LLP vs. Partnership: A Comprehensive Comparison for Indian Businesses

30 April 2025

Are you confused about whether to start an LLP or a partnership firm? 

This concern is an excellent sign of thoughtful decision-making. Before making any decision, you should know everything about these two business structures in India. Certainly, there is a major difference in both structures in terms of legal status, liability, compliance, and operational flexibility. 

Here in this blog, you can discover all major points distinguishing an LLP from a partnership firm. 

LLP vs. Partnership Firm

As aforesaid, these two business entities differ in many aspects. Let’s describe what sets them apart. 

1. Legal Status and Governing Laws

• LLP: It’s a legal entity that the Limited Liability Partnership Act, 2008, regulates. This act allows this structure to own a property, enter agreements, face litigation, or sue in its own name. 
• Partnership Firm: This is not an independent legal entity but is associated with partners. The Indian Partnership Act, 1932, governs it, disallowing it to own a piece of land or property or sign contracts in its own name. All partners collectively make these decisions, but not individually. 

2. Liability of Partners

• LLP: Unlike partnership, LLP partners enjoy limited liability, as restricted in their agreement. They are not individually responsible for inappropriate behavior, conduct, or negligence of other partners.
• Partnership Firm: In this case, partners have to bear unlimited liability, which means that their personal assets can be involved to offload or settle debts in the name of the firm. Each partner has to be jointly responsible to bear the liabilities of other partners.

3. Registration and Formation

• LLP: In this case, the registration is a must with the Registrar of Companies, or RoC. Like other company registrations, its process starts with obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN) and then filing documents for its incorporation.
   
• Partnership Firm: On the other hand, you may or may not register a partnership firm with the Registrar of Firms. Definitely, the unregistered firm won’t be able to navigate limitations like being unable to sue third parties. 

4. Compliance and Regulatory Requirements

• LLP: This company owner(s) has to be transparent in tax compliance. Filing an annual return and a statement of accounts and solvency with the RoC is a must. In case its annual turnover surpasses ₹40 lakh or the capital exceeds ₹25 lakh, it cannot escape an audit.
• Partnership Firm: In comparison, partnership firms face countable compliance requirements. Annual filing is no longer required unless it is legally registered. But yes, audits can be required provided that its turnover exceeds ₹1 crore. 

5. Taxation

• LLP and Partnership Firm: For taxation, both entities are taxed at a flat rate of 30% on their overall income in this financial year (2025-26). Furthermore, they can be applicable for a surcharge of 12% in case their taxable income exceeds ₹1 crore. It also covers a 4% health and education cess.
• Recent Updates: Effective April 1, 2025, the Finance (No. 2) Act, 2024, has included Section 194T, which necessitates a 10% TDS provided their payments surpass ₹20,000 for partners. Furthermore, the partner's income limit is increased, offering greater flexibility and compensation for convening this structure.
   

6. Ownership and Transferability

• LLP: A limited liability partnership not only can own property in its own name but also allows the transfer of its ownership as per agreement. So, the provision of structural changes in partnership is there in this case. 
• Partnership Firm: In this case, property cannot be owned in its own name. And assets can be owned jointly by all partners. If the transfer of ownership is necessary, all partners’ consent is necessary, which makes this structure less flexible. 

7. Perpetual Succession

• LLP: Its succession remains unchanged, which means that the partnership remains intact even if a partner has withdrawn or is no more.
• Partnership Firm: There is no provision of perpetual succession in this case. The death, insolvency, or retirement of a partner may dissolve it unless other partners show their consent upon it. 

8. Foreign Participation

• LLP: Foreign nationals and entities are allowed to partner in an LLP, meaning they have to be partners in compliance with Foreign Direct Investment (FDI) guidelines.
   
• Partnership Firm: In this case, foreigners cannot become partners. 

9. Cost and Ease of Formation

• LLP: The registration process is legally formal, which mandates following the defined process and compliance requirements, which actually involves higher costs than other company registrations.
• Partnership Firm: Since it’s not necessary in this case, the formation is relatively simpler, easier, and more economical. It does not require intricate legal formalities to follow, except for fewer ones. Also, the compliance cost is way lower. 

10. Suitability

• LLP: This is ideal for independent professionals, startups, and businesses that look for a separate legal option offering limited liability protection. 
• Partnership Firm: This is ideally likeable for small businesses and family-run enterprises that mutually agree and trust, and the scale of operations is limited. 

Conclusion

However, an LLP and a partnership firm involve partners. But they differ in terms of needs, registration, compliance, and other matters. Considering an LLP, it offers limited liability and a legal identity to conduct scalable commerce and seek external investment. On the flip side, a partnership firm does not necessarily require its registration. However, people register it easily with limited capital and partners. Entrepreneurs that look for the suitable alternative must meticulously analyze their actual goals, capital requirements, and risks before making any final decision.