Section 23(4) of the LLP Act, 2008 states that if the partners disagree on terms of the LLP agreement, the mutual rights and duties of the partners in an LLP will be as per the provisions specified in the first schedule of Limited Liability Partnership Act, 2008. This article explains the points of that schedule.
A Limited Liability Partnership is a business entity with the perks of multiple business entities. Like a partnership, it has partners, and like a company, it has limited liability. However, the infrastructure of a company doesn’t determine the cooperation of the partners. Disagreements can happen, and there can be a time where the partners fail to reach an accord. What happens then? What happens if an LLP agreement doesn’t exist because no partners have agreed to its terms?
The first schedule of the LLP act takes charge. The Limited Liability Partnership Act, 2008 introduced the first schedule for one purpose: to provide a roadmap to an LLP that has lost its way. It specifies the duties and prerogatives of every partner within an LLP. In simple words, it establishes a template for the partners to follow, allowing them to draft an LLP agreement.
Points of the first schedule of the Limited Liability Act, 2008
The following are the points of the first schedule of LLP incorporation that allows the partners to draft an agreeable LLP Agreement.
- Equal Sharing: Every partner of a Limited Liability Partnership is entities to share all the profits, capital, and losses of an LLP equally.
- Rules of indemnification(for the LLP): The LLP must indemnify all the partners using payments if loss of an LLP has incurred a loss of assets for these partners. The conditions are as follows:
- The losses must have occurred during the ordinary operations of the LLP.
- The partners took the losses to preserve the status-quo of the Limited Liability Partnership.
- Rules of indemnification(for the Partners): The partners must rectify the losses LLP has incurred if his fraudulent act is responsible for those losses.
- LLP management rules: Every partner must make equal managerial contributions to the LLP.
- Adding new partners to the LLP: LLP can only add new partners to the LLP with the consent of its existing members.
- No remuneration for the partners to manage the LLP: LLP act does not contain any provision that incentivizes the partners for commanding the Limited Liability Partnership.
- Rules for taking decisions: LLP must only take decisions after taking into account the votes of all the partners. The final decision shall be determined based on the majority votes.
- Recording the Decisions: The LLP must record every decision it takes in the Minutes of Meeting within 30 days after taking said decision.
- Providing true accounts: All the partners must provide the correct account details and information impacting the Limited Liability Partnership.
- Rules about competing LLP: If the partner carries on any business whose objective is the same as the LLP, he is liable to hand over all the profits he has made from that business.
- Rules about deriving benefits: If a partner has derived certain benefits from the LLP without the consent of the other partners, he must provide all the information concerning the transactions and profits entailing those benefits.
- Rules about removing the partners: An LLP does not have the authority to remove any partner based on the majority decision. Removal of partners can only happen based on the majority decision if mentioned in the LLP agreement from the start.
- Rules about dealing with disputes: If the provisions of the LLP agreement cannot resolve any disagreements among the partners, the responsibility of resolution falls on the shoulders of the Arbitration and Conciliation Act, 1996.
Checkout about the Remuneration allowed to Limited Liability Partnership
LLP agreement is the foundation of a Limited Liability Partnership. However, the rules to draft it are flexible. Therefore, if you feel lost, you must confer with the points mentioned in this first schedule. It ensures that you take a streamlined approach to operate your business entity.