In this article, Rohit Upadhyaya who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Ten must-have clauses in an LLP Agreement that are not prescribed by default under LLP Act.
With the development of modern day industrial structures, a new concept of legal artificial person was adopted to promote industrial development and to encourage industrial development of trade and business. In old primitive days establishment of corporation and companies was based on the will of the parliament of the nation and if the roots are traced further during the regime of kings and emperors and monarch there such an entities were incorporated by the means of charter. The incorporation of such a business entity is done by formation of a legal personality. So whenever such incorporation is done an independent legal personality is formed. Legal personalities are of two types first is natural legal personality and second artificial legal personality. All living human individual who are capable of contractual liabilities and are of sound mind can termed as a natural legal personality. Whereas formally incorporated entities such as companies are example of artificial legal personality.This method of incorporation was adopted by the modern day economic scenario because the legal personality was created with an intention to form such a body which will have its legal existence which will have a few legal rights such as right to sue some individual person or some other legal personalities and such legal firm could be sued. In case of any contractual liability the accountability could be fastened upon the whole company of firm. The company and the firm can never be made liable for any criminal liability and it could be made only as subject to pay compensation unless involves a deep involvement of the members of the firm or company.
Types of legal entities
The legal artificial entities could be identified in following categories. The artificial legal entities are formed to conduct and carry financial and mercantile activates. In order to promote a regulatory body and to ascertain a common set of regulations. The legislature have prepared a statutory authority name as “Registrar of Company”. Company is huge independent structure which have its own legal existence and have all the authorities for such existence there are two types of companies firstly, public company and secondly is private. A company is the most organised structure of artificial entity. When compared to the other structures the structure of a company is very transparent and clear structure of business management. Another business module is simple partnership deed is formatted under Indian partnership act, 1932. There is no formal need of incorporation of such firm required. The non-registration of such partnership firms invites no penalties and penal consequences. So it could be easily understood that a simple partnership firm is an opaque form of business structure which have uncertain and ambiguous. So in order to introspect into the understanding of the scheme is not a convenient. Another form or incorporation of a legal entity is a limited liability partnership firm. A limited liability partnership firm is hybrid concept which has both the merits of a registered company and have flexibility of a partnership firm.
History of limited liability partnership.
The evolution of limited liability partnership was not an overnight event. This business structure was evolved to satisfy the upcoming needs of business formats the major factor contributing towards was the ambiguity and uncertainty of the partnership.During the primitive days there were only two ways of business structuring were either too form a company (different form of companies) or to enter into a partnership fir. When compared between both the business modules the later one was very convenient. As it was free of all the technical formalities and it was had very easy conditions of formation and the statutory compliances required by the government were also relative very low. So in corporation of a partnership firm was very easy and was considered to be on time saving and cost effective measure. But with lack of statutory control on regulation of these firms and they used to manage business on their own whimsical. During the year 1980-1990s the American economy was troubled with the issue of declaration of insolvency. This course was adopted to alienate the liability occurring out of arbitrary actions of the partners of the firm. The innocent partners were unnecessarily subjected to the hardships and was accounted towards the actions of his partners whether those action were weather consistent with the spirit of the partnership or not. The innocent partners were fastened with the liability of the partner responsible for the unwarranted debts of the partnership firm. As partnership firms hold indefinite liability upon it partners. This drew attention of the legislators to prepare such as statute which would encourage the free spirit of the person who wanted to run such firm and to cap the fraudulent intentions of partners who used get engaged in such illicit practices. So the hybrid concept of limited liability partnership was adopted. This was done with an intention to ascertain personal liability of the defrauding partner and save the hard earned effort of the innocent partner. This method of business structuring was recognised and followed and was implemented by means of incorporation of statute. Limited Liability partnership act, 2008. The salient feature of the act of 2008 which lead to its adoption in
The salient feature of the act of 2008 which lead to its adoption in Indian business structuring module are as following
- This Limited liability partnership act 2008 was first to act to firstly extinguish the liability of the firm with the liability of the partners personally. The limited liability partnership firm has its own corporate legal entity.
- The Limited liability partnership act 2008 provide first opportunity to the partners to personally set up their respective shares into the liability. The partners mutually determine their share into any future lability that may incur.
- The statutory authority have a wise judicial control over the limited liability partnership by the means requiring the limited liability partnership to produce their liquidation status every financial year such a corporate compliances restricts any wilful default on the end of the partners and also prevents the financial interest of the partners engaged into the practice.
- The limited liability partnership have a few more advantages over the regular setup of partnership firm which are further associated with advantages of a company practice.
