This article is written by K.K. Nishchita pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
Table of Contents
What is a limited liability agreement?
LLP agreement is a contract that is penned between the associates of the LLP or sometimes among the LLP and its authorized partners. It institutes the rights and duties of such partners towards each other as well as towards the limited liability partnership. It is mandatory to execute and file the LLP agreement with the Ministry of Corporate Affairs within 30 days of the incorporation of LLP.
It builds the base for the smooth functioning of a limited liability partnership. It characterizes the standpoint and sets clear cut suppositions that are required for making the right decisions, adding a new partner and the exit of existing partners, or shifting in roles.
Hence, a complete and well-organized LLP agreement set the understructure and acted as a strong foundation to intensify the strength of the firm. It is the guide that makes way to the LLP registration.
Applicable law
Lok Sabha had passed the Limited Liability Partnership Bill on 13th December 2008 and later it received the assent of the President on 7th January 2009 and it also received legal status as Limited Liability Partnership Act, 2008. This act particularly governs the provisions related to the LLP agreement as well.
What is a partnership agreement?
A partnership agreement is a contract among two or more individuals who manage and run a business together in order to make some gains. Each partner shares a portion of the partnership’s profits and losses and is personally liable for the debts and obligations of the partnership.
The partnership agreement narrates the responsibilities of the partner, sketches out the ownership interest in the partnership, ascertains the profit and loss distribution of each partner, braces the partnership for common business situations, and encompasses other essential and relevant regulations about how the partnership will be managed.
Applicable law
Partnership agreements come under the purview of the laws of individual states. There is no specific federal law covering the requirements for a partnership agreement. This is because each state governs the businesses formed within that state.
Difference between LLP agreement and Partnership agreement
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LLP agreement 
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Partnership agreement |
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Registration under the Act |
Registration is done under LLP Act, 2008. |
It is registered under the Partnership Act, 1932. |
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Registered to |
LLP registration is done under the Ministry of Corporate Affairs. |
Partnership registration is done with the registrar of firms. |
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Liability |
One of the main differences between LLP and partnership is the liability of partners. Since the partner and the firm is considered as a separate legal entity. Thus, the liability of the partners is limited to the amount invested in the company. |
The partner and the firm are not considered separate legal entities. Therefore, partners are personally liable for the unlimited amount of liabilities of the partnership. |
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Number of partners and requirements |
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Agreement between partners |
LLP agreement governs the operation, management, and decision-making methodologies, and other activities of the LLP. |
Partnership deed governs the operation, management, and decision-making methodologies, and other activities of the partnership. |
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Formalities of Incorporation |
Various e-forms are filled with the registrar of LLP with prescribed fees. |
In case of registration, partnership deed along with form is required to be filled with the registrar of firms along with requisite filing fee. |
Operations of both the LLP and partnership firm are administered by an agreement signed between the partners of the entity.
Pre-requisites of LLP agreement
Names and motives
LLP agreement needs to consist of the full name of the business enterprise and also the partners. There are no restrictions on the number of partners that can be included in an LLC filing in some states of India. The nature and scope of the establishment should be clearly mentioned to avoid inconsistency from the aforesaid purpose.
Duration
Partnerships are generally dissolved after the demise of a partner. The accredited and approved date the partnership began and the expected date must be included. In certain cases of LLP, there are multiple partners wherein provision can be included in the agreement to address how the LLP will proceed in such circumstances.
Capital contribution
Contribution towards capital combines both cash as well as non-cash such as goods, services, furnishings, time, office space, or another type of property. It should be duly noted in the agreement as to what each partner’s ratio of contribution consists of.
Partnership rights and interests
LLP is a business model in which one or more of the partners have limited liability. LLP may not perform a prominent role in day-to-day business operations yet it is very significant to officially declare how the work will be distributed. In LLP, management and decision-making authority lie amongst the partners. Every aspect needs to be declared clearly to hopefully avoid clashes and disagreements.
Distribution of profits
Gains of LLP importantly rely upon the framework of LLP. In case no designation has been appointed, income is distributed equally or in accordance with each partner’s share or contribution ratio. Partners can be as pliable while drafting the agreement. Profits that will be paid out need to be stated, as well as what percentage of the profits will be reinvested back into the business should be emphasized and mentioned.
Essentials of partnership deed
Coalition of two or more persons
There must be a minimum of two persons to form a partnership. Regarding the maximum number, the Companies Act, 1956 provides that where the firm is carrying on banking business, the number of partners should not exceed 10, and where the firm is carrying on any other business, the number of persons should not exceed 20.
An agreement or contract
Partnership happens as a result of a contract. It does not emerge from status, operation of law, or inheritance. This is a paramount element that differentiates it from numerous other associations that pop up by operations of law and not from an agreement. Section 5 of the Indian Partnership Act, 1932 provides that ‘the relation of partnership arises from contract and not from status’. The agreement need not be a formal or written agreement.
Business
The partnership is formed to carry on some business. The term ‘business’ includes every trade, occupation, and profession. The idea behind the business is to secure gain. Thus, if the purpose is to carry on some charitable or religious work, it will not be constituted as a partnership.
Sharing of profits
Splitting of profits of a business is a core component for the survival of partnership. It even involves sharing of losses, but sharing need not be equal all the time. Partners can mutually agree to share profits in whichever way they wish. But sharing of profits only does not make anyone a partner. It is only first-hand evidence of the existence of a partnership. The undeniable test is that of mutual agency.
From the above, it can desist that a servant or an agent who collects a share of profit as his remuneration, a seller of goodwill of a business who is getting a share of profit as consideration for the sale of goodwill is not by reason of such facts alone, considered as partners.
Mutual agency
This is the most crucial proposition of partnership. The partnership business may be continued by all the partners or any (one or more) of them acting on behalf of the others. Each partner is the agent of the firm as well as other partners.
He can bind the firm by his acts done in the typical course of business. Correspondingly, a partner may be bound by the act of the other partners. Hence, the question of whether a person is or is not a partner depends on whether he can bind others by his act or be bound by the act of others. It’s not necessary that each and every partner must actively engage in the proceedings of the business. The important point is that the business must be carried on behalf of all the other partners.
Conclusion
The above comparison makes it clear as to why LLP is more preferable over the partnership firm as it accounts for the benefits of the partnerships with higher preference.
The amount of ease of a transaction is flawless in the LLP and its notable position in the corporate world, places LLP in a beneficial position than a partnership. It is not required that everyone should mandatorily opt for an LLP but for people who are looking for long-term growth and are willing to leap into the corporate world without facing the high boundaries that are set. In the case of companies, the person may desire LLP taking into consideration its merits and demerits.
It can also be observed that LLP and partnership have their own advantages and disadvantages. However, LLP gives name reservation that creates goodwill for firm. The liabilities of partners are limited up to capital contribution in the firm.
Register experts are always present to help in obtaining the certificate of LLP incorporation with 10-15 days without any hindrance. The only necessity is to provide the required documents and all the documents need to be provided in soft copy and also there is no need to submit any hard copy for the purpose of this registration.
References
- https://www.legalwiz.in/blog/benefits-of-llp-over-partnership-firm
- https://www.anbca.com/difference-between-llp-vs-partnership-firm/
- https://www.registerexperts.com/company/difference-between-llp-partnership-firm
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