LLP or Partnership Firm: Liability, Compliance and Tax Compared
Two people starting a business together usually look at three choices: a partnership firm, an LLP or a private company. This article compares the first two, since the choice between them comes up most often for small and mid-sized businesses.
Liability
In a partnership firm, every partner is personally liable, without limit, for the firm's debts and for the acts of other partners done in the course of business. Creditors can go after a partner's personal assets.
In an LLP, a partner's liability is limited to the contribution agreed in the LLP agreement. A partner is not liable for another partner's wrongful act. The exception is fraud: where the business has been carried on with intent to defraud, liability can become unlimited.
Formation and continuity
| Point | Partnership firm | LLP |
|---|---|---|
| Governing law | Indian Partnership Act, 1932 | LLP Act, 2008 |
| Registration | Optional with the Registrar of Firms (strongly advisable) | Mandatory with MCA |
| Minimum partners | 2 | 2 designated partners, at least one resident in India |
| Separate legal entity | No | Yes – can own property and sue in its own name |
| Change of partners | May dissolve the firm unless the deed provides otherwise | Does not affect existence |
Section 69 of the Partnership Act stops an unregistered firm from filing a suit to enforce a contract against a third party. For any firm that deals with customers on credit, registration is a practical necessity.
Annual compliance
A partnership firm has no annual filing with any registrar. Its compliance is mainly income tax, TDS and GST.
An LLP must file:
- Form 11 (Annual Return) within 60 days of the end of the financial year, that is, by 30 May
- Form 8 (Statement of Account & Solvency) within 30 days of the end of six months from the year end, that is, by 30 October
- Event-based forms for changes in partners, registered office or the LLP agreement
An LLP's accounts must be audited if its turnover exceeds ₹40 lakh or its contribution exceeds ₹25 lakh in a financial year. Late filing of LLP forms attracts an additional fee of ₹100 per day per form, which adds up quickly.
Taxation
Both are taxed in the same way under the Income-tax Act. Profits are taxed at 30% plus applicable surcharge and cess. The partners' share of profit is exempt in their hands. Interest on capital and remuneration paid to working partners are deductible within the limits in the Act, provided the deed or agreement authorises them.
Since 1 April 2025, a firm or LLP must deduct TDS at 10% on salary, remuneration, commission, bonus or interest paid or credited to a partner, where the total for the year exceeds ₹20,000. This provision continues under the consolidated TDS section of the Income-tax Act, 2025. Many firms that never had to deduct tax on partner payments now need a TAN and quarterly TDS statements.
An LLP is not subject to dividend distribution and is not covered by the deemed-dividend rules, which apply to closely held companies. This gives it more flexibility than a company in drawing funds.
Which one to choose
- Choose a registered partnership firm if the business is small, the partners trust each other fully and you want minimum paperwork.
- Choose an LLP if the business has meaningful credit exposure, you expect partners to change, or you want a separate legal entity without the compliance load of a company.
- Look at a private company if you plan to raise equity from investors.
A firm can later convert into an LLP under Section 55 of the LLP Act. If the conditions are met, the conversion is tax-neutral. Our article on entity conversions covers this.
The information in this article reflects the law as on the date of publication and is for general guidance only.