Any commercial transaction or relationship should be secured through a legal agreement, which describes the nature of relationship between agreeing parties and also provides the means to settle various issues that may arise in course of operations.
In case of an LLP, the LLP agreement is one such written document, which determines the rights, duties and obligations of partners and governs the working of LLP.
This is the most important document with regards to an LLP.
Now, there is no specific format for LLP agreement. However, the LLP Act (Limited Liability Partnership Act, 2008) specified that in case of absence of any agreement between the partners or absence of any clause in the agreement on any matter, the First Schedule of the Act will prevail.
If you do not want to use the default rules under the Act to govern your partnership and its operations, it is highly recommended to have your own written agreement signed by all the partners to guide the LLP. It will also ensure that there are no operational problems in future.
Creating an agreement for your LLP
The Form 3, as prescribed by the LLP Rules, is a good guidance document to draft the LLP agreement.
In fact, you need to mention the detailed clauses of the LLP agreement in Form 3 too. So, it is advisable that when you prepare the LLP agreement, make sure the clauses are in the same sequence as required in Form 3.
Yet again, the Form 3 is great and cover several aspects including Capital, Contribution, Rights & Duties, Dissolution, etc.
However, there are some important clauses concerning an LLP agreement, which are not mentioned in Form 3.
This article is my attempt to list those clauses, which in my view and experience must be included in the LLP agreement.
#1 – Definition clause
Like any good agreement, the Definition clause seeks to provide common understanding of any terms that are used in the LLP agreement. Hence the clause for definition for various terms should be included in the LLP agreement.
E.g. – definition of capital of LLP
#2 – Contribution by the partners
Although this is mentioned in Form 3, here are detailed points which can be added in the agreement –
- Total contribution of the LLP and the contribution by each partner.
- If any partner is contributing in non-monetary form, that is, he / she is going to render services instead of monetary contribution, add the same.
- The percentage of contribution by each partner.
- Additional capital contribution by partner during the course of agreement.
- Manner in which contribution can be withdrawn by the partners – whether it can be withdrawn partly, fully, with or without consent of partners, etc.
#3 – Voting rights of partners
Apart from the various rights and duties of partners, make sure to mention the voting rights of each partner on resolutions passed in meetings.
Also include if the Chairman has a casting vote in case of equal votes.
#4 – Restrictions on Partners’ activities
Make sure to include the conditions applicable to partners if they want to get into any other business, which may or may not be in competition to the existing business of LLP.
#5 – Acts, matters or things which can be done only with the consent of partners
- Matters on which decisions can be passed by either passing circular resolution or actual meeting of partners
- Matters which require consent of all partners and which require consent of majority of partners
#6 – Procedure for any changes in the partners
The changes in the partners can be due to admission of a new partner, resignation, retirement, removal and death of a partner. Make sure to include clauses about
- eligibility to become partners
- changes in profit and loss sharing percentage
- changes in percentage of contribution
In case of death of a partner:
What will happen to the LLP if there are only two partners and one of the partners passes away.
Also, mention clauses for treatment of the deceased partner’s contribution, whether the legal heir will become partner of LLP, what will be rights of the legal heirs of the deceased partner, etc.
#7 – Salary or remuneration of partners
If the partners / designated partners are going to receive salary / remuneration from LLP, the same should be specifically mentioned in the agreement along with the amount or percentage.
#8 – Treatment of income of business
If any part of the income received by LLP is going to be
- set aside for expenses or
- invested or
- distributed among partners,
the same should be mentioned in the agreement.
To be more specific, mention the avenues where the surplus amount will be invested.
E.g. – 30% of the income will be invested in liquid mutual funds
#9 – Borrowing money by LLP
Mention how can the LLP borrow money – whether from outsiders or from existing partners
If the partners are going to provide loan to LLP, mention the conditions for interest on loan, repayment of loan, etc.
#10 – Loan to partner(s)
Mention whether LLP can give a loan to the partner. Decide the limits for giving loans, the interest to be charged, if any, repayment of loan, etc.
One more thing
Although there are guidelines available to draft an LLP agreement and you may have taken great care to draft yours, it is quite likely that you may miss out on any speicifc clause or may not anticipate a situation, which is not covered in the agreement.
To provide for this, you should always add one more clause.
Any decision / action which is not mentioned or covered in the agreement should be dealt with the consent of all the partners.
What if you already have an LLP agreement and now wish to modify it?
If the partners want to modify any clause in the agreement, they can do so by making a supplementary agreement.
E.g. if the LLP wants to admit a new partner, a supplementary agreement needs to be made to insert a new clause about admission of new partner. The clause should have details of the new partner, the capital contribution, the profit / loss sharing ratio, etc.
One point to note here is that the LLP agreement and the supplementary agreement need to be stamped, signed and notarised.
Make sure that you file the LLP agreement or supplementary agreement online within 30 days of incorporation of LLP in LLP Form 3.
Drafting any agreement is a tricky process. Use of words has to be done carefully to make it easy to understand and remove the ambiguity. The consent of all the parties involved is very important too.
Hiring a professional for your agreement can be a good investment.
Read more: All about forming a Limited Liability Partnership
What was your experience in drafting the agreement? Do you wish to make an agreement for your LLP or modify the agreement? For queries and feedback, you can write to me at kruti@cskruti.com