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Since each partner is jointly and severally liable for the debts and obligations incurred by the partnership while he or she is a partner, limited liability cannot be implemented under a partnership agreement. Therefore, each partner is legally responsible for the entire debt, not just a portion, if a partner runs away with the client's funds.
By introducing the Limited Liability Partnership (LLP), this gap is filled, as the LLP is a response to the need for large partnerships to find a form of incorporation with limited liability in an increasingly litigious world that offers the same tax advantages as ordinary partnerships as well as internal management flexibility.
It is a set of rules that govern business transactions in the Western world, and these transactions stimulated the creation of law and the legal system. LLPs are governed by the LLP Act, 2008, and its Rules.
In this blog, you will learn how LLP agreements are drafted and what all elements are included.
In an LLP Agreement, what are the essential elements?
Following are the main contents of a well-structured and organized agreement:
1. Name of the LLP
The Limited Liability Partnership Act of 2008 requires the partnership's name to end with LLP.
2. The parties to the agreement and the date of the agreement
The full legal names of all partners agreeing to join the LLP agreement and the agreement date should be included in this section. Moreover, the details of the same must be filed in e-form 3 within 30 days of incorporation, however, in order to avoid any possible disputes between the partners regarding the content of the agreement after the LLP has been formed, it is always in the interest of the parties involved to have the LLP Agreement draft and executed prior to its incorporation.
3. Introduction provisions
This clause contains all the definitions and terms used in an LLP Agreement format, including designated partners, partners, contributions made by the partners, profit-sharing ratio, admission of new partners, business activities in an LLP, duration of the LLP, management, accounting, and auditing.
4. Statement of background
The details of the LLP's incorporation and activities are described in this clause. A brief description of the LLP's business and purpose can also be included.
5. Partner's contribution and method of contribution
In this clause, indicate whether the partner's contribution is tangible, intangible, moveable, or immovable. Additionally, the agreement provides for additional contributions from the existing partners to satisfy operational, working capital, and any other needs. Changes in contributions can be made by amending the LLP Agreement format with all partners' approval. A withdrawal of contributions can also be specified in an agreement.
6. Address of the business
The LLP's registered office is where the business is conducted. The premises mentioned in the LLP agreement cannot be claimed by third parties.
7. Profit sharing ratio
A profit-sharing ratio is written in this section and can be determined by the proportion of each partner's contribution, their respective voting rights, or by majority decision.
8. Details of partners
The document provides for the admission of new partners, the resignation or retirement of existing partners, the death of a partner, and the removal of a partner. If a partner wishes to resign/retire as a Partner, he/she must provide thirty (30) days' notice in writing. Alternatively, a partner may be expelled by giving thirty (30) days' notice in writing.30 days after the majority of partners have taken a decision, after that partner has been heard.
9. Rights of partners
Partner rights in an LLP are outlined in this clause. In addition to participating in business decisions, expressing opinions, accessing the company's books, and sharing profits, partners are entitled to receive interest on capital and advances, as well as being indemnified for payments made on behalf of the company.
10. Duties of partners
In this clause, you must specify all of the responsibilities of the partners in an LLP. Each partner must carry on the business to the greatest advantage, be just and faithful to each other, provide accurate and complete accounting, provide full information about all matters affecting the firm, indemnify the firm for fraud, conduct the firm's business diligently, use the firm's assets, and refrain from earning personal profits or competing against others.
11. Business activity
An LLP's business activities must be approved by the Ministry of Corporate Affairs when it is incorporated.
12. Place and manner of the meeting
A LLP Agreement should specify the location of the meeting. It can take place at your registered office or somewhere else. You should also specify how the partners will meet, such as by teleconference or videoconference.
13. Quorums at meetings
This clause discusses the minimum number of partners required to constitute a quorum at a meeting.
14. Chairman of the meeting
Upon the start of the meeting, a presiding partner should be present within fifteen minutes.
15. Arbitration and general provisions
When a conflict arises, this clause will be used to resolve it and determine how the costs will be divided.
16. Other types of provisions
LLP Agreements can also include provisions regarding the remuneration of designated partners, transfer or assignment of rights, borrowing powers of partners, winding up, and circular resolutions.
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