Entrepreneurs and business owners often consider shifting their current business structure into another one for reasons ranging from ease of operations, flexibility, low cost of compliance, transferring of partnership, tax benefits, etc to many more in order to help the business succeed and prosper.
Business owners usually consider converting a Partnership firm to LLP as a type of business entity is preferred by organizations as it incorporates the benefits of both partnership firm and company into a single form of organization.
However, the other way round is also a choice that business owners seek for certain reasons. Before considering the specifics of why businesses choose to turn into a Partnership it is vital to know about the salient features of both the business entities.
Limited Liability Partnership (LLP) and Partnership Firms
Definition of Partnership
A partnership firm is where two or more partners get together to run a business and also share the profits in a ratio that is fixed by them while drawing up the Partnership Deed. The partnership firm is governed by the Indian Partnership Act of 1932.
The key features of a Partnership include-
- It is an agreement between 2 or more partners.
- There is also an agreement to share the profits between the partners.
- The business carried out under the partnership is lawful.
- A minimum of 2 partners are needed to form a partnership and a maximum of 50 partners is allowed.
- Each partner within the partnership is liable for the business and is equally and jointly responsible, thus pertaining that he has unlimited liability.
- Each partner is responsible for his own actions and the actions of the business and is like an agent of the business who represents it.
- The partners and the partnership firm are a single unit and the partners are responsible for any contracts made by the firm, individually and collectively.
- Without the consent of the other partners, a partner cannot transfer his share of interest in the firm to others.
Definition of Limited Liability Partnership
A Limited Liability Partnership firm (LLP) is a hybrid structure between a partnership firm & a private limited company where the LLP enjoys benefits of both the type of entities.
LLPs are governed by the LLP Act, 2008 and the business operations of the LLP are in accordance with the terms and conditions set in the LLP partnership deed.
The key features of an LLP are-
- An LLP is a separate legal entity, that is independent of its partners.
- An LLP can sue and be sued.
- The liability of the partners in the LLP is limited to the extent of their contribution.
- The minimum number of partners required is 2 for an LLP while there is no limit on the maximum number of partners.
- An LLP remains an entity even if the partners withdraw and thus has perpetual succession.
- Each partner within the LLP is partially LLP and this is termed limited liability.
- The partners in an LLP are free to draft the LLP agreement as per their requirement with regard to their rights and duties.
Why do Businesses Consider Converting their LLP structure to Partnership
Despite its several benefits, some business owners seek to convert LLP to Partnership. The reasons could be-
- Since LLP has limited liability, all the partners would not take complete responsibility and dedicate their full attention and time to the business and consequently, the business could suffer the consequences owing to that.
- There are greater chances for there to be fraud or wrongful act of commission or omission by some of the partners.
- An LLP can be structured such that one partner can have more rights compared to the others and this can, in turn, affect the count for a vote too when the need arises. Also, the partner with lesser rights might feel compromised, especially if the partners with higher rights call the shots and conduct business as per their discretion.
- Venture capitalists (VCs) might deter from investing in an LLP because as per the Act, shareholders must be partners in the LLP and partners need to share the responsibilities and the VCs might not be interested in taking on these responsibilities. This means that LLPs might be unable to get equity investment.
- LLPs have very few compliances but an inability to adhere to these compliances might result in higher penalties, with fines being high in amount.
Additionally, since all the partners are equally liable and responsible in a Partnership, they are involved to a greater extent in the day to day running of the business. Further, Partnership boosts of combined skills of all the partners and as well as their resources, which is an advantage to the business and includes the balanced judgments of all the partners.
To top it, a Partnership firm is very easy to form since the Partnership Firm Registration Documents required are the bare minimum, such as the PAN card and address proof of the partners of the firm, the Deed of Partnership, its PAN details and address proof of the business premises.
Owing to these reasons, and the ease of registering their business as a partnership, business owners choose Partnership over an LLP structure and benefit from the advantages of a Partnership firm.