Comparison: LLP vs Partnership vs Company

When a client asks what to register, the lawyer is really choosing between three statutory worlds. A general partnership lives under the Indian Partnership Act, 1932; a company under the Companies Act, 2013; and the limited liability partnership under the Limited Liability Partnership Act, 2008, a deliberate hybrid that borrows the internal flexibility of a firm and grafts on the separate personality and limited liability of a body corporate. This chapter sets the three side by side on the points examiners actually test: legal personality, liability, formation, management, succession, taxation and conversion. For the statutory architecture of the LLP itself, read alongside Introduction to the LLP Act and Nature of an LLP: body corporate and perpetual succession.

The Three Vehicles at a Glance

The general partnership is the oldest and simplest form: an association of persons who have agreed to share the profits of a business carried on by all or any of them acting for all, as defined in section 4 of the Indian Partnership Act, 1932. It is cheap to form, lightly regulated and built on mutual trust, but it carries unlimited personal liability and no separate legal existence. At the other extreme sits the company under the Companies Act, 2013, a body corporate with a distinct legal personality, limited liability and perpetual succession, but burdened with rigorous compliance, board governance and statutory disclosure.

The LLP, introduced by the Limited Liability Partnership Act, 2008 on the recommendation of the J.J. Irani Committee (2005) and the earlier Naresh Chandra Committee, occupies the middle ground. Section 3(1) declares it a body corporate, a legal entity separate from its partners, yet its internal affairs are governed contractually by an LLP agreement in the manner of a partnership. The Statement of Objects and Reasons of the 2008 Act expressly described it as a vehicle combining the flexibility of a partnership with the advantages of limited liability at low compliance cost, aimed especially at professionals and small enterprises.

Separate Legal Personality: The Foundational Divide

The single most important distinction is legal personality. Section 3(1) of the LLP Act provides that a limited liability partnership "is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners." A company enjoys the same status: ever since the House of Lords in Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 held that an incorporated company is in law a person entirely distinct from its subscribers, the corporate veil has shielded members from the entity's debts. The Supreme Court adopted the doctrine in Indian conditions in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40, observing that a corporation has an existence wholly separate from that of its shareholders, with its own name, seal and assets, and that its creditors cannot reach the assets of its members.

A general partnership has no such personality. The firm name is merely a compendious description of the partners; in law the firm is not a separate juristic person. The Supreme Court reiterated this in Malabar Fisheries Co. v. CIT, AIR 1980 SC 176, holding that a partnership firm under the 1932 Act is not a distinct legal entity and that partnership property belongs to the partners collectively, so that a distribution of assets on dissolution is not a transfer by the firm to the partners. The same conception underlies CIT v. R.M. Chidambaram Pillai, AIR 1977 SC 489, where the Court treated the firm as a compendious mode of describing the partners rather than a person separate from them.

The practical consequences ripple outward. An LLP and a company can own property, sue and be sued, and contract in their own names; a firm acts only through its partners and litigates in their names, subject to the procedural convenience of suing in the firm name. The separate personality of the corporate forms is not, however, absolute. Courts may lift the corporate veil where the form is used to perpetrate fraud or evade the law, a power the Supreme Court recognised in Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370, and in State of U.P. v. Renusagar Power Co., AIR 1988 SC 1737. By parity of reasoning the same veil-piercing logic can reach an LLP, since both forms derive their separateness from statute rather than from any immunity against abuse. For the doctrinal detail on how the LLP acquires this status, see Nature of an LLP.

Liability: Unlimited, Limited and Limited-with-an-Exception

Liability is where the three forms diverge most sharply, and it is the most heavily examined point. In a general partnership, section 25 of the Indian Partnership Act, 1932 makes every partner jointly and severally liable, with all the other partners and also individually, for all acts of the firm done while he is a partner. Because the firm has no separate estate at law, creditors may pursue a partner's private assets without limit. This unlimited, joint-and-several exposure is the historic Achilles heel of the partnership form.

In a company limited by shares, the liability of a member is limited to the amount, if any, unpaid on the shares held by him; once fully paid, the shareholder has no further exposure to the company's creditors. The LLP delivers comparable protection through a different mechanism. Section 28(1) of the LLP Act limits a partner's liability to his agreed contribution, and section 28(2) provides that a partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner. Crucially, the wrongful-act exception is narrow: under section 27(3) read with section 28, an LLP partner is liable for his own wrongful act or omission, but is not liable for the wrongful acts or omissions of any other partner. This is a sharper shield than the unlimited cross-liability of a 1932-Act partner, and it is why professional firms favour the LLP.

Agency: Whom Does a Partner Bind?

The agency rules track the personality divide. In a general partnership, section 18 of the 1932 Act makes every partner an agent of the firm for the purposes of its business, and because the firm is not a separate person, the acts of one partner bind all the partners personally. The LLP Act recalibrates this. Section 26 provides that every partner of an LLP is, for the purpose of its business, the agent of the limited liability partnership, but not of the other partners. The act of a partner therefore binds the LLP as a body corporate, yet does not fasten personal liability on a co-partner.

