LLP vs partnership firm: what actually differs

In a firm, every partner is an agent of the firm and of every other partner. If one partner signs a bad contract, takes a loan in the firm’s name, or is negligent with a client, a creditor can recover the entire amount from any partner’s personal assets, and leave that partner to chase the others. Retiring does not end liability for what happened before, and continues for later acts until public notice of the retirement is given.

In an LLP, the entity owes its own debts. A partner loses at most what they agreed to contribute, plus personal liability for their own wrongful acts. One partner is not liable for another’s negligence. For professional practices, agencies handling client money, anything with employees, leases or borrowings, that difference is worth far more than the compliance it costs.

Two MCA filings a year, Form 11 by 30 May and Form 8 by 30 October, each with an additional fee of ₹100 a day when late, without a cap. A statutory audit once turnover crosses ₹40 lakh or contribution ₹25 lakh. Designated partner KYC on its cycle, and a filing within 30 days for each change of partner or agreement. Professionally, ₹8,000 to ₹15,000 a year for a small LLP; ours is ₹2,499. A dormant LLP that ignores the two forms accumulates a five-figure liability in a couple of years, which is the commonest way LLPs go wrong.

The other cost is presumptive taxation. A resident firm of professionals or a small trading firm can declare 50, 8 or 6 percent of receipts as income with no books; an LLP cannot, and must compute actual profit with books of account.

Both pay 30 percent plus surcharge above ₹1 crore and cess. Both deduct interest on partners’ capital up to 12 percent and working partners’ remuneration within section 40(b), where authorised by the deed or agreement, and both must now deduct 10 percent tax at source on such payments above ₹20,000 a year under section 194T. Partners’ profit share is exempt in both. Alternate minimum tax at 18.5 percent applies to both where specified deductions are claimed. On tax alone there is nothing to choose, other than presumptive taxation.

• Partnership firm: a small, low-risk business between people who trust each other, with no borrowings, few employees and no client liability; a family trading business; a venture you may wind up in a year; any case where presumptive taxation is the main saving.
• LLP: professional and consulting practices, agencies, anything with leases, staff, loans or contractual exposure; partners who are not family; businesses that may admit and retire partners; any business taking foreign investment.
• Neither: if outside equity investors or ESOPs are in view, a private limited company; see our structure comparison.

A firm converts under section 55 and the Second Schedule of the LLP Act: all the partners of the firm, and no one else, become partners of the LLP; the name is reserved, Form 17 is filed with FiLLiP, and on registration all assets, liabilities, contracts and proceedings of the firm vest in the LLP. The Registrar of Firms is informed within 15 days. The partners remain personally liable for the firm’s obligations incurred before conversion.

The conversion is not treated as a transfer for capital gains where all partners carry over with the same capital and profit ratios, take no consideration other than their share in the LLP, and keep at least 50 percent of the profit share for five years. Licences, the GST registration and the bank accounts need fresh applications or amendments because the PAN changes. The process and fees for the LLP itself are in our LLP registration guide; the firm side is in our partnership guide.