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A Guide to the Essentials of Limited Liability Partnership Agreement

Limited Liability Partnerships, or LLPs, are common business structures in the business world. Simply put, an LLP is a versatile business structure that allows its partners to pocket all its profits collectively, and shields them from all its risks and liabilities.
A Guide To The Essentials Of Limited Liability Partnerships
Law firms are a good example of an LLP. You must have frequently seen names like “Green, Smith, & Hudson, LLP.” This means that partners are accountable for their actions but are not liable to the other partners. If you’re thinking about forming an LLP, the first thing you should do is consult with a lawyer who must have good first-hand experience setting one up.

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How are LLPs different from Traditional Partnerships?

Traditional Partnerships are exactly what they sound like, an agreement between two or more people to collaborate and share profits, the agreement being supported by legal documentation like the Partnership Deed or Agreement. While a traditional partnership is a quick and easy option for establishing shorter duration partnerships, these are not suitable for the complicated world of corporates, where a load of factors determines the success and advancement of a business.
Traditional Partnership Limited Liability Partnership
May or may not be incorporated
Definitely gets incorporated
Liability of the Partners are unlimited
Liabilities of the Partners are limited
Partners are responsible for business management
Partners are not responsible for business management
Maximum number of partners is 20
No maximum limit on the number of partners

What are the benefits of LLPs?

LLPs are a popular choice for accountants, lawyers, solicitors, and architects all over the world. It enables them to collaborate among themselves without burdening them with unnecessary risks. As a result, there are numerous advantages to forming a Limited Liability Partnership, which include:
  1. LLPs can hire employees, acquire and lease property in its name: As an LLP is registered, it gains a legal identity of its own, and is treated as a separate “legal person” in the eyes of law. Therefore all business operations like hiring employees, renting property, acquiring property, or suing third parties in the event of a conflict can be done in the name of the LLP itself.
  2. Personal asset protection: Owing to its mandatory need for registration, an LLP is established as a legal entity separate from its partners. Therefore, all the liabilities of the LLP are fulfilled under the name of the LLP, and not under the name of its partners. In simple words, the liabilities of the LLP are paid off by the assets of the LLP and not by the personal assets of the partners.   
  3. LLPs are flexible with change: The day to day operations of an LLP, as well as the distribution of its profits and overhead costs, are governed by a written agreement among all its partners. In order to alter any internal rules of management, a simple change in the agreement has to be made. Such an easy and flexible process of change  enhances the adaptability of the LLP to quite a great extent.

The Essentials of Limited Liability Partnership Agreement

While LLPs are highly valued for their adaptability, several factors must still be considered while drafting an LLP Agreement. With each partner contributing differently towards the LLP, in terms of capital, social networking, and other professional skills, an LLP Agreement must contain certain essential clauses that can help the partners in avoiding conflicts and disagreements in the future. Given below are some essential clauses that an LLP Agreement must contain:

The Definition Clause

The Definition Clause, which is considered the core clause of any professionally drafted LLP agreement, includes the following provisions:
  • Names and Addresses of designated partners
  • Primary objective / business activity of the LLP
  • Legal name of the LLP
  • Registered Office address of the LLP
  • Names and addresses of of all Partners

The Operation Clause

The LLP’s operations is another essential clause that should be included in any LLP agreement. This clause should include all its business activities conducted at all its business locations, as well as the dates on which all the businesses had begun.

The Capital Clause

The capital contribution of each LLP partner is the third most significant clause. This clause must be stated and specified explicitly. The capital of an LLP is the amount that is invested into the business by its partners. This clause must contain the overall capital contribution to the LLP and the individual contributions by each partner in the LLP.

Partner’s Rights and Obligations

Before drafting an LLP, partners must mutually agree on their respective rights and responsibilities towards the LLP, and must have them expressly stated in the LLP Agreement. This is to ensure that the LLP runs smoothly and that there are no conflicts or disagreements between the partners during the course of the business. However, if a partner breaches his duties mentioned in the LLP agreement, they will be liable to face legal consequences and may even be expelled from being a partner in the LLP.

Profit and loss sharing ratio

Limited Liability Partnership Agreements, in particular, must state the profit and loss sharing among the partners. To make things clearer, the agreement must state the percentage of profit that each partner shall receive, as well as the percentage of loss that each partner shall bear. In some cases, LLP agreements also mention the percentage of interest to be paid on the Capital Contribution of certain partners.

The Dispute Resolution Mechanism

An LLP is only considered fully formed only if the LLP agreement contains a dispute resolution mechanism. Arbitration is the most commonly used dispute resolution mechanism, in which an independent arbitrator negotiates between the conflicting parties to ensure that each party, or in this case each partner is heard and represented fairly. Dispute resolution mechanisms are critical because they allow partners to avoid costly and time-consuming litigation processes for the purpose of resolving large and petty disputes.

Restrictions on Partners

While restrictions placed on partners are often viewed skeptically, they can significantly assist a business in remaining profitable, in case a partner leaves. A common example of such a restriction is a clause stating that members are not permitted to start a competing business after leaving the LLP. Believe it or not, these are just as important to the LLP’s stability as any other clause.

The Duration Clause

LLPs could be created for a specific purpose or project and thus have a specific duration of existence, usually till the time the project is completed or the purpose is fulfilled. In the absence of such a specific purpose, the duration of existence might be indefinite. The duration clause of an LLP Agreement mentions the duration of existence of the LLP, whether fixed or indefinite.

The Indemnity Clause

Indemnity is the protection that the partners receive against financial losses. An indemnity clause should be included in an LLP agreement with the purpose of shielding the partners from risks, liabilities, or losses incurred on the LLP during its normal course of operations. Members must also mutually agree to indemnify the partnership against losses caused by a violation of laws or ethics, according to standard operating procedure.

Conclusion

In a nutshell, LLPs should be considered as a business structure by any business that wishes to operate in an organized, self-contained manner. They help to reduce the risk of unnecessary lawsuits, have limited liability for all partners, and ensure that all issues are handled fairly and efficiently.
As a result, LLPs are a useful business partnership solution for many businesses, particularly those involved in financial planning, legal services, or architecture design. LLPs can be easily set up and offer fantastic functionality with minimal risk, whether you’re just getting started or creating a new avenue of growth.

About Setindiabiz

Setindiabiz is an organized team of experienced CA, CS, & Lawyers, duly supported by a pool of trained accountants & paralegal staff that provides quality & affordable compliance services to startups & small businesses in India. The views, statements and recommendations expressed in this article or post are only for the sole objective of providing information, and it does not constitute professional advice or recommendation of the company. Neither the author nor the company or its affiliates accepts any liability for any loss or damage arising from any information in this article or any actions taken in reliance thereon.

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