LLP Act 2008 defines LLP agreement as “Any written agreement between the partners of the Limited Liability Partnership or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP”. Hence, in simple terms, it is an agreement inter-se between the partners of the LLP, which forms the bylaws of the LLP.
The LLP Act, 2008 requires every LLP to draft and execute a LLP agreement and file it with the registrar within 30 days of incorporation in form in Form 3.
Why do we need an LLP agreement?
Doing business in partnership is not as easy as it sounds. Initially, there might not be any complexities in business, but with due course of time they are sure to arise. An absence of a written method to adopt in such scenarios would not only affect the relation between the partners but also hamper the business to a great deal.
A written agreement would not only help to manage different expectations of the partners and but also give them confidence about the future of the business venture. It acts as a safeguard that protects both the business venture and each partner’s investment.
Drafting of LLP Agreements The aim of an LLP Agreement is to provide a written structure for the business with respect to each partner’s responsibility, rights, profit/liability sharing, and also the terms on which the partnership can be terminated. Four key points should be remembered while drafting an LLP Agreement:
OWNERSHIP: It includes the %of ownership of each partner in the LLP. What will be the profit sharing ratio, voting rights and so.
MANAGEMENT: It includes Partners’ authority to bind the partnership into agreements. What types of decisions a partner may make unilaterally, and which ones require a vote? Who will be the signing authority for any bank accounts or any special agreement.
LIQUIDATION: It includes conditions for liquidation of the LLP. What will be the outcome if any partner(s) dies, ceases, retires or resigns. What will be the procedures for buying out a partner, conditions for adding/removing a partner.
CONFLICT: If a conflict arise, what would be the method of resolving the same?
Keeping in view the above points, an LLP agreement can be drafted containing the following provisions:
- Name of LLP, Place of Business and Nature of Business
- Date of agreement
- Details of the parties to the agreement
- Capital of LLP
- Interest on Capital Contribution and Loans
- Duties and Liabilities of Partners
- Sharing of Profit or Loss/voting rights/ownership
- Remuneration to Partners
- Management of business and fiduciary duties
- Liability of LLP to Indemnify the Partner
- Liability of Partners to Indemnity
- Provisions related to addition/expulsion/resignation/retirement of partner (s)
- Book Keeping and Management of Bank Account(s)
- Lending Money or Transacting Business by Partners with LLP
- Liability on Ceasing Partner whether by Resignation or Retirement
- Terms for Appointment of new partner
- Rendition of Accounts /Books of Account, Annual Accounts & Audit
- Decision making in the LLP
- Meetings and Recording of Minutes of meetings
- Non-Compete clause
- Dispute Resolution
- Protection of IPR
- Transfer or Assignment of Interest
- Extent of Liability of LLP
- Dissolution / Winding Up
- Compulsory Cessation of Partnership
Nikita Bhatia is the co-founder of VenturEasy, an online platform for Company registration, book-keeping, accounting, tax consultancy and legal compliances in India. A Chartered Accountant and company secretary by profession, she has wide experience in the fields of audit, accountancy, taxation and corporate governance.
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