What are the Essentials of an LLP Agreement?
LLP agreement must be written amongst the partners while setting up an LLP. LLP agreement must include the essential information regarding such LLP agreement with respect to the partners, profit sharing ratio, capital contribution, board meetings, mechanism for dispute resolution, winding up of the firm, etc. Under LLP act 2008, schedule I provides provisions of LLP registration in India. It has general template of agreement commonly suits the LLP.
There are some critical features such as drafting of a specific LLP agreement because there many forms of unique nature and contribution of each partner in terms of investment, time, differs from business to business. Following are the LLP agreement essential clauses which every firm must take into account while drafting.
Definition clause is considered as the essence of any LLP agreement. LLP agreement must contain various definitions such as the definition of designated partners, the accounting period, business of LLP and the name with which the LLP will be known. Agreement must have the full address of the registered office of the LLP as well as the address of all the partners.
The partners needs to specify the amount of capital that each of them contributes to constitute the LLP. Capital contribution or Capital of LLP is the amount that each of the partners invest in the LLP. Capital can be any form of fund, cash, assets or in kind .
Business of LLP
LLP members must clearly specify the nature of the Business and areas the in which Business deals with. The agreement must include the place of business where the business of LLP shall be carried on as well the commencement date of such business.
Rights and Duties
Rights and duties of the members mutually agreed by them must be mentioned in the LLP Agreement. the provisions of Schedule I of the Limited Liability Act, 2008 will apply as given in Section 23(4) of the said act. In the absence of such separate agreement between the partners about such rights and duties, etc.,
Profit Sharing Ratio
LLP Agreement must have particular mention ratio in which the profits and the losses of the business will be shared among the partners. The partners must clearly state the amount of profit that each member receives, or the amount of the loss that they are liable for will be set out in the agreement. The agreement could also provide for part of the profits to be paid as interest calculated on the members capital contributions.
Dispute Resolution Mechanism
LLP agreement is considered fully formed agreement if it consist of provision for resolving disputes between the members. In a normal course, every LLP prefers Arbitration as a mode of resolving disputes. Such LLP is governed by the Arbitration and Conciliation Act, 1996. It is suggested that every LLP agreement must incorporate a clause providing for a dispute resolution mechanism to avoid disputes that result in lengthy and expensive litigation.
The LLP agreement should contain a provision regarding indemnities. Protection of its members from any kind of liability or claim incurred by them while carrying the business of the LLP must consist of clause of indemnity states.The members should also agree to indemnify the LLP for the loss caused by it due to any breach committed by them.
Members of can be under various restrictions on its members. Every LLP agreement must contain a provision regarding such restrictive covenants. For instance, a member after leaving the firm might be prohibited from carrying on a competitive business with that of a firm. Such restrictions are called restrictive covenants which are important to protect the legitimate interests of the LLP and an LLP agreement must make a mention of it.
The partners must specify the term of validity of such LLP agreement whether it is a perpetual agreement or is valid for a fixed period.LLP agreement must also provide some situations in case the partners have agreed to wound up the affairs of the LLP either voluntarily or by an order of Tribunal for the specific violations as mentioned in Section 64 of the Act.
The members must also make provisions regarding admission of new partners, retirement as well as the death of a partner, etc. While drafting LLP agreement. The agreement must provide guidelines for the expulsion of partners as well as when can an LLP agreement be renewed. Further, such agreement must include any other relevant clauses as agreed upon by the partners of an LLP.
A complete LLP agreement must contain all the features given above. We should also consider some of the various other clauses that needs to be incorporated in an agreement depending on the type of the business carried on by an LLP. Keep things in mind the schedule only provides for limited clauses. But as a matter of prudence, there must be a detailed agreement for registering an LLP.
LLP agreement is an important feature for the success of every LLP mainly depending upon the manner in which the partners have drafted the. Therefore, it is important that the LLP Agreement must be drafted with the help of expert knowledge which is in a position to foresee the future needs of the firm and understand the amount of flexibility required to adjust with the changing circumstances for the smooth and efficient functioning.