LLP Agreements Explained
LLP Agreement means a written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to LLP
A Limited Liability Partnership (LLP) is a body corporate created by law. As per the LLP law, any two persons can incorporate an LLP by subscribing to the incorporation documents. Once an LLP is formed, the rights and duties of partners are governed by Schedule One of the LLP Act, unless the LLP's partners or the LLP and partners create an LLP agreement.
The main benefit of a LLP over other incorporated business structures is that maximum contractual freedom is granted to its partners to tailor the LLP agreement in order to meet their needs and interests. Such a level of freedom is not available to a company, given that a majority of its administrative procedures are framed as per prescribed provisions of the Companies Act.
So a well defined LLP Agreement is a must for proper functioning of an LLP.
LLP Agreements Explained
Contents of LLP Agreement
A well structured and drafted LLP agreement is very much required for the successful functioning of an LLP. Since an LLP is not a company and provisions of the company law is not applicable to an LLP, the LLP agreement must address all corporate structure related issues in the LLP agreement.
CompaniesInn.com has developed customized LLP agreements after careful study of the LLP Act and Rles. Our standard LLP agreement contains the below mentioned provisions:
LLP Agreements Explained
- Name of the LLP - The name of the LLP shall end with LLP or Limited Liability Partnership as per the provisions of the LLP Act.
- Date of the agreement and parties of agreement - Since the LLP agreement is executed after incorporation and as per incorporation, the same needs to be executed within 30 days of incorporation, the date of the LLP agreement must be a date within 30 days from the date of incorporation. As per the LLP Act, an LLP agreement is an agreement between partners of LLP or LLP and partners; hence, the parties of the LLP agreement can be all partners or LLP and all partners. For our agreement, the parties are the LLP and its partners.
- Statement of background - This section describes incorporations details, state of registration, activities of LLP, etc.
- Introductory provisions - Definition of terms used in the LLP agreement, name of the LLP and future name changes, initial partners, new partners admission, business activities, power of LLP, duration, management, accounting, auditing, etc.
- Partners' contribution and method of contribution - How each partners contribute, whether they can take back the contributed amount, interest on contribution, etc.
- LLP record keeping and bank arrangement - Method of keeping LLP books and records.
- Allocation and distribution - How profit of the LLP allocated among the partners and how distribution including interim distribution or final distribution in the LLP.
- Capital and current account - What to be credited and debited in each account.
- Disassociation of partner - How a partner needs to be disassociated from the LLP, what are his rights, notice to existing partners, rights over assets of the LLP including termination of a partner from LLP.
- Redemption and cross purchase of rights - How partners' rights can be redeemed from the LLP, method of readmission, cross purchase, etc.
- Issue of partnership rights - Fresh issue of rights in the LLP including admission of new partner.
- Sales, transfer of partnership rights - Procedures for sale of partner rights, transfer of rights, etc. to existing and new partners.
- Partners' meetings and voting - How the meeting needs to be conducted, decision-making process and voting rights are covered in this clause.
- Partners' rights to records - Rights of each partner to inspect records of LLP and copies of the same.
- Management and fiduciary duty - Who will manage the LLP, how day-to-day management function including fiduciary duty of partners in the LLP.
- Arbitration and general provisions: Method of appointing arbitrator, proceedings, etc.
LLP Agreement and Tax Planning
As per the Income Tax law, an LLP is considered to be a 'firm'; therefore, tax provisions applicable to a firm are also applied to LLPs, provided the following criteria are satisfied:
a)The relation of partners is evidenced by an instrument, and
b)The individual shares of partners are specified in the instrument.
Therefore, to avail the benefits of a firm under the Income Tax act, the LLP agreement must be an instrument in writing and each partner's partnership interest identified and specified in the LLP agreement.
Other considerations to avail tax benefits while drafting LLP agreements are:
a)Interest on capital contribution can be availed as a deduction from LLP income within the overall limit if such provision is provided in the agreement.
b)Working partners and the remuneration payable to each working partner should be specified in the LLP agreement. A partner can draw salary from the LLP if his name is indicated in the agreement as working partner.
