Before we get into the format of a Limited Liability Partnership deed, let’s take a moment to understand what a Limited Liability Partnership (LLP) exactly is, and why is it needed. Suppose you start a business with a partner and you are working with some variables beyond your control, you’d naturally want to ensure that in the unfortunate event of the business getting into a legal situation, your personal assets are not sued for damage. At the same time, you also want your ‘arrangement’, for the lack of a better word, to be a bit customized and structured, and roles and responsibilities relatively well defined. If such were your requirements, you’d normally opt for an LLP, which not only is a formal structure with written partnership agreement but also protects your personal assets from being part of any lawsuit.
As opposed to a limited partnership, in which one partner has all the decision making power while other partners have a financial stake only, all partners in an LLP usually share responsibility and the decision making power. But, as Uncle Ben so eloquently said, “with great power, comes great responsibility”, all partners in an LLP share power, and the liability, albeit limited – as the name suggests. But enforcing these shared powers, and more importantly shared liabilities, will require a well-written agreement, including the essential information with respect to the partners, capital investment, gain-share ration, dispute resolution process, and eventually the mechanism to close the firm, among other things. Below is a brief outline of some of the most important details that are generally included:
Definition clause – All LLPs must clearly define certain aspects of the arrangement, such as designated partners, nature of the business, the formal name of the company, accounting period, registered office address of the company. In some cases, the address of all the partners may also be required. In addition, the agreement must also state the business of the LLP, areas in which the business will deal, place of business, and the start date of the business. Also, the ideal agreement will also specify the mutually agreed rights and responsibilities of various partners partaking the LLP.
Capital investment and gain share – The LLP partnership deed must also clearly specify the capital each partner has invested in forming the business. This capital does not necessarily have to be in the form of monetary contribution – partners may also bring assets, skills, connections, or brand equity to further the business, and it must all be documented. In addition, an ideal LLP partnership deed will also specify the distribution of profit (or indeed, loss) among the partners. In case partners invest capital only, this distribution is typically proportionate to the capital invested, however, if the investment is not easily quantifiable, the partners must come to a mutually acceptable agreement, and document the amount of profit that each member receives, or the amount of the loss that they’re liable for.
Dispute resolution process and indemnities – A thoughtfully drafted partnership deed will also lay down the mechanism for resolving the material disagreements between the partners or members. If push comes to shove, an LLP can always resort to Arbitration as a mode of resolving disputes, which will be governed by the Arbitration and Conciliation Act of 1996. But such arbitrations can become lengthy, ugly, and expensive. To avoid such fiascos, which can harm the reputation and goodwill of the company, every LLP agreement must incorporate a clause providing for a dispute resolution mechanism. Additionally, a partnership agreement should also contain a clause of indemnity that protects the partners from personal liabilities as a result of actions taken while carrying out the business of the LLP. An ideal LLP agreement will also have the members indemnify the LLP for the loss caused by it due to any non-business related actions taken by them.
Restrictions on members – A well-drafted LLP partnership agreement will also include covenants of restrictions on the partners. Such restrictions might include forming or joining a rival firm upon separation, conducting standalone business with clients, or divulging the corporate secrets without proper authorization. Not only do such restrictions ensure that partners always have the best interest of the LLP in their mind, but protect the legitimate interests of the LLP.
Winding up and miscellaneous provisions – A well-drafted partnership deed will also define whether the term of the LLP is perpetual or is valid for a predefined period only. It is also advisable to have a clause detailing the situation in which the affairs of the LLP are wound up either voluntarily or by an order of Tribunal for the specific violations as mentioned in Section 64 of the Act. Additionally, the partnership deed will also have provisions regarding admission and separation of a partner – this separation could by voluntary, due to an expulsion, or even the death of a partner. Further, the agreement should also have guidelines for renewal of the agreement, and any other relevant clauses as agreed upon by the partners.
While these details ought to cover most requirements of most LLPs, there can be a whole bunch of other clauses that partners may need to include in the partnership deed, given their specific conditions. In fact, it would be pretty difficult for anyone to list down all the clauses that will make an agreement a ‘one size, fits all’ document, and, quite frankly, even if such a document were compiled, most clauses would be irrelevant for any given company anyway – as we said in the beginning, ‘customized’ is the word.
If yours is a small partnership, and you are looking to draw up a detailed agreement, we have you covered! Our experts at www.revmystartup.com have extensive experience to foresee the future needs and flexibility required by your firm and will be more than happy to prepare a draft agreement for you incorporating relevant clauses depending on the type of the business conducted by your LLP.
www.Revmytartup.com is the leading provider of CA services all over India. We are the outsourced CA for the most trusted brands in the country.
Tags Corporate Law