What does an LLP Agreement consist that partners should know?
Before an LLP could start its operations, an LLP agreement is should be entered between partners. LLP agreement covers how members can be expelled, and other critical issues, to avoid unfair prejudice claims. This Limited Liability Partnership Agreement will also consist of the date and month of the year it was entered between the partners. Complete address of the partners will be quoted in the agreement, this address would be used for future emails. This blog will answer your question on ‘What does an LLP Agreement consist that partners should know?’
‘Statement of Background’ section:
- Date of submission of form 2
- The RoC in which the firm will be registered with.
- The principal activity of the LLP: A brief note on the purpose of the business and laws that will abide by.
‘LLP Name and status details’ section:
- LLP’s Name section: This will have the LLP name and a provision for LLP to change its name in future (after voting process).
- Then comes the ‘Identification of initial partners’ section: This section will consist of rules under which addition of partners can be made.
- Status of LLP and LLP Assets’ section: This would state that LLP shall be a legal entity separate and distinct from its Partners. The LLP shall own all its assets in its own name.
- LLP’s Principal Business Activities’ section will consist additional note to the brief description on the activities that the LLP would undertake.
LLP’s Powers ‘section:
- LLP’s Duration: The duration of the LLP can be indefinite and can wind according to LLP Act
- LLP’s Registered Office’ Section: will state the address as mentioned on Form 2 and the criteria for it to change the address.
- ‘Reservation of LLP’s Management’ section: The management of the LLP shall be reserved to the Partners.
LLP’s Annual Accounting’ sections: This section will look something like this
- LLP should prepare profit and loss account and balance sheet including statement of accounts and solvency in accordance with the provisions of Income tax Act, 1961
- Partners’ Contributions to the LLP in Exchange for Their Partnership Rights
- In deciding income, the LLP shall use the accrual basis or cash basis as decided by majority of partners
- LLP’s Accounting Method: As per Indian Accounting Standards and Income Tax Act, 1961 unless otherwise required under the LLP Act.
- The LLP’s annual accounting period for financial and tax purposes shall be the financial year as defined in the LLP Act.
‘LLP Partners contribution’ section: This section will look something like this
- Documentation of Contribution. Promptly after any Partner contributes to the LLP, the LLP shall file in the LLP’s records
- Initial Contributions. Partners shall, in exchange for their Partnership rights, make contributions to the LLP of the cash, property, services, and promises of cash, property, and services.
- No Capital Calls. No Partner shall be obligated to contribute to the LLP except as mentioned in the agreement.
- Subsequent Partner Contributions. Partners admitted to the LLP after execution of this agreement shall make contributions in exchange for their Partnership rights only b making amendments to
- The Partners shall earn 10% interest on their contributions as specified in the agreement.
LLP Record Keeping and Banking: This section will look something like this
- Compile and Maintain Records and Information in Compliance with the LLP Act
- Compile and Maintain Books of Account and Other Records Required for the Sound Management of the LLP, LLP’s business and for its internal affairs.
- Compile and Maintain Certain Records Concerning Contributions
- Compile and maintain records evidencing that its Partners have made to the LLP the contribution.
- The LLP shall open and operate one or more bank accounts either current account or overdraft with one or more banks as may be agreed upon by affirmative vote of all partners
LLP’s allocation and distribution to the partners:
- Allocation of its profit or loss between the Partners in proportion to the Partners’ partnership interest in LLP.
- Interim Distributions criteria
Capital account and a Current account of the partners:
- Capital Account
- Maintenance of Capital Accounts. A Partner’s capital account should be credited or debited whenever there are contributions made.
- Distributions in Liquidation of the LLP. In connection with the LLP’s liquidation, the LLP shall make distributions that leave each partner with a capital account of zero.
- Current Account: A Partner’s current account shall at the relevant time have credit or debit to each of them as the case may be any;
- any share or profit or loss allocated under section 5.1 or
- any interim or liquidation distribution under section 5.2 or
- any interest on capital or loan from a partner.
LLP Partner Dissociation and purchase of shares: This section will look something like this
- Events of Dissociation—In General (rights after dissociation will also be listed down)
- Dissociation upon Resignation
- Dissociation upon death
- Dissociation upon disability
- Dissociation upon partner insolvency
- Dissociation upon expulsion
- Redemption and Cross Purchases of Partnership Rights post dissociation
- Option of LLP to Redeem and Other Partner to Cross-purchase the Partnership Rights of Dissociated Partner
- Option of Disabled or Deceased Partner to Require Redemption or Cross-purchase of the Partner’s Partnership Rights
- Buy out Terms
LLP Grants of Partnership Rights: This section will look something like this
- LLP Grants of Partnership Rights to Third Parties, done after execution of agreement and affirmative vote of all partners
- LLP Grants of Additional Partnership Rights to Partners, After the execution of this agreement, shall be decided by the affirmative vote of all partners
- Partners sales and other transfers of their partnership rights to 3rd parties require the affirmative vote of all partners .
- The requirement of Consent of Other Partner for Pledges of Partnership Rights.
LLP Partner meeting:
This section will lay down the frequency in which the meeting shall be held.
LLP Partner Voting:
Each material matter relating to the day to day LLP’s business and internal affairs (a ‘partner matter’) will be decided by affirmative vote of all partners. Each partner shall cast one vote on each partner matter.
LLP partners rights to LLP records and confidential information:
- Right of Access, Etc. Each partner will have right to access, copy and use LLP records and information.
- Each partner shall maintain the confidentiality of confidential LLP records and information.
LLP Management: This section will look something like this
- Partners’ Responsibility for Managing the LLP
- Partners’ Agency Authority; Restriction on Exercise of Agency Authority like contract signing
- Partners’ Compensation and Fringe Benefit
- Partners fiduciary duty of care and loyalty
Mandatory Arbitration mechanism:
Any arbitration under or relating to this Agreement or relating to the LLP will be conducted by a single arbitrator, in accordance with Arbitration and Conciliation Act, 1996.
Amendment of Agreement: Provision for amendment of the Agreement will be valid unless it is approved by affirmative vote of all partners, and is in writing, and is signed by partners as decides.
Signature and Dates:
In witness of their acceptance of the terms and conditions of this LLP agreement, the parties, by themselves have duly signed this Agreement the day, month and year.