- A limited liability partnership would be merged or amalgamated into another firm by compliance of statutory regulation made under limited liability partnership act 2008.
- The limited liability partnership can be converted into a company.
- The regulation of the partnership firm is regulated by Indian partnership act 1932. Whereas limited liability partnership is governed by the limited liability partnership act, 2008.
- The limited liability partnership is subject to inspection of statutory bodies as a company formed and incorporated under companies act.
Major structure of business planning and business structure
The following are major business industries.
- Manufacturing process– The process of consuming raw goods to produce a fine product to be utilised by the end term product to the consumer.
- Merchandising or mercantile business process– This business process outsourcers produces made by the manufacturer to the distributor and then to the retailer till the end term consumer.
- Service based industry – this industry is established to outsource service to the various sectors and resultantly serves between all levels of business interphases. To provide bridge between all the organisations.
The following are major structure of business
- Sole proprietorship: -In this form of business structure there is only person who is responsible to manage the business affairs. This form of business is adopted for small business strategies it is adopted to promote small scale enterprise.
- Cooperative society: – This a business format is established to benefit the lower and socially and economically backward society. Such an institutions are incorporated with a philanthropic intent.
- Partnership firm: – It is the most primitive form of business organisation as this was adopted to mutually promote business by two or more person entering into mutual agreement to initiate or conduct mercantile exercise.
- Limited liability partnership: – This is the modern hybrid concept which have equitability of a partnership and secured presence of company.
- Limited liability Company: – Limited Liability Company is a mutual path of corporation and a company benefits. The members or directors of such companies cannot be personal liability for the company.
Few must have clauses which should be incorporated as an integral part of a limited liability partnership (LLP) agreement
The following are the major highlights which a proper limited liability partnership agreement must address for its proper compliance and for obtaining the maximum outcome of the limited liability partnership agreement.
- The title clause: This clause is the head note of the limited liability partnership and it should specifically mention that between how many parties this particular is being executed this is done to ascertain the parties with individual existence so that the contracting parties could be identified.
- Date of execution of limited liability partnership agreement: This is a necessary inevitable part to determine the enforceability of the agreement and to provide it a proper legal position to the firm formed by this limited liability partnership.
- Operating clause: The operating clause of the limited liability partnership agreement is the heart of the complete structure whereas it identifies the spirit of formation of this particular mode of business structuring. The operative clause personally fastens individual liabilities upon the parties of the limited liability partnership agreement. It also defines the nature and ambit of the limited liability partnership agreement. In case of any litigation or any such legal casualty, the interpretation of this particular operative clause plays a vital role to fasten liability upon any of the partner or partners.
- Rights of the partners: This clause of the limited liability partnership agreement defines the status of the partners into the partnership firm. The operating condition of this clause acts as the sovereign and most sanctified condition in case of any unforeseen condition or any fallout between the partners.
- Duties of the partners: This operative clause of the agreement provide for the specific set of instruction and regulation for the partners of the limited liability partnership agreement, non compliance and not regulation of the same conditions give birth to unwarranted legal conflicts. Misuse of the aforementioned legal duties or arbitrary use of the rights by the right conferred upon an individual partner or ultra vios use of the authority may give birth to civil actions.
- Jurisdiction: jurisdiction is the position of authority to form specific rules and regulations pre-determined for any upcoming future contingencies. Jurisdiction in such mercantile agreements are pre-determined in order to avoid any particular dispute and if any particular dispute if arose should be resolved at a place convenient to both the parties. It also ensures that the ill intent of any partner or partners does not maliciously impact others innocent partner or partners.
- Governing statutes: These statutes are for reference for construction of the nature of the transition and it established the civil limitations of the statue.
- Remuneration: This clause is the financial capital of the limited liability partnership this determines the financial viability of the limited liability partnership firm and allocation of the financial produce aspect of the limited liability partnership firm into different coordinates of the expenses.
- Term of limited liability partnership: The original agreement of limited liability partnership firm must necessarily contain the term of the firm as certain tenure and to the partnership firm.
- Mode of theretirementof partner: The limited liability partnership firm has perpetual succession so in case of death, insolvency or unsoundness of a partner the limited liability partnership is succeeded by the another partner which may be introduced by the consent of the partners or by some other means.
- Winding up of the firm: this clause operates and provides for provision in case when the limited liability partnership needs to be dissolved on account of financial crisis, dispute between the partners or any other reason. This clause provides for liquidation of the limited liability partnership firm and for further distribution of all the assets and the liabilities between the members or partners of the limited liability partnership firm.
The above mentioned are the agreement made on the standard regulation of the formation of the limited liability partnership firm. But in addition to the above defined clauses few more clauses are to be added into the limited liability partnership agreement to provide more stringent and effective draft of the limited liability partnership firm. The major highlights of such are as follows.
