Limited Liability Partnership (LLP): Overview & LLP Agreement
A Limited Liability Partnership (LLP) is a unique hybrid structure that combines the advantages of both partnerships and companies. It is governed by the LLP Act, 2008, which came into effect on April 1, 2008. The Act consists of 81 sections and 4 schedules, with supporting LLP Rules, 2009 for filing forms with the Ministry of Corporate Affairs (MCA).
What is an LLP Agreement?
An LLP Agreement is a legal contract among the partners or between the LLP and its designated partners. It defines the rights, duties, obligations, and responsibilities of partners. The agreement must be filed with the MCA within 30 days of incorporation. It plays a key role in operational clarity and conflict resolution.
Key Clauses in an LLP Agreement
- Name of the LLP: Must end with “LLP” or “Limited Liability Partnership”.
- Date and Parties: Includes the date of agreement and names of all partners/designated partners.
- Definitions: Explanation of terms used in the agreement.
- Registered Office: Complete address of the LLP’s principal place of business.
- Nature of Business: Description of business activities approved by MCA.
- Duration: Whether perpetual or based on a specific objective.
- Accounting & Auditing: Bookkeeping method (cash/accrual), audit conditions, access rights.
- Capital Contribution: Capital infusion details, profit-sharing ratio, and withdrawal conditions.
- Record Keeping: Where and how books/documents are stored.
- Profit Distribution: Method of allocation among partners.
- Partner Exit/Disassociation: Rules for resignation, rights over assets, and dues.
- Access to Records: Rights to inspect or access financial records to prevent misuse.
- Fiduciary Duties: Partner obligations, non-disclosure of confidential information.
- Arbitration Clause: Dispute resolution process.
- General Provisions: Voting rights, admission of new partners, and decision-making mechanisms.
Types of LLP Agreements
- Equal Rights LLP: All partners share equally in capital, profits, responsibilities, and decisions.
- Differential Rights LLP: Includes:
- Different capital contributions with aligned profit ratios.
- Separate profit-sharing and management rights based on investments or roles.
LLP Agreement & Tax Planning
- Interest on capital is deductible under Income Tax laws if stated clearly in the agreement.
- Define working partners and their remuneration to legally optimize tax liability.
Absence of LLP Agreement
If no formal LLP Agreement is executed and filed, Schedule I of the LLP Act, 2008 applies. Default provisions include:
- Equal sharing of profits and losses.
- Indemnity for personal payments made for the business.
- Equal rights in management, with no salary for managing the LLP.
- New partners require consent from all existing partners.
- Disputes resolved via arbitration if not settled internally.
Conclusion
An LLP Agreement is essential for defining the roles, responsibilities, and profit-sharing structure in a Limited Liability Partnership. It ensures smooth operation, legal protection, and strategic planning for taxation. Drafting a robust agreement with professional assistance can help prevent disputes and strengthen governance in your LLP.