Hence, one must look into these aspects while preparing an LLP agreement to minimize tax liability among the partners including LLP tax.
LLP Agreements Explained
Types of LLP Agreements
Many people believe that one set of LLP agreements suit all combinations of the LLP. This is wrong; an LLP agreement shall be selected based on the requirements of each case. Following are the main types of LLP agreements.
LLP Agreements Explained
Equal Rights LLP
This is an LLP with two or more partners having equal rights/powers with respect to profits/losses as well as decision-making authority (1:1 basis). This type of agreement will be applicable if all partners in an LLP contribute equally to the LLP and have the same rights including management rights. In this type of LLP, all partners will be working partners and receive the same remuneration. This is a type of LLP agreement suitable when all partners contribute equally to the management and business of the LLP.
Differential Rights LLP
This is an LLP with two or more partners having variable rights/powers based on the ratio of capital contribution or other such considerations. This type can be further classified into:
- LLP Agreement wherein rights are in the ratio of contribution and profit share
- LLP Agreement wherein rights are in the ratio of contribution only but profit rights differ. Management rights may be equal or in the some other ratio
Absolute Rights LLP
If an LLP is incorporated with by two persons and only one person is appointed as the nominee or in some cases only as the investor. The agreement needs to be drafted in such a way that one person will get all the management as well as decision making power.
Husband & Wife LLP
An LLP with a husband and wife as partners; such an agreement can have a structure similar to any of the three LLP agreements listed above. Additionally, a special agreement pertaining to tax liability given the LLP partners' personal relationship is required. We have structured this type of LLP Agreement to meet their goals to minimum family tax liability.
Equal Right and Differential Power LLP
An LLP with more than two partners, each having equal rights, is an Equal Rights LLP. For operational efficiency, this type of LLP agreement typically delegates specific powers to selected partner(s), subject to receiving unanimous consent from all partners. In this type of LLP, partners have equal rights in all aspects; however, by an LLP Agreement, some specific powers are given to particular partners.
Differential Rights and Differential Powers LLP
This is an LLP with multiple partners holding variable rights and powers. The LLP agreement in such a case needs to specifically define rights/powers and duties of each partner.
Partner Managed LLP
This is an LLP with multiple partners; administrative/management/operational decision-making powers are vested with specific partners (two or more), while all remaining partners are nominal or investing partners, i.e. no decision-making rights.
Board Managed LLP
This is an LLP with multiple partners and the business is managed by a committee of partners, similar to a company's Board of Directors. While overall control is exercised by all LLP partners, day-to-day management and decision-making is handled by the committee/board.
Manager Managed LLP
This is an LLP with multiple partners and the administrative, management and operational decision-making powers are vested with designated employees with specific powers (two or more). In this case, all partners are investing partners without any decision-making rights on day-to-day affairs of the LLP.
Why LLP Agreement
LLP incorporation documents (Form 2) makes it compulsory for the partners of every LLP to execute an LLP agreement within 30 days of formation. Hence, if parties to incorporation document agree to sign an LLP agreement within 30 days of formation, they should also execute an LLP agreement within 30 days from incorporation of LLP.
LLP agreement clearly defines the mutual rights and duties of each partner, the relationships among individual partners and that of each partner with the LLP. While drafting an LLP agreement, one must look into first schedule of LLP Act as unless LLP Agreement specify clearly otherwise, the respective entries in the schedule apply to LLP.
The usual elements that can be defined upfront with an LLP Agreement include management and operating procedures, addition of new partners, decision-making methodologies, etc.
Hence, a comprehensive LLP agreement is a prerequisite for the smooth functioning of an LLP. The LLP agreement is the ultimate, helpful guide for all activities and matters relating to the LLP.
Creating a professional LLP agreement requires in-depth knowledge and experience of several legal areas like LLP, corporate and contract laws as well as excellent drafting skills. CompaniesInn.com has this knowledge and experience, having drafted numerous, bespoke LLP agreements for India-based businesses and entrepreneurs.