LLP Agreement and its Contents

LLP Agreement and its ContentsLLP Agreement is basically a contract entered into by the LLPs who are intending to start a LLP for carrying the business with profit motive. LLP agreement determines the rights & duties of the partners through which they are governed. There is no legal provision for having a LLP agreement but it is always advisable to have a written LLP agreement as it helps in clarifying the relationship b/w the LLP and the members. LLP agreement is thus a written agreement between partners and limited liability partnerships. Tax mantra has come up with the contents which should be inserted in a LLP agreement. Some of the important clauses to be inserted are summarized below:

  • Business of LLP – The LLP agreement to be drafted should primarily determine the type and object of business of LLP to be incorporated. This clause contains some information on the main office of the business, which is different from the registered office of the LLP.
  • Governing Body – This clause states the governing body through which the LLP is governed and established.
  • Capital contribution by partners – capital contribution is the sum of money being contributed by each partner at the time of incorporating a LLP. No specific provision has been initiated for contribution. The LLP Agreement makes it clear that no interest will be payable to the members on their capital contributions.
  • Profit/ losses sharing ratio – It determines the profit/ loss sharing ratio between the partners. Generally the proportion of capital contributed is the ratio for profit/ loss also but it is not always the same case. Agreement should determine the ratio too.
  • Drawings and expenses – Every member will be entitled to take certain 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 requirements which they might not otherwise be able to meet if they were to wait until their profit share was determined at the end of each year. This entitlement is called drawings and needs to be incorporated in the agreement clause.
  • Indemnities – This clause contains an obligation on the members to act in good faith in the LLP and perform its duties to the fullest. All these obligations are owed to the LLP. Each member is indemnified by the LLP against any claim arising subject to that member having performed their duties properly. This clause should give the individual members some protection against third party claims which are made against them rather than against the LLP.
  • Duties of partners – The partners are required to obligate certain duties towards the LLP. The duties to be performed by the members of LLP should be specifically mentioned in the LLP agreement.
  • Rights & liabilities of partners – The agreement should mention the rights of partners or members which they would possess while conducting business with the LLP. Every partner is liable to certain liabilities which should be incorporated in the LLP agreement.
  • LLP Banks – This clause sets out the name and address of the banks related to LLP and its transactions.
  • Accounts – Which accounts are to be maintained and which books to be kept should also be determined under the LLP agreement. Maintenance of books and accounts is a statutory requirement for every LLP incorporated.
  • Termination – This clause determines the termination of any member. When any member ceases to carry on the business of LLP, he/ she is entitled to receive his or her share of the LLP capital, any undrawn profits due to him and a share of goodwill depending upon the terms of the LLP agreement.
  • Dispute resolution – The members may involve in any dispute and it needs to be resolved amicably between them. Therefore a clause relating to dispute resolution is an essential requirement to be inserted in the LLP agreement so as to avoid disputes.
  • Dissolution – 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 wind up the LLP, rather than exercise the option to take over their share.
  • Expulsion – This clause sets out the reason for which a member can be expelled from the LLP. Even if a member commits a breach which justifies expulsion, the other members don’t have to give notice to expel the member in default. They however, have the right to do so.
  • Insurance – It’s usual for a business to maintain insurance of the premises and assets and this clause should also be inserted in the LLP agreement.
  • Holidays – This clause determines the partner’s entitlement to holidays and other maternity/ paternity leaves of each member.
  • Confidentiality – It is expected that the members who cease from LLP do not disclose the matters of the Company outside and maintain confidentiality even after termination. It’s essential to maintain confidence between members and LLP even if LLP ceases to exist.

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