Written by Baargavi Ramesh pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution offered by Lawsikho as part of her coursework. Baargavi is a student of CMR law School,Bengaluru, studying in the Fourth year of B.B.A.LLB.
INTRODUCTION
Limited Liability Partnership Agreement is a written agreement between the partners of an LLP or between the partners and the LLP firm. This type of agreement establishes the rights and duties of partners towards each other and also toward LLP or vise versa. It is Compulsory to draft and execute an LLP Agreement within thirty days of incorporation of LLP as per LLP incorporation (Form 2)[2]. LLP Agreement Clarifies managerial, operational as well as administrative outlook and sets well defined methodologies namely for decision making, adding a new partner into the firm or disassociation of an existing partner of the firm.
A Limited Liability Partnership is an alternative form of business that gives benefits of limited liability of a company and the flexibility of partnership.
| Advantages of LLP | Disadvantages of LLP |
| Limited Personal Liability | Limited Power |
| Easy to administer | More difficult in formation when compared to that of Limited Liability Company |
| Can raise money | License fee is applicable |
The LLP like Company as a separate legal existence, wiz it is a separate legal entity. A limited Liability Partnership Agreement is made between the partners of LLP and LLP in order to establish a fair relationship between them and protect the investments made by them. An LLP Agreement basically sets out the following[1] :-
- Rights and Obligations of the members
- Regulate the members capital invested in the business.
- Regulate the property used and owned by LLP
- Regulate the procedure for important decision making
This article is an attempt to explain the basic concepts of LLP Agreement , the essential contents of such Agreement and also what all are the default clauses in an LLP Agreement and the procedure to include such clauses.
CONTENTS OF LLP AGREEMENT
There is no statutory provision for having an LLP Agreement but it is always advisable to have an LLP Agreement written among the partners.
Some of the important contents which must be started in an LLP Agreement are as follows[3]:-
DEFINITION CLAUSE
This clause is an essence of any LLP Agreement. This clause contains various definitions such as definition of designated partner, accounting period , business of LLP and the proposed name of such LLP. The Agreement must provide for address of the registered office of LLP as well the address of all the partners.
LLP BUSINESS
The LLP Business clause primarily highlights the purpose and objective behind the LLP that is proposed to be established. This clause contains details as to the head office of the LLP where it is situated which is different from its registered office.
GOVERNING BODY
This clause contains information as to the governing body through which the proposed LLP is to be governed and established. Minute book should be maintained to record minutes of meetings of partners and managing or executive committee of partners. There is no provision for regular meeting of members of LLPs. Partners can decided when and how to meet or as may be laid down in LLP Agreement.
CAPITAL CONTRIBUTION CLAUSE-
Capital contribution means the sum of money that is contributed by each partner towards the LLP at the time of its incorporation. The LLP Agreement should make it clear that no interest will be provided to partners on capital contributed by them.
5.PROFIT/LOSS SHARING RATIO CLAUSE-
This Clause states the profit/ loss sharing ratio at which the amount of profit or loss will be shared among the partners.
DRAWING CLAUSE
Every member will be entitled to take certain amount of money from the LLP fund every month This is a payment on account of each member’s annual profit share and is recognition that members will have personal requirements which they might not otherwise be able to meet if they were to wait until their profit share was determined at the end of each year. This entitlement is called drawings and needs to be incorporated in the agreement clause.
INDEMNITY CLAUSE
Each member of the LLP has certain obligations towards the LLP. This clause contains all those obligations which are owed by the partners towards LLP. All the members of the LLP has a right to be indemnified against any losses caused to them inspite of them carrying out their duties and obligations according the rules established by the LLP.
NON-COMPETE CLAUSE
The members of the firm after their retirement, termination or otherwise from the firm is prevented from working for or carrying out any business with in the specified geographical location which is in such a nature of competing with the business of the firm
FINANCE
This is a clause which is added to restrict any member from using firm’s resources for personal gains without the permission of other members. It can also restrict decisions that are based on personal connection or which benefits the immediate family members of the partner.
ACCOUNTS
This Clause contains in detail the accounts and books of accounts that have to be maintained by the LLP from time to time and also accordance with the accounting standards established.
LLP BANKS
This clause contains the details as to the bank and its address to which LLP and its transactions are related.