Section 27(1) reinforces the point: an LLP is not bound by anything done by a partner in dealing with a person if the partner has no authority to act and the third party knows of that want of authority or does not know or believe him to be a partner. Section 27(2) then makes the LLP liable for a wrongful act or omission of a partner done in the course of the business of the LLP or with its authority, and section 27(4) makes that liability the obligation of the LLP alone, met out of its property. The combined effect of sections 26, 27 and 28 is to channel the consequences of a partner's conduct to the entity and, where there is personal wrongdoing, to the wrongdoer, while insulating innocent co-partners entirely.

The contrast with the 1932 Act is stark. There, because section 18 makes the partner an agent of the firm and the firm is not a separate person, the Supreme Court has repeatedly enforced collective personal liability; in cheque-dishonour and recovery contexts the partners are treated as jointly and severally answerable for the firm's obligations under section 25. The LLP statute deliberately breaks this chain of imputation, which is precisely why professionals exposed to negligence claims, such as auditors, lawyers and architects, gravitated to the form once it became available. These mutual-rights questions are developed in Mutual rights and duties of partners.

Formation and Registration: Optional, Mandatory, Mandatory

Formation requirements expose another structural gap. A general partnership can be created by a mere oral or written agreement; registration under Chapter VII of the 1932 Act is optional. The optionality is, however, heavily disincentivised. Section 69 bars an unregistered firm or its partners from suing third parties or each other to enforce contractual rights, though the bar does not extend to a suit for dissolution, accounts of a dissolved firm, or realisation of the property of a dissolved firm. The Supreme Court applied this disability strictly in Raptakos Brett & Co. Ltd. v. Ganesh Property, (1998) 7 SCC 184, underlining that section 69(2) is a substantive bar to maintainability.

By contrast, both the LLP and the company exist only upon registration. An LLP comes into being when the Registrar issues a certificate of incorporation under section 12 of the LLP Act, following filing of the incorporation document under section 11; the procedural steps are set out in Incorporation of an LLP: procedure. A company is born on the issue of its certificate of incorporation under the Companies Act, 2013. Registration is thus the constitutive act for both bodies corporate, whereas for a partnership it is merely an evidentiary and enabling formality.

Number of Members: Floors and Ceilings

The three forms differ on how many participants they require and permit. A partnership and an LLP each require a minimum of two partners. Section 6(1) of the LLP Act mandates at least two partners, and section 7 requires at least two designated partners, of whom one must be resident in India. Significantly, the LLP Act prescribes no maximum number of partners, mirroring the company position and freeing the LLP from the historical cap on partnership size.

For companies, the Companies Act, 2013 permits a one-person company (a private company with a single member) under section 3, while a private company may have up to 200 members and a public company has no upper limit. For general partnerships, the maximum number of partners is now governed by section 464 of the Companies Act, 2013 read with the Rules, which caps an association at 100 (prescribed as 50 by rule), beyond which the body must be registered as a company or it is an illegal association. The LLP, having no ceiling, is therefore the more scalable partnership-style vehicle.

Management and Governance

Governance is where the LLP most resembles a partnership and least resembles a company. The internal management of an LLP is governed by the LLP agreement between the partners, and in its absence by the default rules in the First Schedule to the LLP Act under section 23(4). There is no statutory board of directors, no mandatory general meetings and no concept of shareholding; partners run the business directly, subject to the contractual allocation of rights and duties.

A general partnership is similarly managed by the partners under their partnership deed and the default provisions of the 1932 Act, with every partner entitled to take part in the conduct of the business under section 12(a). A company, by contrast, separates ownership from control: the members own the shares but the board of directors manages, subject to the Companies Act, 2013, the memorandum and articles, and an elaborate scheme of meetings, resolutions and fiduciary duties. The LLP thus offers managerial flexibility close to a partnership while retaining the limited-liability and separate-entity advantages of a corporate.

Perpetual Succession and Stability

Continuity is a corporate virtue the partnership lacks. Section 3(2) of the LLP Act confers perpetual succession on an LLP, and section 3(3) provides that any change in the partners shall not affect the existence, rights or liabilities of the LLP. A company has enjoyed the same attribute since the Salomon doctrine; its life is unaffected by the death, insolvency or retirement of members.

A general partnership is far more fragile. Under section 42 of the 1932 Act, a firm is dissolved, subject to contrary agreement, on the death or insolvency of a partner, and a partnership at will may be dissolved by any partner giving notice under section 43. The firm's very existence is therefore hostage to changes in its membership, even though the surviving partners may continue the business under a fresh agreement. The Supreme Court has accepted that the reconstitution of a firm on a partner's exit creates, in strict theory, a new firm rather than a continuation of the old, underscoring the absence of true perpetual succession.

For an LLP and a company the position is the opposite: the death, retirement, insolvency or expulsion of a partner or member is, at most, an internal event that may trigger admission of a replacement, but it never disturbs the legal existence of the entity, its title to property, or the enforceability of its contracts. This durability is what allows the entity to give long-term security to lenders and to hold leases and licences in its own name across decades. The contrast is therefore decisive for businesses seeking durability and external finance, and is treated more fully in Nature of an LLP: body corporate and perpetual succession.

