LLP Agreement – Essential Clauses

What is an LLP Agreement?

Section 2(1)(O) of the Limited Liability Partnership Act, 2008 defines it as under:

“LLP Agreements mean any written agreement between the partners of the Limited Liability Partnership or between the Limited Liability Partnership and its partners which determines mutual rights and duties of the partners and their rights and duties about that limited liability partnership.”

It is compulsory to make and execute an LLP agreement within 30 days of the incorporation of LLP. The value of stamp paper on which the LLP agreement must be printed or stamp duty to be paid on the LLP agreement depends on the state of incorporation and the amount of capital contribution from the partners.

LLP agreement defines the roles, responsibilities, rights, and powers of the partners to LLP and each other. So, it creates the base for the smooth running of LLP. LLP agreement clarifies the managerial, operational, and administrative responsibilities and sets transparent methodologies for decision making, adding a new partner and disassociating an existing partner.

How to prepare LLP agreement

• Draft the agreement and print it on a Stamp paper of requisite value. The value of the Non-judicial Stamp Paper depends on the state in which Registration of LLP is done and on the amount of capital contribution.
• All partners should sign the agreement at the bottom of all pages.
• The two witnesses should sign the agreement at the end of the document.
• A copy of the agreement should be provided to every partner.

Essential Clauses to be included in the LLP agreement

Interpretation / Definitions

This clause is the spirit of any LLP agreement. An LLP Agreement must provide for various definitions such as the definition of designated partners, the accounting period, business of LLP and the name with which the LLP will be known. The agreement must also provide the full address of the registered office of the LLP and the address of all the partners.

Designated Partners

LLP agreement shall mention the name, age, and address of each of the Designated Partners correctly.

Name of The LLP And Changes to It

This clause shall state that the business of the LLP shall be carried on in the name and style of [Name of LLP]. Any change in the name of the LLP shall be notified to the Registrar by the Designated Partner(s) following the provisions of the LLP Act and the Rules.

Registered Office of the LLP

LLP agreement shall state that partnership business shall be carried on at the address below, which shall also be its registered office. The company shall also be carried from such other places as the partners may mutually decide from time to time.

The business of the LLP

This clause must specify the nature of the business that the LLP will be carrying on. The LLP may engage in any activities necessary, desirable or incidental to the accomplishment of the conduct of such business of the LLP, including but not limited to such ancillary business. It may also include any other business conducted in such a manner as may be decided by the majority of Partners from time to time.

Capital Contribution

The total contribution of the LLP and the contribution by each partner, along with the percentage of contribution to be mentioned in this clause. Suppose any partner is contributing in non-monetary form. In that case, they will render services instead of monetary contribution, add the same—manner of Additional capital contribution by a partner during the agreement to be included as well. How the partners can withdraw contributions shall also be stated in this clause.

Profit-Sharing Ratio

An ideal LLP Agreement must also mention the ratio in which the business’s profits and losses will be shared among the partners. The partners must clearly state the amount of profit that each member receives, or the amount of the loss that they’re liable for will be set out in the agreement.

Rights and Duties of Designated Partners

The LLP Agreement must specify the various rights and duties of the Designated Partners as they may mutually agree upon. In the absence of such separate agreement between the partners about such rights and responsibilities, etc., the provisions of Schedule I of the Limited Liability Act, 2008 will apply as given in Section 23(4) of the said act.

Admission of Partner, Retirement Resignation and Expulsion of Partners

LLP agreement must include the provisions regarding admission of new partners, retirement, the death of a partner, etc. The agreement must provide guidelines for the expulsion of partners as well.

Remuneration & Interest to be Paid to Partners

The LLP agreement shall contain a clause regarding the amount of remuneration to the Designated Partner(s) for rendering the services. This clause shall include the rate of interest to be paid to the partners on their capital contribution.

Bank Account

This clause shall set out the modus operandi of the Bank account transactions of the LLP.

Books of Accounts and Accounting Year

The LLP agreement shall contain a clause relating to the maintenance of books of accounts and other documents, method of accounting and the details relating to the Accounting year of the LLP.

Meetings

LLP agreement shall clearly state how the decisions of LLP shall be taken in the meeting of the partners and shall also provide how the same shall be recorded in the minutes and the place of maintenance of such minutes book etc.

Indemnity

The LLP agreement should contain a provision regarding indemnities. The clause of indemnity states that the LLP must protect its partners from any kind of liability or claim incurred by them while carrying the business of the LLP. The partners should also agree to indemnify the LLP for the loss caused by it due to any breach committed by them.

Dispute Resolution

A well-drafted LLP must always contain a provision for resolving disputes between the members. In an ordinary course, every LLP prefers Arbitration as a mode of resolving disputes. Such LLP is governed by the Arbitration and Conciliation Act, 1996. Thus, every LLP agreement must incorporate a clause providing a dispute resolution mechanism to avoid disputes resulting in lengthy and expensive litigation.

Term of LLP/Winding Up

The partners must specify the validity of such an LLP agreement, whether it is a perpetual agreement or valid for a fixed period. The agreement must also provide for the situations when the partners have agreed to wound up the affairs of the LLP either voluntarily or by order of Tribunal for the specific violations as mentioned in Section 64 of the Act.

General Provisions

In addition to the clauses as mentioned above, the LLP agreement shall include general provisions on binding on heirs, successors, counterparts, serving of notices, waiver, Governing law, etc.