In this blogpost, Harsha Jeswani, Student, National Law Institute University, Bhopal writes about the essentials of an LLP agreement.
A Limited Liability Partnership (LLP) is a combination of partnership as well as a company. It is a body corporate which has the features of limited liability of partners similar to that of a company. At the same time, it also has the informality of an unincorporated partnership. It has therefore become one of the prominent forms of carrying on business among small enterprises due to the amount of flexibility and various tax benefits it offers.
While setting up a Limited Liability Partnership, it is important that the partners must enter into a written LLP agreement which must include the essential information regarding such LLP agreement with respect to the partners, capital contribution, profit sharing ratio, board meetings, mechanism for dispute resolution, winding up of the firm, etc.
The Limited Liability Partnership Act, 2008 governs such LLP agreements in India. The Schedule I of LLP Act, 2008 provides for registration of LLP in India, which is a general template of agreement commonly suits the LLP. However what is critical is the drafting of a specific LLP Agreement since the nature of every business is unique and the contribution of each partner in terms of investment, time, differs from business to business. Therefore, the essential clauses which every firm must take into account while drafting an LLP Agreement are as follows-
- DEFINITION CLAUSE
This clause is the essence of any LLP agreement. An LLP Agreement must provide for various definitions such as the definition of designated partners, the accounting period, business of LLP and the name with which the LLP will be known. The agreement must also provide with full address of the registered office of the LLP as well as the address of all the partners.
- CAPITAL CONTRIBUTION
The partners must also specify the amount of capital that each of them contributes to constitute the LLP. The capital of an LLP is the amount that each of the partners invest in the LLP. It can be made in cash, assets or in kind (e.g. a member’s skills, connections or reputation).
- BUSINESS OF LLP
The members of LLP must clearly specify the nature of the business and the areas they will be dealing in. The agreement must also provide for the place of business where the business of LLP shall be carried on as well the commencement date of such business.
- PROFIT SHARING RATIO
An ideal LLP Agreement must also mention the ratio in which the profits and the losses of the business will be shared among the partners. The partners must clearly state the amount of profit that each member receives, or the amount of the loss that they’re liable for will be set out in the agreement. The agreement could also provide for part of the profits to be paid as interest calculated on the members’ capital contributions.
- RIGHTS AND DUTIES
The LLP Agreement must specify the various rights and duties of the members mutually agreed by them. In the absence of such separate agreement between the partners about such rights and duties, etc., the provisions of Schedule I of the Limited Liability Act, 2008 will apply as given in Section 23(4) of the said act.
- DISPUTE RESOLUTION MECHANISM
A well-drafted LLP must always contain a provision for resolving disputes between the members. In a normal course, every LLP prefers Arbitration as a mode of resolving disputes. Such LLP is governed by the Arbitration and Conciliation Act, 1996. Thus, every LLP agreement must incorporate a clause providing for a dispute resolution mechanism to avoid disputes that result in lengthy and expensive litigation.
- INDEMNITIES
The LLP agreement should contain a provision regarding indemnities. The clause of indemnity states that the LLP must protect its members from any kind of liability or claim incurred by them while carrying the business of the LLP. The members should also agree to indemnify the LLP for the loss caused by it due to any breach committed by them.
8. RESTRICTIVE COVENANTS
The LLP might incorporate various restrictions on its members. Every LLP agreement must contain a provision regarding such restrictive covenants. For instance, a member after leaving the firm might be prohibited from carrying on a competitive business with that of a firm. Such restrictions are called restrictive covenants which are important to protect the legitimate interests of the LLP and an LLP agreement must make a mention of it.
- WINDING UP
The partners must specify the term of validity of such LLP agreement whether it is a perpetual agreement or is valid for a fixed period. The agreement must also provide for the situations when the partners have agreed to wound up the affairs of the LLP either voluntarily or by an order of Tribunal for the specific violations as mentioned in Section 64 of the Act.
- MISCELLANEOUS PROVISIONS
While drafting LLP agreement, the members must also make provisions regarding admission of new partners, retirement as well as the death of a partner, etc. The agreement must provide guidelines for the expulsion of partners as well as when can an LLP agreement be renewed. Further, such agreement must include any other relevant clauses as agreed upon by the partners of an LLP.
CONCLUSION
The abovementioned provisions are a must for every LLP agreement. Apart from this, there can be various other clauses which need to be incorporated in an agreement depending on the type of the business carried on by an LLP. Moreover, the schedule only provides for limited clauses. But as a matter of prudence, there must be a detailed agreement for registering an LLP.
The success of every LLP mainly depends on the manner in which the partners have drafted the LLP agreement. Therefore, it is important that the LLP Agreement must be drafted with the help of expert knowledge which is in a position to foresee the future needs of the firm and understand the amount of flexibility required to adjust with the changing circumstances for the smooth and efficient functioning.
