Difference Between LLP & Partnership Firm

Collate Institute
Jun 13
3 min read

Partnership Firm and LLP (Limited Liability Partnership).

If you’ve ever thought of starting a business with a friend or family member, you’ve probably come across terms like Partnership Firm and LLP (Limited Liability Partnership).

Both involve working together, sharing profits, and building something great — but they’re not the same. The way they’re set up legally, the responsibilities, the risks, and the rules are quite different.

Let’s break it down in the simplest way, so even if you’re in 11th commerce or planning your first startup, you’ll walk away fully informed.

What is a Partnership Firm?

A Partnership Firm is a traditional business setup where two or more people agree to run a business and share profits and losses. The partners are personally liable — meaning if the business is in debt, their personal savings or property could be used to pay it off.

Example: Ramesh and Suresh start a dairy business. They split profits 50-50. But if the business takes a loan and fails, both partners are personally responsible — even from their own pockets!

What is an LLP (Limited Liability Partnership)?

An LLP is a modern business structure where partners still share profits, but their personal liability is limited. The LLP is a separate legal entity, meaning if it takes on a loan, only the LLP’s assets can be used to repay — not the partner’s house, car, or bank account.

Example:Ravi and Priya run a digital marketing firm as an LLP. They borrow ₹5 lakhs. If the LLP fails, the bank can only take the business’s assets — not Ravi or Priya’s personal savings.

Comparison Table: Partnership vs LLP

Aspect	Partnership Firm	LLP (Limited Liability Partnership)
Formation	Formed by agreement between two or more individuals	Requires registration with Ministry of Corporate Affairs (MCA)
Legal Status	Not a separate legal entity from partners	Separate legal entity
Liability	Unlimited; partners are personally liable	Limited liability; personal assets are protected
Governing Law	Indian Partnership Act, 1932	LLP Act, 2008
Number of Partners	Minimum 2, Maximum 100	Minimum 2; no maximum limit
Registration	Optional	Mandatory
Compliance	Minimal annual compliance	Requires annual filings with Registrar of Companies (ROC)
Taxation	Taxed at firm level; partners pay personal tax on share	LLP is taxed as a separate legal entity
Management	All partners manage jointly	Designated partners manage the LLP
Name Requirement	No specific requirement	Must include “LLP” in the name (e.g., Pixel Creators LLP)
Transfer of Ownership	Difficult; needs consent from all partners	Easier through amendment in LLP agreement
Perpetual Succession	May dissolve on death or retirement of a partner	Continues to exist irrespective of partner changes
Audit Requirement	Required only if turnover exceeds ₹1 crore (as per Income Tax rules)	Required if turnover exceeds ₹40 lakh or capital contribution > ₹25 lakh
Foreign Partners Allowed	No	Yes, Foreign Nationals can be partners
Asset Ownership	Owned jointly by partners	LLP owns the assets independently
Dissolution	Can be dissolved by agreement, court, or mutual consent	Can be dissolved voluntarily or by NCLT order

When to Choose What?

Here’s a simple guide to choosing the right structure:

Choose Partnership Firm if:
- Your business is small and local (like a shop or tuition class)
- You want simple compliance and paperwork
- You trust your partner fully and don't worry about liability
Choose LLP if:
- You’re starting a startup or professional service (like IT, legal, finance)
- You want limited liability protection
- You plan to scale the business or bring in new partners later
- You want to build credibility with banks, investors, and clients

Real-World Scenario

Imagine two college friends — Tanvi and Ayan.

They start a café near a college and register as a Partnership Firm. Business grows. Two years later, they launch a food delivery app and raise funding. They convert the business into an LLP to protect themselves legally and appear more professional.

Moral? Start small as a partnership. Scale as an LLP.

Conclusion

The main difference between a Partnership and an LLP lies in liability and legal recognition.

A Partnership is easy to form but offers no protection for personal assets.
An LLP is slightly more complex but protects partners and looks more professional.

Whether you're a student studying for your CA or CMA or CS exams or an entrepreneur launching your first venture — understanding this difference helps you make smarter decisions.