In a partnership agreement, one thing that cannot be achieved is limited liability, because, under the partnership law each partner is jointly and severally liable for the debts and obligations of the partnership incurred while he or she is a partner. Therefore, if a partner runs away with the client’s funds each partner is legally responsible for the whole debt, not just a proportion of it.

This gap is filled by the introduction of the Limited Liability Partnership (LLP), as an LLP is a response to the desire of large partnerships to find a form of incorporation with limited liability in an increasingly litigious world which nevertheless provided the tax advantages and internal management flexibility traditionally associated with the ordinary partnership.

Limited Liability Partnership is the set body of rules that govern commercial transactions and these commercial transactions were the stimulating factor in the creation of law and legal system in the Western world. In India, the LLPs are governed by the LLP Act, 2008, and various Rules are made thereunder. 

In this blog, you will understand how a limited liability partnership agreement is drafted and what all elements are included in an LLP Agreement format.

What is the limited liability partnership agreement?

The ‘limited liability partnership agreement’ (the LLP Agreement) constitutes the charter document of an LLP which is in written form for the advantage of all concerned. Depending upon the nature of contents and concerto, the LLP Agreement may confer equal rights or differential rights or absolute rights or equal rights with differential powers or differential rights with differential powers.

As the contract is the very foundation of Section 168 in LLP and so is the case with LLP. Accordingly, another pertinent step is the drafting of the LLP Agreement as the post-formation functioning of an LLP is circumscribed by an agreement called the LLP Agreement which is in written form and registered with the Registrar.

Generally, the mutual rights and duties of the partners of LLP and the mutual rights and duties of LLP and its partners are governed by this agreement only. It is submitted that in the case of an LLP there is no concept like that of Memorandum of Association or Articles of Association as in the case of a company form of a business organization rather, the LLP Agreement is the charter document around which the LLP operates. However, the LLP Agreement is not a prerequisite for the formation of an LLP as in its absence the provisions of Schedule I of the LLP Act are applicable.

What are the essential elements included in an LLP Agreement format?

A well-structured and organized agreement includes the following main contents:

1. Name of the LLP

As per the provisions of the LLP Act, 2008, the name of the partnership must end with the LLP or Limited Liability Partnership.

2. Date of the agreement and parties to the agreement

In this section, mention the full legal name of all the partners agreeing to be in the LLP agreement and the date of the agreement. Also, the details of the same are required to file in e-form 3 within 30 days of incorporation yet to avoid the possibility of any dispute between the partners as to the contents explicating the terms and conditions of the agreement after the formation of the LLP, it is always in the interest of the parties involved to have the LLP Agreement drafted and executed before the incorporation of the LLP.

3. Introductory provisions

This clause contains all the definitions and terms used in an LLP Agreement format such as designated partners, partners, the contribution made by the partners, profit-sharing ratio, admission of new partners, business activities in an LLP, duration of the LLP, management, accounting, and auditing.

4. Statement of background

This clause describes the incorporation details and the activities of an LLP. You can also give a brief description of the nature of the business and the purpose behind conducting the LLP business. For example, you can briefly describe your real-estate business or manufacturing business.

5. Partner’s contribution and method of contribution

In this clause, mention the nature of the partner’s contribution as it can be tangible, intangible, moveable, or immoveable property. It also contains the provision for bringing in an additional amount of contribution from the existing partners in their profit sharing ratio, for meeting operational needs, working capital requirements, and any other requirements. If there is an increase in contribution, then it can be done by amending the LLP Agreement format with the approval of all partners. The partners can also withdraw their contribution if mentioned explicitly in an agreement.

6. Place of business

You have to mention the registered office of the LLP where it is carrying out its business. Any third party will have no right over the premises mentioned in the LLP Agreement and hence, cannot claim any title or right over the said property.

7. Profit-Sharing Ratio

In this section, the profit-sharing ratio of the partners is written which can be either in the proportion of their contribution, their respective voting rights, or in the ratio determined by the majority of all of the partners.

