he is taxed accordingly.

7. Succession – An OPC needs to have a nominee designated by the members, the record of which is also registered with the Registrar. In the event of death of the member or him becoming incompetent to contract, the Nominee becomes the member of the company. In case of proprietorship, succession can take place through execution of a Last testament or will.

8. Compliances – An OPC has to meet all such compliances such as filing of annual returns, financial statements, maintenance of books of accounts, holding of meetings and so on, as mentioned in the Companies Act. There’s no such compliances for a proprietorship

9. Audit of Accounts – OPC has to get it accounts audited by a Chartered Accountant. On the other hand, a sole proprietorship will only need to get its accounts audited under the provisions of Section 44 AB of the Income Tax Act if its turnover exceeds the threshold limit.

10. Conversion – An OPC must convert itself into a private or public limited company the moment it has an average turnover of over Rs. 2 crore for three years or a paid-up share capital of over Rs. 50 lakh. A sole proprietorship, on the other hand, may remain one no matter what its revenues are.