How should an LLP agreement be drafted?

Limited liability is not possible under a partnership agreement, since under partnership law each partner is jointly and severally liable for the debts and obligations of the partnership incurred while he or she is a partner. Consequently, if a partner runs off with the client's funds, each partner is legally responsible for the entire debt, not just a portion.

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 still provided the same tax advantages as ordinary partnerships and internal management flexibility.

A Limited Liability Partnership is a set of rules that govern commercial transactions in the Western world, and these commercial transactions stimulated the creation of law and the legal system. LLPs are governed by the LLP Act, 2008, and its Rules. 

Throughout this blog, you will learn how LLP agreements draft 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. LLP's name

According to the LLP Act of 2008, the partnership's name must end with LLP or Limited Liability Partnership.

2. 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, but to avoid any possible dispute 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 drafted and executed prior to its incorporation.

3. Provisions for introduction

This clause contains all the definitions and terms used in an LLP Agreement format, including designated partners, partners, the contribution 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. Background statement

An LLP's incorporation details and activities are described in this clause. A brief description of the LLP's business and its purpose can also be included. You can briefly describe your real estate business or manufacturing business, for example.

5. Contribution and method of contribution of the partner

Mention whether the partner's contribution is tangible, intangible, moveable, or immovable in this clause. In addition, the agreement provides for additional contributions from the existing partners to meet operational needs, working capital requirements, and any other requirements. A change in contribution can be made by amending the LLP Agreement format with all partners' approval. An agreement can also specify that partners can withdraw their contributions.

6. Business address

The LLP's registered office is where it conducts its business. Third parties cannot claim any title or right over the premises mentioned in the LLP Agreement.

7. Ratio of profit sharing

Profit-sharing ratios are written in this section and can be determined either by the proportion of each partner's contribution, their respective voting rights, or by the majority of all partners.

8. Partners' details

It 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. Partner must give thirty (30) days' notice in writing to the other Partners of his/her intention to resign/retire as a Partner. A partner can also be expelled by giving a notice of thirty (30) days from the date on which the decision is taken by the majority of partners, after allowing that partner to be heard. 

9. Partners' rights

This clause lays out the rights of the partners in an LLP. Partners are entitled to participate in business decisions, express opinions, access the company's books, share profits, receive interest on capital and advances, and claim indemnification for payments made on behalf of the company.

10. Partners' duties

You must specify all the responsibilities of the partners in an LLP in this clause. All the partners must carry on the business to the greatest advantage, be just and faithful to each other, render true and complete accounts, provide full information regarding all things affecting the firm, indemnify for fraud, diligent in the conduct of the firm's business, use the firm's property, and refrain from earning personal profits or competing against other partners. 

11. Activity in the business world

Describes the type of business activities that will be carried out by the LLP. At the time of LLP incorporation, the business activities must be approved by the Ministry of Corporate Affairs.

12. Meeting place and manner

Describe the location of the meeting in your LLP Agreement Format. You can hold it at your registered office or somewhere else. It is also important to specify how the partners will meet, such as by teleconference or videoconference.

13. Meeting quorums

The minimum number of partners required to constitute a quorum in a meeting will be discussed in this clause. 

14. Meeting chairman

A presiding partner will chair the meeting, and he should be present within fifteen minutes of the meeting time. 

15. General provisions and arbitration

Whenever a conflict arises in relation to the agreement, this clause will be used to resolve it and determine how the costs will be divided between the partners.

16. Provisions of other kinds 

Other important provisions that you can include in your LLP Agreement format are remuneration of designated partners, transfer or assignment of rights, borrowing powers of partners, winding up of the LLP, and circular resolutions.