What is Limited Liability Partnership?

Limited Liability Partnership is governed by Limited Liability Partnership Act-2008 which came in to force on April 1, 2008. LLP Act, 2008 constitute 81 Sections and 4 schedules. So far LLP Rules 2009 has prescribed many forms to be filed with MCA for a successful LLP agreement.

Meaning of LLP Agreement and Importance

LLP Agreement is a written contract between the partners of the LLP or between the LLP and its designated partners. It establishes the rights and a duty of the designated partners toward each other as well toward the LLP. It is compulsory to execute and file the LLP agreement with MCA within 30 days of the incorporation of LLP.   

It creates the foundation for the smooth running of Limited Liability Partnership. It defined the outlook and set well define concepts for decision making, adding a new partner and leaving of existing partners or change in roles. 

Therefore, well structured detailed LLP Agreement set the groundwork and act as a backbone to strengthen the firm. It is the guide that gives directions to the LLP registration

Content of LLP Agreement

A well structured and briefly summarized agreement is very much required for the successful functioning of an LLP.  

Every standard agreement contains the below-mentioned provisions:

1.Name of the LLP 

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

2. Date of the agreement and parties to the agreement 

After incorporation, the agreement is to be executed within 30 days as per the LLP Act, 2008. LLP agreement is between all the partners and designated partner.  The agreement must contain the date and of entering into an agreement.

3. Introductory provisions

It includes all the definitions of terms used in the LLP agreement.

4. Place of business 

The agreement must contain the place of business which is the registered office of the LLP. 

5. Business activity

It is important to include the business activities to be carried on by the LLP. It must be in the same nature as approved by the MCA at the time of incorporation of LLP.

6. Duration

If the LLP is formed for the specific period, then such period must be mention after which the LLP must be dissolved. LLP can also be formed for certain object, after completion of such object; the LLP must be closed.  In the absence of specific period or object, one can include the duration of LLP as up to the period until which, it is terminated with the consent of the partners of the LLP.

7. Accounting and auditing etc.

This includes how to maintain the books of accounts, whether it is cash basis or accrual basis. During which period a partner can access books of accounts, whether an audit is mandatory or will follow the rules mentioned in the LLP Act. 

8. Partners’ contribution and method of contribution

Represents the contribution ratio of partners in terms of capital invested, interest on contribution, Profit Sharing Ratio as well as the time period after which the capital can be withdrawn by any of the designated partners. It is important for maintaining a good relationship between partners.

9. Record keeping and bank arrangement

It includes the maintenance, storage, and recording of books and other related documents.

10. Allocation and distribution

It clarifies the system of profit sharing among all partners and distribution including interim distribution or final distribution. It portrays the distribution of Profit between the partners as per the decided ratio.

11. Disassociation of partner

Specifies the terms and conditions when partners can withdraw or disassociate from the LLP. This is one of the vital clauses of the LLP Agreement. It states the rights of partners and rights on assets after disassociation. 

12. Partners’ rights to records

Each partner has the right to check the records for avoiding misappropriation.

13. Management and fiduciary duty

It takes into account the liability of the management of a LLP and the appointment of the person liable for taking care of confidential information of the LLP. 

14. Arbitration and general provisions

In the case of conflict between parties, the parties may involve the third person known as an arbitrator who listens to both the parties and takes a decision, which is to accepted by both the parties concerned and the final order must be applied on both parties.

15. Other Provisions

Several other provisions also come under the LLP Agreement such as admission of new partners and its rights thereafter and changes in the designation. It includes the right to take part in business, title and interest in assets, right to access, right to continue the independent business, right to recover the due debt. and selling, transferring of partnership right to existing partner and another partner. It covers the mode, time period of the meeting of partners, the decision-making process, agenda and the voting rights of the partners. 

It also includes the rights of designated partners as well as how those rights can be availed from the LLP. It considers methods of readmission of partners as well as cross purchase. This clause illustrates the right of redemption of a partner’s rights. 

What are the types of LLP Agreements?

The agreement should be met with the need of all the partners without compromising on the aim and growth. The sole agreement may not fit all the partners into a satisfactory zone.  

The following are the main types of LLP agreements. 

Equal Rights LLP (1:1) 

In such a type of LLP, all partners contribute equal capital, time and efforts in the LLP. All receive the same remuneration and share equal profit and loss. The decisions are mutually taken. All the partners have the same rights, liabilities and contribute equally to the management as well as the business.

Differential Rights LLP 

In such a type of LLP, Partners have a different amount of contribution in terms of capital, energy, and time as well as liability. Hence the right to profit sharing, decision making, and managerial right differs. It can be classified into 

  • Agreement wherein rights are in the ratio of contribution and the profit sharing ratio. The level of contribution may decide the level of profit sharing only. 
  • Agreement wherein rights are in the ratio of contribution only, but profit rights differ. Rights of management may be equal or in some other ratio 

LLP Agreement and Tax Planning

Since LLP is a “Firm” hence all the taxation provision of “Firm“ are applicable, provided the following criteria fulfilled.  

There must be a relation of partnership between the parties concerned through a proper instrument i.e. LLP Agreement. The individual shares of partners must be well specified in the agreement. It shall contain all the details related to partnership, their share, and contribution, etc. 

In order to avail tax benefits, the following things may be taken into account while drafting LLP agreements are: 

  • Adding provision of Interest on the capital contribution that will deduct from income within the overall limits 
  • The agreement must clarify the working partners and the remuneration payable to them so as to reduce the  income and hence the tax liability also. Remember, to include partners name as well as define them as “working partners” in the LLP agreement to avail this specific benefit. 

Provisions in the Absence of LLP Agreement

If there is no registered LLP agreement, the provisions of Schedule I of the LLP Act, 2008 will apply to all the partners. These provisions are as follows,

  • All partners of LLP will share profits and losses equally. 
  • Partners will have indemnity for any personal payments made by him in the ordinary course of business or anything done for the preservation of assets of the business 
  • Partners will indemnify the LLP if losses are caused due to a fraudulent act was done by him 
  • All partners can take part in the management of the firm 
  • No partner entitled to any salary for the management of the LLP 
  • Admission of any new partner will need the permission of all the partners. 
  • Any other issue will decide by a vote of all the partners, and a simple majority will need to pass a resolution. But if the firm wants to change the nature of the business, all the partners must consent.
  • The partners cannot force out a partner unless there is an express agreement between partners. 
  • Any disputes between the partners of an LLP that are not resolved amongst themselves must be referred for arbitration as per the act. 

DISCLAIMER 

This write-up is based on the understanding and interpretation of the author and the same is not intended to be professional advice. 

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