2022-09-17 13:59:51

What is an LLP Agreement?

Introduction

LLP Agreements which means a written agreement between LLP or the partners of the Limited Liability Partnership and its partners establish the rights and duties of the partners toward each other as well as toward the LLP.

It is a body corporate that is created by law. According to the LLP law, any two persons can incorporate an LLP by subscribing to the incorporation documents. Once an LLP is formed then 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 self-agreed LLP agreement provides flexibility and contractual freedom to partners to fulfill their requirements and interest as compared to an incorporated business structure as the majority of its administrative procedures are framed according to the provisions of the Companies Act. An LLP Agreement is a must for smoothing the long-term functioning of an LLP.

LLP Agreement

An LLP Agreement is a written contract between the LLP and its designated partners. This agreement established the rights and duties of the designated partners towards each other as well as toward the LLP. It is compulsory to execute and file the LLP Agreement with the Ministry of Corporate Affairs within thirty days of the incorporation of the LLP.

It creates the foundation for the smooth running of the LLP. It defines the concepts for decision making, adding a new partner or leaving existing partners, or changing in roles of anyone. So the LLP Agreement acts as a backbone to strengthen the firm or LLP. It works as a guide that provides direction to LLP registration.

Types of LLP Agreements

The main two types of LLP agreements are given below:

Equal Rights LLP (1:1)

In this type of LLP, all partners contribute equal capital, time, and energy in the LLP. All receive the same earnings and share equal profit and loss. Any decisions are taken by all the partners mutually. All the partners have the same rights and duties which contribute equally to the management as well as the business of the LLP.

Differential Rights LLP

In this type of LLP, Partners have different amounts of contribution in terms of capital, time, and energy. The right to profit sharing, decision making, and managerial rights are differs. It can be classified into two parts which are mentioned below:

LLP Agreement wherein rights are in the ratio of contribution and profit sharing. The level of contribution may decide upon the level of profit sharing.
LLP Agreement wherein rights are in the ratio of contribution only, but profit rights are different.

Content of LLP Agreement

A well-structured agreement is necessary for the successful functioning of an LLP. The contents of the LLP Agreement which is given following:

Name of the LLP: - According to the provisions of the LLP Act, 2008 the name of the LLP shall end with Limited Liability Partnership.
Date of the agreement and parties to the agreement: - According to the LLP Act, 2008 after incorporation the LLP Agreement is to be executed within 30 days. LLP Agreement is between the LLP and its designated partners. It must include the date and of agreeing.
Introductory provisions: - These include all the definitions of terms that are used in the LLP agreement.
Place of business: - Under this agreement must mention the place of business which is the registered office of the Limited Liability Partnership.
Business activity: - It is most important to include the business activities which are carried on by the LLP. It must be of the same nature which is approved by the MCA at the time of incorporation of LLP.
Duration: - If the LLP is formed for a specific period then such period must be mentioned in the LLP Agreement after which the LLP must be dissolved. It can also be formed for a specific object, after completion of that object LLP must be closed. In the absence of a specific period or object, it must include the duration of the LLP as up to the period until which, it is terminated with the consent of the partners of the LLP.
Accounting and auditing: - In the LLP Agreement also includes how to maintain the books of accounts whether it is cash or accrual basis. During this period a partner can access books of accounts, whether an audit is mandatory or will follow the rules mentioned in the LLP Act.
Partners’ contribution and method of contribution: - Represents the contribution ratio of partners in terms of capital invested, interest on contribution, Profit Sharing Ratio, and the time period after which the capital can be withdrawn by any of the designated partners of the LLP. It is important for maintaining a good relationship between partners of the LLP.
Record keeping and bank arrangement: - It includes the maintenance, storage, and recording of books of accounts and other related documents of the LLP.
Allocation and distribution: - It clarifies the system of profit sharing with all the partners and distribution including the interim distribution or final distribution.
Disassociation of partner: - When partners can withdraw or disassociate from the LLP then specifies the terms and conditions. It is an important clause of the LLP Agreement which stated the rights of the partners and assets after disassociation.
Partners’ rights to records: - Every partner of the LLP has the right to check the records for avoiding misappropriation.
Management and fiduciary duty: - It takes into account the liability of the management of an LLP. The appointed person is liable for taking care of confidential information of the LLP.
Arbitration and general provisions: - In the case of conflict between parties then the parties may appoint a third person known as an arbitrator who listens to both the parties and after that arbitrator takes a decision that is accepted by both the parties and the final order must be followed by both parties.
Other Provisions: - Several other provisions also come under the LLP Agreement e.g. – The admission of new partners and their rights and after that changes in the designation. It also includes the right to take part in the business, title, interest in assets, right to access, right to continue the independent business, right to recover the due debt and selling, etc. It covers the mode, period time of the meeting of partners, the decision-making process, agenda, and the voting rights of the partners of the LLP.

Essential points for LLP Agreement

The LLP Agreement format can be changed to suit the essentials as long as replacement is filed and registered with the Registrar in the appropriate form in the appropriate manner, and with the appropriate fees.
If any provision of the Act is violated by the LLP Agreement format then each partner will be subject to a fine of not less than Rs.2000 but not more than Rs.25000.
The LLP Agreement must include the procedure for the sale or transfer of Partnership rights and must be mentioned if the transfer of rights is banned under the LLP Agreement.
The provisions of hostility are also included in the structure of the LLP Agreement. If any of the LLP’s partners choose to leave then the procedure and process are outlined. It also endeavors information about the rights of exciting partners, continuing partners, and the division of firm assets with other things.

Procedure to create LLP Agreement

Some steps to create your LLP agreement which is given below:

Make the contract and print it on stamp paper with sufficient value.
All partners should sign the agreement at the bottom of each page.
Two witnesses shall sign the agreement at the end of the document.
The Sub-Registrar office registers their contract and according to the state, regulations pay their relevant registration fees.
A copy of the agreement must be given to every partner.

Conclusion

It concluded that LLP Agreement is a written contract between the LLP and its designated partners. This agreement established the rights and duties of the designated partners towards each other as well as toward the LLP. It is compulsory to execute and file the LLP Agreement with the Ministry of Corporate Affairs within thirty days of the incorporation of the LLP. The self-agreed LLP agreement provides flexibility and contractual freedom to partners so as to fulfill their requirements and interest as compared to an incorporated business structure as the majority of its administrative procedures are framed according to the provisions of the Companies Act.

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