An LLP is mostly governed by the LLP Agreement. Thus, it is essential to carefully draft the LLP agreement and ensure its validity. The Agreement must address a number of issues pertaining to business dealings and relationships between the LLP and its partners as well as amongst the partners.
A Limited Liability Partnership, or LLP, is a type of corporate business structure that combines the core features of a partnership firm with the advantages of a limited company. Unlike a Sole Proprietorship business, many people can collaborate as partners to invest in and operate an LLP. In contrast to a Partnership firm, which does not have a separate legal identity from its partners, an LLP is incorporated as a separate legal entity and is liable to fulfill all its obligations in its name instead of the name of its partners.
The liability of the partners in an LLP is distributed among them in the ratio of their capital contribution or as otherwise mentioned in the LLP Agreement. Akin to a Limited Company, the individual liabilities of partners in an LLP are also limited. Moreover, the partners are protected against joint liability, that is the actions of one partner does not make the other partners liable as well.
The LLP Agreement outlines the partner’s rights and obligations as well as the rights and obligations of the LLP. Additionally, it describes each partner’s ownership stake in the LLP, specifies how profits and losses are to be distributed among them, gets the LLP ready for typical business situations, and contains other crucial guidelines about how the LLP will pursue its activities. The LLP agreement is therefore essential as a basic foundational document of the LLP. It ensures effective communication and clearly defines each partner’s roles, positioning the LLP for further success.
Before the partners begin the process of formation of an LLP, an LLP Agreement can be considered as the first requirement, as it can alone clarify the rights and responsibilities of the partners. The most significant clauses mentioned in the LLP Agreement have been mentioned below:
The initial partners of the LLP are those who sign the LLP Agreement. According to the terms of the LLP Agreement, anyone who is eligible, can join as the partner of the LLP. It is made clear that only an individual or a corporation may be a partner in a limited liability partnership in accordance with section 5 of the LLP Act, 2008.
For the purposes of the LLP Act of 2008, a HUF (Hindu Undivided Family) cannot be regarded as a corporate body. As a result, neither a HUF nor its Karta can be named a partner in an LLP. The LLP agreement defines the relation that shall exist among the partners, and between the partners and the LLP.
As a legal entity separate from its partners, an LLP is responsible for fulfilling its duties and liabilities, in its own name instead of the name of its partners. The liabilities of the LLP must be covered by assets of the LLP only. When a partner acts on behalf of the LLP without proper authorization, the LLP shall not be held accountable for his actions.
LLP is responsible for any partner’s misconduct committed during the course of business or while acting under the LLP’s authority. A partner is not personally liable towards the LLP. The partner is himself responsible for his own improper action or omission, nevertheless.
A partner’s obligation to contribute capital must follow the terms agreed by all partners and mentioned in the LLP Agreement. Apart from capital contribution, the contribution of the partners may also be with regards to movable or immovable property, tangible or intangible assets, and contracts of services rendered or to be rendered.
The amount and type of each partner’s contribution must be stated in the LLP’s financial statements as well. A Chartered Accountant, Cost Accountant, or Approved Valuer must estimate the monetary value of the non-financial contribution for the purpose. A creditor of an LLP who offers credit based on a partner’s commitment to pay it off, may hold the partner accountable for the payment of that credit.
LLP is obliged to maintain books of accounts on an accrual basis or a cash basis, following the double-entry system of accounting. The financial situation, specifics of money received and spent, the list of assets and liabilities, the cost of products acquired, inventories, work-in-progress, finished goods, and the cost of goods sold should all be disclosed in the books of accounts.
The designated partner shall be able to verify from the books of accounts that the Statement of Account and Solvency is genuine. Such a Statement of Account and Solvency must be filed in Form 8 to the Registrar of Companies by the LLP, not later than October 30th, of the immediately succeeding financial year. The LLP’s accounts are also required to be annually audited.
The LLP Act has given a new dimension to the concept of a partnership and has consequently ushered a new era of economic development. A significant aspect of this ground-breaking legislation limiting the liability of partners towards their partnership, which was until then impossible due to the existence of Partnership firms in India as the only business model of Partnerships. Such significant changes have positively affected the corporate world and the world of professionals.