- Interpretation clause: The limited liability partnership agreement must have an interpretation clause. This eases the functional understanding of the terms of understanding of the limited liability partnership agreement. The advantage of the interpretation clause in the limited liability partnership agreement is to ascertain the Conesus ad idem. The interpretation clause also helps to understand the basic nature of the agreement and to distinguish the nature of the limited liability partnership agreement.
- Non-competitive clause: In modern day scenario the ethical standards of the business fraternity are falling often leading to actions which are highly unethical and immoral standard hazards. One of the prevalent practices observed now a days that the founder members or the principle partners of a firm due to their high expectations get engaged into few practices which are adverse against the financial or otherwise interest of the limited liability partnership firm. These actions can be controlled by induction such non-competitive clauses which not only restricts such action, conduct and behavior of the partners but also improves the overall produce of the limited liability partnership firm.
- Restraint of the partner retiring or terminated from the limited liability partnership firm: this clause have a huge functionality approach to refrain the partners from engaging into business activities with the rival business organizations which proliferate of any trade or business secrets to other organizations. The business secrets of a particular organization are backbone to their survivals and gives them an upper hand over their rivals when it comes to the competition in the market. To keep the novelty of the secret, this clause helps the management to appoint partners without the fear of getting their secret disseminate in the industry.
- Conditions for termination or suspension of partners:
Pre-determination of the conditions that may leads to termination or suspension of a partner/s is a vital pre-requisite of the limited liability partnership firm as after the execution of the agreement, those specific domains will be the main ground on which the termination/ suspension will be executed. Pre-determination will also provide clarity among the hired and Hiree partners as well as to the arbitration. These specific conditions will act as a preventive measure for the partners to not indulge in those activities which may end up hurting the interest of the business.
Following are the generic conditions which are basic to most type of businesses and industries,
- No criminal antecedents: A partner must not have any criminal record/trial pending against him/her under the court duly established by laws of India. He/she, with the prior approval of the quorum could be appointed as a partner or appointee, subjected to the decision the quorum after examining the facts and the relevant penal laws. If such previous antecedent are not disclosed to the pre-existing partners of the firm. it would be considered as concealment of material fact and may further lead to suspension or termination of the partner.
- Office of profit: A partner/ appointee must not hold any other office of profit other than limited liability partnership firm. The partner should have only single business association with the firm only. In Absence of compliance to this particular condition, the accused partner may serve term of suspension which may be a period of 6 months up to indefinite period. As per the conditions prevailing by then, subsequent offence regarding the same activity/mis-conduct, would be a valid ground for termination of that partner.
- Harassment: a Partner of limited liability partnership firm who is accused or found guilty of any act which may come under Physical, mental, sexual harassment or found guilty of using any criminal force against any employee can be valid ground for suspension. Habitual indulgence of similar practices would be considered as a ground for termination of partnership.
Arbitration clause:The limited liability partnership agreement must have a necessary arbitration clause to resolve any legal disturbance. The arbitration proceeding are highly efficient and contribute towards the mutual benefit of the litigating parties. Consequently saving a lot human effort and time in respect thereof.
Compulsory retirement of partner:The partner of a limited liability partnership firm must have a fixed age of retirement. Since the limited liability partnership firm has perpetual succession. The legal position of the retiring partner could be further followed by person or candidate of his choice. This compulsory retirement of the partner would promote newer and dynamic approach. Compulsory retirement is adopted to ensure the partner engaged with the limited liability partnership firm could make his best possible efforts to maximise the profit of the firm or to promote the interest of the limited liability partnership firm
Annual report:The managing partner of the firm would be under an obligation to produce a status report of the performance of the firm to all the other members of the firm. This repot must include audited financial report, current reserved, and status report of the previous plans, the up comings plans and the scheduled organiser of the year. This practice would ensure that all the members of the limited liability partnership firm are actively updated about the performance of the firm and may participate in the decision making exercise.
Pre quantified damages:The limited liability partnership agreement must have clearly distinctive conditions on prequantified damages as in event of any particular event the partner accused of responsible for a certain damage must be pre liquidated. Such prequantified damages are extremely essential to abstain a partner from particular actions.
Winding up the process: A limited liability partnership agreement must have a proper description of the winding up process. It must figure all the conditions in which a liquidation could be initiated and how the residue assets would be distributed within remaining partners.
Liberty to change business: The limited liability partnership agreement must have a clause which may further change the basic nature of the limited liability partnership firm into a company which may be further subjected to compliance of regulations of company law.