LLP Agreement

LLP Agreement

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.

Why LLP agreement and what does it contain?

LLP incorporation documents (FiLLiP Form 2) make it compulsory for every LLP to execute an LLP agreement within 30 days of formation. Hence, if two 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.

Contents of an 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’s professional team develops LLP agreements after careful study of the LLP Act and rules. Our standard LLP agreement contains the below mentioned provisions:

• 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:

1. The relation of partners is evidenced by an instrument; and
2. 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:

• 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.
• 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.