Overview When a company is in its incorporation stage, it is best to have a legal agreement that lays down the roles and responsibilities of the persons associated with the...
At present, the Limited Liability Partnership or LLP as a business format is chosen by various businesses. The term “businesses” include several Auditing Firm, Real Estate Agencies, and SMEs (Small Medium size enterprises), etc. The provisions of the LLP Act 2008, acts as the governing law this business structure. Whereas, the written agreement between the partners of the LLP, is known as the LLP Agreement.
In this learning blog, we will discuss in-depth the concept, provisions, and sample format of the LLP Agreement.
Concept of Limited Liability Partnership
The Limited Liability Partnership or LLP is a combination of a Private Limited Company and Partnership Firm. Therefore, an LLP includes all the benefits of a private company as well as a partnership firm. In this format, the individual partners are termed as Designated Partner. In India, incorporation of LLP firm requires a minimum of 2 Partners.
A limited liability partnership is a separate legal entity distinct from its partners. That means the Designated Partners enjoys the feature of limited liability. It means the liability is limited to the amount of contribution made at the time of registration.
The Limited Liability Partnership Act 2008 acts  as the regulatory framework for an LLP. That means the provisions of the Indian Partnership Act, 1932, do not apply to a Limited Liability Partnership Firm.
Concept of LLP Agreement Format
An LLP Agreement format is known as the Bible for an LLP. It is a written agreement between the Designated Partners of the Limited Liability Partnership (LLP). This agreement is a set of mutual rights and duties of the partners working in an LLP. Further, all the day to day business activities will be governed by the Limited Liability Partnership Agreement.
A Limited Liability Partnership Agreement clarifies the working and functioning of an LLP. Therefore, it is known as the Detailed LLP. Within 30 days of the registration of the LLP, the Partners need to execute an LLP Agreement. A Limited Liability Partnership Agreement is formed as per Form 2 of the LLP Act.
Details regarding new, terminating and existing partners, profit sharing ratios, capital contribution in the LLP, are also contained in this agreement. The Profit Losses Sharing ratios denotes the way for distributing profit and losses of the LLP.
In the absence of agreement, the provisions of Schedule I of the Act will apply to both Partners and Firm. However, the designated partners need to pass a resolution in a general meeting for the matters included in Schedule II.
Contents of LLP Agreement Format
For the smooth functioning of an LLP Firm, a detailed LLP agreement format is a must.In India, the contents of a Limited Liability Partnership Agreement Format can be summarised as:
- Name of the LLP: The name of an LLP Firm must end with the suffix “Limited Liability Partnership” of “LLP”.
- Date of the Agreement: After LLP Registration, the partners need to execute a Limited Liability Partnership Agreement within 30 days. The agreement must include the date of entering into an agreement.
- Parties to the Agreement: All the designated partners are the party to this agreement. It clearly defines the duties, functions and capital invested by each designated partner. The agreement also contains the date on which the partner enters into an LLP Firm.
- Introductory Provisions:These provisions mean a separate part of the agreement which defines the terms used in it.
- Registered Office:A limited liability partnership agreement must contain the details of the registered office of the firm. The Registered office of the LLP is also known as the place of business of LLP.
- Business Activity: All the activities that a firm wants to carry out will be included in the agreement. However, the MCA (Ministry of Corporate Affairs)  must approve the nature of activity during registration.
- Duration of Agreement: An LLP firm can be made either for a fixed tenure or for some specific objective. If it is made for a fixed time period, the agreement must contain the date of automatic dissolution. However, if it is made for some specific purpose, the details of that purpose must be mentioned in the agreement.
- Accounting and Auditing: How the books of accounts will be maintained is described under this section. The methods of maintaining accounts can be either on a cash basis or accrual basis. Further, the requirement of conducting the audit is also mentioned under the agreement.
- Designated Partners Contribution: This section includes the profit loss sharing ratios, amount of capital invested by each partner, etc.
- Record Keeping and Bank Arrangement: This part consists of the storage, maintenance, and recording of books and other required documents.
- Allocation and Distribution: It specifies the method of sharing profit and loss partners. The term “distribution” includes both interim and final distribution in the LLP.
- Termination of Partner: It specifies the terms and conditions in which a partner can withdraw from the LLP. It is considered as the crucial part of an LLP Agreement format. This section also states the rights of a partner on assets after termination.
- Issue of Partnership Rights: It provides details concerning to admission of new partners and their rights thereafter.
- Arbitration Provisions: In a dispute between partners who will have the power to arbitrate is included in this section. Further, it also consists of the court which will have the jurisdiction in such situations.
Provisions in the Absence of an LLP Agreement
In India, if there is no LLP agreement format, the provisions of Schedule I applicable to the parties and firm. The same can be summarised as:
- The profit and loss will be shared equally among partners;
- The Partners will need to indemnify for any personal payments made by them in the ordinary course of business.
- The partners will be responsible for compensating the losses caused due to their fraudulent act;
- All partners can take part in the firm’s management;
- Partners are not entitled to any salary;
- The admission of a new partner will need permission from partners;
- Any other issue will be decided by the voting of all the partners.
- Any change in the nature of the business will require the consent of all partners;
- All the partners must have free consent, i.e., partners cannot force each other for a mutual decision;
- All the unresolved disputes among the partners will be referred for arbitration.
Sample LLP Agreement Formatsample-LLP-Agreement
Considering the dynamic and changing nature of the Corporate Sector, a business structure that shifts the focus from a Partnership Firm was the need of an hour. Limited Liability Partnership is a combination of a partnership firm and private company. Whereas LLP Agreement format is a bible for Limited Liability Partnership Firm.
However, the formation of this document needs expertise and experience. Our expert team at Swarit Advisors can assist you in preparing LLP agreement suitable to the requirements of the LLP registration process.