RIGHTS AND LIABILITIES
This clause mentions in detail the rights and liabilities which the members of the LLP posses so long as they conduct the business of the LLP.
DISSOLUTION/ WINDING UP OF LLP
A clause for dissolution should also be inserted which specifies that if a member dies or retires , the others may decide that they would prefer to wind up the LLP, rather than exercise the option to take over their share. The winding up of LLP may be executed either by[4] :-
- By Tribunal- A petition to the Tribunal for the winding up of a LLP shall be presented by:-
(a) the LLP or any of its partner or partners
(b) any secured creditor or creditors, including any contingent or prospective creditor or creditors
(c) the Registrar
(d) any person authorized by the Central Government in that behalf
(e) in a case falling under section 51 of the Act , by the Central Government or
(f) in a case falling under clause (d) of section 64, by the Central Government or a State Government
- Voluntary – A LLP may be wound up voluntarily if the LLP passes a resolution with approval of at least three fourth (in number) of total number of partners, requiring the LLP to be wound up voluntarily. A copy of resolution shall be filed with the Registrar within 30 days of passing up such resolution.
WHETHER LLP AGREEMENT IS MANDATORY FOR ALL LLP[5] ?
As per the provisions of Limited Liability Act , in the absence of agreement relating to any matter regarding the partnership or the partners , the mutual rights and liabilities as provided under the schedule I of the Act shall apply . Therefore, if the LLP wishes to exclude any of the provisions as mentioned in schedule I of the Act it has to enter into an LLP Agreement in order to specifically exclude those provisions.
DEFAULT CLAUSES IN AN LLP AGREEMENT
Without LLP Agreement or where an LLP Agreement is silent the LLP will be governed by the default provisions as set out in Limited Liability Partnership Act 2000 and Limited Liability Partnership Regulation 2001. The default provisions may be as follows:-
- All the members are entitled to equal share in profits of the firm irrespective of the different amount of capital invested by them.
- The members have equal rights in participating in management and administration of the business and all the members have equal voting rights.
- Unanimous Consent from the existing members is required for admission of new member into the firm.
- The members of the firm can not expelled from the firm without his/her consent.
- LLP will indemnify the members in respect of expenses incurred by them in relation to LLP.
As stated earlier schedule I of the Act comes into existence only in the absence of an LLP Agreement or if the matter has not been addressed in the LLP Agreement it can redefined or excluded by the LLP as per the provisions of Schedule I of the Act.
SAMPLE OF LLP AGREEMENT[6]
LIMITED LIABILITY PARTNERSHIP AGREEMENT
(As per Section 23(4) of LLP Act, 2008)
This Agreement of Limited liability Partnership is made at [Place] and on [Date].
Between
- Partner One
And
- Partner Two
The first and second party will be individually referred as partner and collectively as partners.
It is hereby agreed between partners hereto as follows
1.Defition
2.Name of the LLP
3.Registered office
4, Property of LLP
5.The object of the Limited Liability Partnership
PARTNERS
- Admission of partners
2.Rights of Partners.
3.Duties of Partners
Designated Partners
- Initial Designated Partners
5.Appointment of Designated Partners
6.Resignation of Designated Partners
7.Removal of Designated Partners
8.Powers of Designated Partners
9.Duties of Designated Partners
10.The extent of Liability of LLP
11.Decision making process
12.Miscellanous Provisions
13.Arbitration
- Winding up
IN WITNESS WHEREOF the parties hereto have signed this agreement this [date] at[ place]
The witness have put their signature in the presence of the above mentioned parties.
WITNESS:
NAME___________ NAME ___________
ADDRESS_________ ADDRESS _________
SIGNATURE______________ SIGNATURE___________
[1] http://www.legalclarity.co.uk/what-is-an-llp-agreement.htm
[2] https://www.legalraasta.com/llp-agreements/
[3] https://taxmantra.com/llp-agreement-and-its-contents/
[4] http://www.llponline.in/downloads/legal_sphere_rules/draft_llp_winding_up_dissolution_rules.pdf
[5] http://www.mca.gov.in/MinistryV2/natureoflimitedliabilityparterneshipllp.html
[6] https://enterslice.com/learning/wp-content/uploads/2018/04/LLP-Agreement-Format.pdf
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