CHANGE IN CONTRIBUTION OF PARTNERS IN LIMITED LIABILITY PARTNERSHIP

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CHANGE IN CONTRIBUTION OF PARTNERS IN LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership (LLP) is a flexible legal and tax entity wherein each partner has a limited liability when it comes to the debts and claims of the partnership. The LLP’s partners can benefit from the economies of scale by working collaboratively while also reducing their liabilities for other partners’ actions.

Change in Contribution in LLP

Partners can contribute to the LLP in either of these two forms: tangible and/or intangible property such as cash, promissory notes and agreements/contracts. If the LLP’s contribution is received in a form other than cash, it must be valued by a registered valuer. It is necessary to keep in account the monetary value of each partner’s contribution, and the same must be disclosed to all the partners of the LLP.

If any partner of the LLP wants to make any changes in his contribution, it is mandatory to make amendments to the LLP agreement. Unless it is specifically mentioned in the LLP agreement, a change in the LLP’s contribution does not lead to any changes in the partners’ profit-sharing ratio. Partners can change the contribution in the LLP provided that there are pre-defined conditions for the same in the LLP agreement or as per the mutual consent of all the partners. A change in capital contribution in LLP can lead to either an increase or a decrease in the capital of the LLP.

Reasons for Change in Capital Contribution in LLP

Every business entity wants to manage its funds requirements according to its objectives, aims and business policies. The easiest way to meet the capital requirement of an LLP is by changing the contribution in the LLP. But for this, the LLP has to follow the regulations which are provided in the LLP agreements for change in contribution in the LLP.

The need for change in contribution in LLP can arise due to the following factors:

• Change in business policy
• Change in partners
• To start a new project
• To introduce new technology
• Change in the scale of operation

Increase in Capital Contribution in LLP

When a partner or a designated person of an LLP is in the need of extra funds or at the time of introduction of a new partner, the contribution in the LLP can be increased. The capital clause can provide that if it is necessary, then the increase in contribution in LLP is possible. 

Partners need to amend the existing LLP agreement with a supplementary LLP agreement before increasing the capital in the LLP. A supplementary LLP agreement is like an original LLP agreement’s extension and is considered to be a crucial document for any LLP. The supplementary LLP agreement’s validity is the same as that of the original agreement of an LLP. A supplementary agreement for LLP for change in contribution must have all the details regarding the amount of change in contribution, effect with respect to each partner, etc. It is crucial for all the partners of the LLP to sign this document.

Documents required in case of increase of Capital Contribution in LLP

• Copy of resolution passed in meeting for the increase in contribution in LLP
• LLP agreement
• Notarized supplementary LLP agreement
• Designated partner’s digital signature
• Proposed new capital contribution for LLP & its distribution

Decrease in Capital Contribution in LLP

As per the provisions of the Limited Liability Partnership Act, 2008, an LLP does not require any minimum capital amount to be established. There is no mandatory requirement for a minimum capital contribution for the formation of an LLP. Hence, if an LLP wants to decrease its capital contribution due to its circumstances, need for funds, etc. it is permissible to do so by fulfilling the legal compliance requirements.

For this, the LLP must file Form 3 to the registrar with a prescribed fee. The registrar is not obligated to pay for the difference between the fees which was paid on the higher capital and now, on reduced contribution in the LLP.

Procedure for Change in Contribution in LLP

To be able to make any changes in the LLP contribution (whether it’s for decrease or increase in LLP contribution), it is mandatory for the LLP agreement to have provisions for the amendment in LLP contribution. 

The steps involved in the process of change in contribution in LLP are as follows:

• Obtaining the approval of the LLP’s partners: A meeting must be conducted with the presence of all the partners of the LLP and a resolution must be passed by them for the change in contribution in LLP. For an increase in the LLP’s contribution, if the capital is introduced by a new partner of the LLP, then his consent is required. Also, a resolution is mandatory to be passed for the addition of the new partner. 
• Drafting amendment in LLP agreement: Once the approval from all the partners is obtained, as a next step, the LLP agreement must be drafted and executed with effect to change the LLP’s contribution and its distribution amongst the partners.
• Executing the supplementary LLP agreement: It must be executed on requite stamp paper. A stamp duty of min INR 100 is applicable for executing the supplementary agreement of LLP.
• Filing Forms with Registrar of Companies (ROC): For certifying the changes in contribution and LLP agreement, Form 3 must be submitted to the registrar along with the meeting minutes in which the partners' approval is given within 30 days in which change is being consented. The registrar’s approval for the supplementary LLP agreement must be received.

Other things to be kept in mind

Here are a few pointers which you must keep in mind when it comes to the change in contribution in LLP: 

• Disclosing the amount of contribution in LLP account is a mandatory requirement.
• If the contribution is received in a form other than cash, it has to be valued by a registered valuer, i.e., a practicing chartered Accountant, a practicing Cost Accountant or any Valuer authorized by the Government of India.
• Change in contribution does not lead to change in profit sharing ratio unless LLP agreement specifies in this regard.
• Stamp duty has to be paid on an increase in contribution

Conclusion

If any partner of the LLP wants to make any changes in his contribution, it is mandatory to make amendments to the LLP agreement. Unless it is specifically mentioned in the LLP agreement, a change in the LLP’s contribution does not lead to any changes in the partners’ profit-sharing ratio. If you need assistance for a change in contribution of LLP, get in touch with the Registrationwala team.

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