Property, Contract and Litigation Capacity

Because both an LLP and a company are bodies corporate, each can hold and dispose of property, both movable and immovable, in its own name, can contract in its own name, and can sue and be sued as such. Section 14 of the LLP Act expressly equips the LLP with these capacities, including the power to acquire, own, hold and develop property and to do all such things as a body corporate may lawfully do. A company has identical capacity under the Companies Act, 2013.

A general partnership cannot, strictly, own property as an entity. As Malabar Fisheries Co. v. CIT confirms, property described as belonging to the firm in truth belongs to the partners jointly; the firm sues and is sued in the partners' names (with the procedural convenience of suing in the firm name under Order XXX of the Code of Civil Procedure, 1908). The separate-entity capacities of the LLP and the company give them a decisive edge in holding assets, contracting with banks and litigating without the cumbersome joinder of every partner.

Compliance, Audit and Cost

Regulatory burden rises as one moves from partnership to LLP to company. A general partnership has almost no statutory filing obligation beyond income-tax returns; there is no compulsory audit under the 1932 Act and no annual filing with any registrar. The LLP occupies a middle position. Under section 34 of the LLP Act, every LLP must maintain proper books of account, and section 35 requires the annual filing of a Statement of Account and Solvency, while section 35 read with the Rules also requires an Annual Return; audit is mandatory only where turnover or contribution exceeds prescribed thresholds, so smaller LLPs are spared.

A company bears the heaviest load: statutory audit of accounts, board and general meetings, maintenance of statutory registers, and a battery of filings with the Registrar of Companies under the Companies Act, 2013, alongside director and governance duties. The LLP's lighter compliance, expressly an object of the 2008 Act, is its principal attraction for professionals and small businesses that want limited liability without corporate formality. The trade-off is fewer avenues for raising equity, since an LLP cannot issue shares or invite public investment.

Taxation: Where LLP and Partnership Converge

Taxation reverses the usual hierarchy and is a frequent examination twist. Under the Income-tax Act, 1961, both a general partnership firm and an LLP are taxed as a "firm" at a flat rate, and crucially neither is subject to dividend distribution in the hands of partners: profits, once taxed in the firm or LLP, may be withdrawn by partners without further tax on distribution. An LLP and a partnership thus avoid the classic economic double taxation.

A company is taxed at the corporate rate on its profits, and historically the distribution of profits as dividend attracted a further layer of tax (the dividend distribution tax, since abolished and replaced by taxation of dividends in shareholders' hands). The upshot is that the LLP delivers corporate-style limited liability while retaining the single-layer, pass-through-style taxation of a firm, a combination that explains much of its popularity. Note, however, that an LLP attracts an alternate minimum tax regime analogous to the corporate minimum, so the parallel with a partnership is close but not perfect.

Conversion and Migration Between Forms

The LLP Act deliberately builds bridges from the other forms. Section 55 read with the Second Schedule permits a firm to convert into an LLP, and section 56 read with the Third Schedule permits a private company to convert, while section 57 read with the Fourth Schedule allows an unlisted public company to convert. On conversion, the property, assets, liabilities and the whole undertaking of the predecessor vest in the LLP by operation of law, and the predecessor stands dissolved and removed from the relevant register. This statutory novation is far smoother than transferring a partnership's assets piecemeal.

The traffic, however, is one-directional under the statute: the LLP Act provides no mechanism for an LLP to convert back into a partnership or a company, so migration toward the LLP form is facilitated but exit from it is not. A general partnership, lacking separate personality, cannot simply re-badge itself; its winding up proceeds under Chapter VI of the 1932 Act, while an LLP and a company are wound up under their own statutory regimes (the LLP through the winding-up provisions read with the Insolvency and Bankruptcy Code, 2016, as applicable). For the definitions that frame designated partners and contribution in these provisions, see Definitions: LLP and designated partner.

Choosing the Right Form: A Practitioner's Matrix

The choice collapses into a few axes. If liability protection and separate personality are essential but compliance cost must stay low, the LLP wins; it is the natural home for professional firms, consultancies and asset-light ventures. If the business must raise equity capital, issue shares, attract venture funding or eventually list, the company is unavoidable, because an LLP cannot issue shares or invite public investment. The general partnership survives only where the venture is small, short-lived, founded on absolute mutual trust and indifferent to unlimited liability, since its sole advantages are cheapness and informality.

For the judiciary and CLAT-PG examinee, the safe framework is to compare the three on legal personality (none for partnership; separate for LLP and company), liability (unlimited and joint-and-several for partnership under section 25; limited for LLP under section 28 and for company shareholders), succession (fragile for partnership; perpetual for LLP under section 3 and company), governance (contractual and partner-run for partnership and LLP; board-managed for company), and taxation (firm-rate pass-through for partnership and LLP; corporate rate for company). Returning to first principles, revisit the Introduction to the LLP Act and the broader LLP Act notes hub to see how each comparison point flows from the hybrid design of the 2008 Act.