Default Clauses in an LLP Agreement- An Overview
Limited Liability Partnership Agreement is a written agreement among the partners of an LLP or between the partners and the LLP firm. This type of agreement sets the rights and duties of partners towards each other and also toward LLP. It is Necessary to draft and administer an LLP Agreement within 30 days of incorporation of LLP as per LLP incorporation. LLP Agreement Explains managerial, operational as well as administrative outlook and sets well-defined methodologies specifically for decision making, adding a new partner into the firm or disassociation of an existing partner of the firm.
A Limited Liability Partnership is an alternative form of business that produces benefits of limited liability of a company and the flexibility of a partnership.
|Advantages of LLP||Disadvantages of LLP|
|Limited Personal Liability||Limited Power|
|Easy to administer||More difficult in the formation when compared to that of Limited Liability Company|
|Can raise money||A license fee is applicable|
The LLP like Company as a separate legal existence, which is it is a separate legal entity. A Limited Liability Partnership Agreement is established between the partners of LLP and LLP in order to stabilize a fair relationship between them and protect the investments made by them. An LLP Agreement basically sets out the following:-
- Rights and Obligations of the members
- Regulate the members capital invested in the business.
- Regulate the property used and owned by LLP
- Regulate the procedure for important decision making
This article is an attempt to explain the basic concepts of LLP Agreement, the essential contents of such Agreement and also what all are the fault clauses in an LLP Agreement and the procedure to include such clauses.
CONTENTS OF LLP AGREEMENT
There is no lawful provision for having an LLP Agreement but it is always advisable to have an LLP Agreement written among the partners.
Some of the great contents which must be started in an LLP Agreement are as follows:-
This clause is a character of any LLP Agreement. This clause contains various definitions such as the definition of a designated partner, accounting period, business of LLP and the proposed name of such LLP. The Agreement must provide for the address of the registered office of LLP as well the address of all the partners.
The LLP Business clause essentially highlights the purpose and objective behind the LLP that is proposed to be established. This clause includes details as to the head office of the LLP where it is situated which is different from its registered office.
This clause includes information as to the governing body through which the proposed LLP is to be governed and established. A minute book should be maintained to record minutes of meetings of partners and managing or executive committee of partners. There is no provision for a general meeting of members of LLPs. Partners can decide when and how to meet or as may be laid down in LLP Agreement.
CAPITAL CONTRIBUTION CLAUSE
A capital contribution is the sum of money that is contributed by each partner towards the LLP at the time of its incorporation. The LLP Agreement should elucidate that no interest will be provided to partners on capital contributed by them.
PROFIT/LOSS SHARING RATIO CLAUSE
This Clause states the profit/ loss sharing ratio at which the value of profit or loss will be shared among the partners.
Every member will be allowed to take a specific amount of money from the LLP fund every month This is a payment on account of each member’s annual profit share and is recognition that members will have personal requisites which they might not otherwise be able to meet if they were to wait until their profit share was decided at the end of each year. This entitlement is called drawings and needs to be incorporated into the agreement clause.
Each member of the LLP has definite obligations towards the LLP. This clause contains all those obligations which are owned by the partners towards LLP. All the members of the LLP have a right to be indemnified against any losses caused to them in spite of them carrying out their duties and obligations according to the rules established by the LLP.
The members of the firm after their retirement, termination or otherwise from the firm is prevented from working for or carrying out any business within the designated geographical location which is in such a nature of competing with the business of the firm
This is a clause which is added to limit any member from using the firm’s resources for personal gains without the permission of other members. It can also bind decisions that are based on personal relationship or which helps the immediate family members of the partner.
This Clause includes in detail the accounts and books of accounts that have to be maintained by the LLP from time to time and also in accordance with the accounting standards ascertained.
This clause constitutes the details as to the bank and its address to which LLP and its transactions are related.
RIGHTS AND LIABILITIES
This clause mentions in detail the rights and liabilities which the members of the LLP posses so long as they carry the business of the LLP.
WINDING UP OF LLP
A clause for dissolution should also be inserted which specifies that if a member dies or retires, the others may decide that they would prefer to dissolve the LLP, rather than exercise the option to take over their share. The winding up of LLP may be executed either by:-
- By Tribunal- A petition to the Tribunal for the dissolving of an LLP shall be presented by:-
(a) the LLP or any of its partner or partners
(b) any secured creditor or creditors, including any contingent or prospective creditor or creditors
(c) the Registrar
(d) any person authorized by the Central Government in that behalf
(e) in a case falling under section 51 of the Act, by the Central Government or
(f) in a case falling under clause (d) of section 64, by the Central Government or a State Government
- Voluntary – A LLP may be dissolved voluntarily if the LLP passes a resolution with the approval of at least 3/4th of a total number of partners, asking the LLP to be wound up voluntarily. A copy of resolution shall be filed with the Registrar within 30 days of passing up such resolution.
WHETHER LLP AGREEMENT IS MANDATORY FOR ALL LLP?
As per the provisions of Limited Liability Act, in the lack of agreement relating to any matter regarding the partnership or the partners, the mutual rights and liabilities as provided under the schedule I of the Act shall apply. Consequently, if the LLP wishes to exclude any of the provisions as mentioned in schedule I of the Act it has to enter into an LLP Agreement in order to specifically eliminate those provisions.
DEFAULT CLAUSES IN AN LLP AGREEMENT
Without LLP Agreement or where an LLP Agreement is quiet the LLP will be governed by the default provisions as set out in Limited Liability Partnership Act 2000 and Limited Liability Partnership Regulation 2001. The default plans may be as follows:-
- All the members are authorized to equal share in profits of the firm irrespective of the distinct amount of capital invested by them.
- The members have similar rights in participating in the management and administration of the business and all the members have equal voting rights.
- Unanimous Consent from the existing members is required for admission of a new member into the firm.
- The members of the firm cannot be expelled from the firm without his/her consent.
- LLP will guarantee the members in respect of expenses incurred by them in relation to LLP.
As stated earlier schedule I of the Act comes into survival only in the absence of an LLP Agreement or if the matter has not been discussed in the LLP Agreement it can be redefined or excluded by the LLP as per the provisions of Schedule I of the Act.