This article is general information only. It is not legal advice, it does not create an advocate-client relationship, and it is not an advertisement or solicitation.
Almost every new venture in Kerala begins with the same question: partnership, LLP or private limited company? The choice looks like paperwork, but it decides who pays when a venture fails, how outsiders view the business, and how much compliance follows you every year.
Contents
Three structures in plain terms
A partnership is a relationship between two or more people who agree to share the profits of a business. It is governed by the Indian Partnership Act, 1932. It is quick and cheap to start, but the firm and its partners are legally the same persons.
A Limited Liability Partnership, or LLP, is created under the Limited Liability Partnership Act, 2008. It keeps the flexibility of a partnership, because the partners decide their own arrangements in the LLP Agreement, but the LLP is a separate legal entity with perpetual succession.
A private limited company is created under the Companies Act, 2013. It is also a separate legal entity, owned through shares and run by directors. It is the most formal of the three.
Side by side
The table compares the points that most often decide the matter.
| Point | Partnership | LLP | Private limited |
|---|---|---|---|
| Governing law | Indian Partnership Act, 1932 | LLP Act, 2008 | Companies Act, 2013 |
| Separate legal entity | No | Yes | Yes |
| Owners' liability | Unlimited, joint and several | Limited to agreed contribution, subject to fraud and a partner's own wrongful acts | Limited to the unpaid amount on shares, subject to personal guarantees and statutory defaults |
| Registration | Optional, but strongly advisable | Mandatory | Mandatory |
| Minimum people | Two partners | Two partners, with at least two designated partners | Two shareholders and two directors |
| Annual filings | No annual return to a registrar | Form 8 and Form 11 | Forms AOC-4 and MGT-7 |
| Audit | Only where tax law requires | If turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh | Always |
| Outside investment | Cannot issue shares | Capital contributions only, no shares | Shares, ESOPs and convertible instruments |
Where liability really sits
In a partnership, each partner is liable for the firm's debts and for acts of the other partners done in the course of the business. If the firm cannot pay, a creditor can look to the personal property of any partner.
The registration question matters too. Registration of a firm is optional, but under Section 69 of the Partnership Act an unregistered firm, or its partners, cannot sue a third party to enforce a right arising from a contract. The firm can still be sued. Our post on registering a partnership firm explains this.
An LLP and a company shield owners better, but not absolutely. Fraud, personal guarantees given to banks, and certain statutory defaults can still reach individuals.
The compliance you sign up for
Each route starts with a different filing, and each carries a different yearly burden afterwards.
A partnership has no annual return to a registrar, which is its great attraction. An LLP files Form 8 (statement of accounts and solvency) and Form 11 (annual return), and delays attract a daily additional fee, as we explain in our post on LLP annual filing. A private company must hold board meetings and an annual general meeting, appoint an auditor, and file Forms AOC-4 and MGT-7.
Funding, exits and succession
A company can issue shares, so it can take a seed investor, grant ESOPs and plan a later funding round. An LLP has no shares, only capital contributions and profit shares, which is why institutional investors rarely prefer it. A partnership cannot do either.
A partnership is ordinarily dissolved on a partner's death or retirement unless the deed says otherwise, while an LLP and a company continue. Founders should settle ownership, decisions and exit early, as we discuss in our post on a founders' agreement for a private limited company. A partnership can also move to an LLP, as covered in converting a partnership firm into an LLP.
Questions people ask
Is it compulsory to register a partnership firm?
No. The Partnership Act does not require it. However, an unregistered firm cannot sue a third party to enforce a contractual right, so registration with the Registrar of Firms is advisable for any business that expects to recover dues.
Can a partnership later move to an LLP or a company?
Yes. The LLP Act, 2008 provides a route for a firm to convert into an LLP, and a firm can also move its business into a newly incorporated company. The effect on property, contracts and licences should be checked before the step is taken.
Can an LLP raise money from investors like a company?
Only in a limited way. An LLP has no shares, so investors come in as partners with a capital contribution and a profit share. A company can issue equity shares, which is why investors usually prefer it.
Questions on a specific matter depend on the facts, and advice should be taken before acting.