8. Details about the partners

This clause contains the provision for admission of new partners, resignation or retirement of an existing partner, death of a partner, and removal of a partner. In this, a partner is required to give a notice in writing of not less than thirty (30) days to the other Partners of his/her intention to resign/ retire as Partners. Also, a partner can be expelled by giving a notice of thirty (30) days from the date of the decision taken by the majority of Partners, after allowing such partner, to be heard. 

9. Rights of the partners

In this clause, you have to lay down all the rights of the partners in an LLP. All the partners have the right to take part in the conduct of the business, express opinions, have an access to the books of the firm, share profits, entitled to interest on capital and advances, and claim indemnity for making payments on the behalf of the firm.

10. Duties of the partners

In this clause, you have to lay down all the duties of the partners in an LLP. All the partners must carry on the business to the greatest advantage, be just and faithful to each other, render true and complete accounts, render full information of all the things affecting the firm, indemnify for fraud, diligent in their duties in the conduct of the business of the firm, use the firm’s property, and refrain from earning personal profits or competing from other partners. 

11. Business activity

Includes what kind of business activities are to be carried on by the LLP. The business activities must be in the same nature as approved by the Ministry of Corporate Affairs at the time of the incorporation of the LLP.

12. Place and manner of meetings

Discuss the place of the meeting in your LLP Agreement format. It can be at your registered office or somewhere else. Also, the manner of a meeting of the partners should be specified i.e. teleconferencing, videoconferencing, etc.

13. The quorum for meetings

In this clause, discuss the minimum number of partners present in a meeting and that will be considered as the quorum for meetings. 

14. Chairman of the meeting

The presiding partner will be the chairman of the meeting and he should be present within fifteen minutes of the time appointed for holding such a meeting . 

15. Arbitration and general provisions

In case of any conflict arising in respect of the agreement, this clause will provide the method for settling such a dispute and determining the distribution of the cost among the partners.

16. Other provisions 

You can add other important provisions in your LLP Agreement format such as the provision of remuneration of designated partners, transfer or assignment of rights, borrowing powers of the partners, winding up of the LLP, circular resolution, etc.

What are the types of an LLP Agreement format?

To meet the need of all the partners without compromising on the aim and growth, the following are the different types of an LLP Agreement format:

1. Equal Rights LLP (1:1)

In this type of LLP, all the partners contribute equal capital, time, effort, and resources in the LLP. Hence, they will receive equal remuneration and share equal profits and losses. This decision should be taken mutually and all the partners will have the same rights, and liabilities and contribute equally to the management as well as the business.

2. Differential Rights LLP

When partners have a different amount of contribution in terms of capital, energy, and time as well as liability, their right to profit-sharing, decision making, and managerial rights differs. Hence, in this case, the profit-sharing ratio will be in the ratio of their contribution.

Important points to be kept in mind while drafting the LLP Agreement Format

• LLP Agreement format can be altered to meet the requirement,s provided the alteration is filed and registered with the Registrar in such form, manner, and accompanied by such fees as may be prescribed.
• If the LLP Agreement format contravenes any provisions of the Act, then every partner shall be punishable with a fine which shall not be less than two thousand rupees but which may extend to twenty-five thousand rupees. 
• The agreement must clarify the working partners and the remuneration payable to them to reduce the income and hence the tax liability also. Remember, to include the partner’s name as well as define them as “working partners” in the LLP agreement format to avail of this specific benefit. 
• The LLP Agreement format must also contain procedural information regarding the sale or transfer of partnership rights. If such transfer of rights is prohibited, then it must be mentioned.
• The LLP Agreement format contains the terms of disassociation as well. If any partners want to withdraw from the LLP, then the procedure and process are listed. Also, it contains the rights of the exciting partners, rights of the continuing partners, the division of firm assets, etc.
• The LLP Agreement format has provisions related to the recording, storage, and maintenance of the books of accounts and other important documents.

Conclusion

With the advent of the LLP Act, a new dimension is added to the concept of Partnership which will usher in a new era of economic growth and development. A curious feature of this path-breaking enactment is the introduction of Limited Liability of partners for the first time extending to the whole country which will have significant ramifications for the corporate sector as well as all the professionals associated with the corporate sector. If you want to know more about what to include in an LLP agreement, contact eSahayak.