QUICK SUMMARY ↬ In this comprehensive blog, we have discussed the detailed format of LLP Agreement, one of the most crucial documents required for LLP incorporation in India. An accurate LLP Agreement format determines the success rate of your incorporation application and firmly establishes partners rights, obligations, and relationship with the business. Read further to understand the detailed meaning of LLP Agreement, its content structure, and crucial clauses that makes it suitable for LLP governance and administration.
An LLP Agreement serves as a pivotal contract binding two or more individuals or entities in the joint ownership of a Limited Liability Partnership (LLP). This legally binding document delineates the mutual rights and obligations of partners, crucially outlining the framework for their collaborative endeavors. While the LLP maintains its distinct legal identity through incorporation, the foundation of its governance is laid down in the LLP Agreement. Therefore, preparing an accurate LLP Agreement Format becomes imperative to adhere to legal standards and safeguard the interests of all parties. In this blog, we will discuss how to draft LLP Agreement in its proper format to avoid any confusion or hassle in your LLP incorporation process.
What is LLP Agreement?
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.
Contents of the Draft LLP Agreement
Before partners begin the journey of forming an LLP, preparing a draft LLP Agreement is absolutely essential. The agreement outlines each partner’s rights and responsibilities, the legal name and activities of the LLP, partner details, and the sharing of capital, profits, and losses. It also covers voting rights and procedures for partner additions, expulsions, and changes to the agreement. Once signed by all partners in the presence of witnesses and a public notary, copies of draft LLP Agreement should be retained for record-keeping, with any changes documented in writing. Here’s a comprehensive structure of the LLP Agreement for a clearer understanding.
- The legal name of the LLP under which it shall conduct its business
- An overview of the LLP’s intended business activity / activities
- Complete Information of the partners: their full names, addresses, and contact details
- Rights and obligations of the Partners
- Powers and duties of the Designated Partners
- An account of the capital, assets, and other resources of the LLP
- The capital, profit, and loss sharing ratio
- Voting rights of the partners
- Partner additions and expulsion: the rules for how the LLP will handle partner additions, retirement, removal (both voluntary and involuntary)
- All of the partners should sign and date the LLP Agreement once it has been completed. A witness who is at least 18 years old and is not affiliated with the LLP, must attest to each partner’s signature. The agreement must then be stamped by a public notary. Note that the LLP agreement shall be signed by all the partners in the presence of 2 witnesses and the public notary.
- Copies of the LLP Agreement should be kept by the partners for their records. The partners must make any changes to the agreement in writing if they intend to make any changes to its provisions.
Important Clauses in the LLP Agreement Format
The LLP Agreement Format encompasses pivotal aspects governing partnerships within an LLP. It defines the relationship among partners, ensuring their eligibility for partnership, and outlining their extent of liability towards the business as well as other partners. Moreover, the LLP Agreement Format delves into the specifics of capital contributions, emphasizing the importance of adhering to agreed-upon terms for profit sharing. Also, it mandates meticulous accounting practices and annual audits, ensuring transparency and compliance with regulatory standards. Here are a few crucial clauses of draft LLP Agreement format to help you understand better!
Partners and their Relationships
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.
The degree of LLP's and its Partners' liability
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.
Contributions
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.
Accounts and Audit
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.
Conclusion
Mastering the intricacies of the LLP Agreement Format is paramount for establishing a robust foundation for Limited Liability Partnerships (LLPs). By carefully delineating partner relationships, liabilities, capital contributions, and accounting practices, this format ensures clarity, accountability, and compliance with legal requirements. Whether embarking on LLP incorporation or managing existing partnerships, adhering to the guidelines set forth in the LLP Agreement Format is essential for fostering successful business endeavors and safeguarding the interests of all stakeholders involved.
FAQs
Q1: What is an LLP Agreement?
An LLP Agreement is a legally binding document that outlines the rights, responsibilities, and obligations of partners within a Limited Liability Partnership (LLP). It serves as a foundational framework for governing the operations and relationships within the LLP.
Q2: Why is drafting a precise LLP Agreement format crucial?
Drafting a precise LLP Agreement format is essential as it clarifies the terms of partnership, including capital contributions, profit-sharing ratios, voting rights, and procedures for partner additions or expulsions. It provides a comprehensive roadmap for managing the LLP effectively and resolving disputes amicably.
Q3: What should be included in a draft LLP Agreement?
A draft LLP Agreement should include details such as the legal name and business activities of the LLP, complete information of partners, their rights and obligations, capital contributions, profit-sharing ratios, voting rights, and procedures for partner additions or expulsions. Additionally, it should address accounting practices, audits, and any other pertinent clauses relevant to the partnership.
Q4: How does the LLP Agreement protect partners' interests?
The LLP Agreement safeguards partners’ interests by clearly defining their rights, responsibilities, and liabilities within the partnership. It establishes a framework for resolving disputes, ensuring transparency, and protecting partners from potential misunderstandings or conflicts.
Q5: Can changes be made to the LLP Agreement format after it's been finalized?
Yes, changes can be made to the LLP Agreement format after it’s been finalized, but they must be documented in writing and agreed upon by all partners. Any amendments to the agreement should be made in accordance with the procedures outlined in the original LLP Agreement itself to maintain its validity and enforceability.