The agreement amongst the partners largely governs LLP. Hence drafting of LLP agreement is crucial, and it is necessary to cover various aspects governing business and relation amongst partners and between LLP and its partners.
Important Clauses of Contents of LLP Agreement
1. Partners and their Relations
Persons who subscribe their names to the ‘Incorporation Document’ are the first partners of the LLP. Any other person may become a partner in accordance with the LLP Agreement. It is clarified that as per section 5 of LLP Act, 2008, only an individual or body corporate may be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body corporate for the purposes of the LLP Act, 2008. Therefore, a HUF or its Karta cannot become a designated partner in LLP. Said clarification leaves scope for interpretation whether HUF through its Karta can become a partner in the LLP or not. Mutual rights and duties of partners and mutual rights and duties of LLP and its partners are governed by the LLP Agreement between the partners, or between the LLP and its partners.
Information relating with regard to the LLP Agreement and any changes therein is required to be filed with the Registrar in Form 3. In case the LLP Agreement is silent on any matter, provisions in the First Schedule to the LLP Act relating to that matter will apply. It may be noted that First Schedule is not very comprehensive to cover various situations, and hence it is necessary to cover various aspects in the LLP agreement. A person may cease to be a partner of the LLP in accordance with the agreement with the other partners or by giving a notice in writing of not less than 30 days. A person also ceases to be a partner on his death, dissolution of LLP, if he is declared to be of unsound mind or applies to be adjudged as an insolvent or is declared as an insolvent. Right of a partner to share profits and losses is transferable. However, the transferee, on account of transfer, does not get the right to participate in the management of the LLP or right to access information. The transfer by itself does not result in dissociation of the partner from the LLP or dissolution of the LLP.
Every partner of an LLP for the purpose of its business is an agent of the LLP but is not an agent of other partners. Obligations of LLP are solely its obligations and liabilities of LLP are to be met out of the properties of LLP. LLP is not bound by anything done by a partner in dealing with another person if the partner had no authority to do the act on behalf of the LLP and the person either knows that the partner had no authority; or did not know or did not believe him to be a partner of the LLP. LLP is liable for wrongful act or omission of a partner done in the course of business or with the authority of the LLP. A partner is not personally responsible for the obligations of the LLP. However, he is accountable for his own wrongful act or omission.
A person who represents (holds out) himself to be a partner or knowingly permits himself to be represented as a partner is liable to any person who, based on such representation, has given credit to the LLP. The LLP receiving the credit is liable to the extent of the credit received, or any financial benefit derived thereon. If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any other person or for any fraudulent purpose, then the liability of the LLP and the concerned partners is unlimited. However, where the fraudulent activity is carried out by a partner, the LLP is not liable if the LLP establishes that the act was without the knowledge or authority of the LLP. Where the business is carried out with fraudulent intent or for a fraudulent purpose, every person who was knowingly a party is punishable with imprisonment and fine. Also, the LLP, its partners, and designated partners or employees fraudulently conducting its affairs are liable to pay compensation.
The obligation of a partner to contribute shall be as per the LLP Agreement. The contribution may consist of tangible or intangible, movable or immovable property or another benefit to the LLP, including the contract of services performed or to be performed. The contribution of each partner, along with the nature of contribution has to be disclosed in the accounts of the LLP. The monetary value of the non-monetary contribution is to be valued by a Chartered Accountant or a Cost Accountant or an Approved Valuer. A creditor of an LLP, who extends credit relying on the obligation of the partner to contribute as recorded in the LLP Agreement, may enforce such obligation against the partner.
LLP is required to maintain proper books of account which may be on a cash basis or on an accrual basis and according to the double-entry system of accounting. The books of account should disclose the financial position, particulars of money received and expended, the record of assets and liabilities, cost of goods purchased, inventories, work-in-progress, finished goods and cost of goods sold. Books of account should enable the designated partner to ensure that Statement of Account and Solvency complies with the LLP Act. Every LLP is required to file Statement of Account and Solvency in Form 8 within 30 days from the end of six months of the financial year, i.e., on or before 30th October. Accounts of LLP are required to be audited. However, an LLP whose turnover in any financial year does not exceed ₹40 lakhs, or the contribution (capital) does not exceed ₹25 lakhs is exempt from the provisions of the audit. For the first year, the auditor may be appointed any time before the end of the financial year.
Thereafter, the auditor is to be appointed at least 30 days prior to the end of the financial year. The designated partners shall appoint the auditors. If they fail to do so, the partners may appoint the auditors. Provisions have been made regarding filling up of casual vacancy in the office of the auditors, the reappointment of the auditors, deemed reappointment of the auditors and removal of the auditors. Unlike a company, there are no provisions under the LLP Act to intimate Registrar about the appointment of the auditor. An auditor may resign or may express his unwillingness to be reappointed by notice in writing. In either case, he is required to enclose with the notice a statement of circumstances connected with his ceasing to hold office. Within 60 days from the end of the financial year, the LLP is required to file Annual Return in Form 11. Where the annual turnover of the LLP is up to ₹5 crore, or the contribution is up to ₹50 lakhs, the Annual Return is to be accompanied by a certificate from a designated partner other than the signatory to the Annual Return, to the effect that the Annual Return contains the true and correct information. In other cases, the Annual Return is to be accompanied by a certificate from a Company Secretary.
Important Clauses of an LLP Agreement
- Definition/interpretation clause
- Names of designated partners
- Lawful business clause
- Registered Office clause
- Capital & contribution clause
- In case of conversion of partnership/Company into LLP appropriate clauses for such takeover
- General terms amongst the partners
- Admission of new partner
- Retirement of a partner
- Cessation of partner
- Resignation of partner
- Expulsion of partner
- Sharing of profit
- Sharing of loss
- Meetings of partners
- Voting rights and its determination
- Rights & duties of partners
- Restriction on partners authority
- Acts requiring the consent of a requisite number of percentage of the partners
- Interest & remuneration
- Appointment of auditors
- Removal of auditors
- Signatory to bank accounts
- Signatory to Agreements
- Share in goodwill
- Assignment monetary interest of partners
- Rights of the legal representative
- Duration of the LLP
- Voluntary winding up
- Meeting, recording in the meeting, etc.
- Changes/amendment in agreement
- Arbitration clause
- Legal Clause for settlement of disputes
- Address for service of documents
- Changes that may occur in future and the procedure for the same.