Amongst the varied business structures available in India, LLP is one of the newest business models. Besides, it is also gradually becoming a popular business model amongst the young generation. The reason behind the popularity of the LLP company is its hybrid form. It provides the flexibility of limited liability and varied fundraising options. These are only a few of the reasons people opt to register LLP company in India. However, the process of LLP registration also requires you to submit the LLP Agreement. This LLP Agreement is a very important document that governs the entire functioning of the LLP once it commences business activity.
In this blogpost, we cover all the important aspects that must be a part of an effective LLP agreement. Whether you are still waiting to register your LLP company or have already completed the process, it is equally important to have a clear understanding of the key components of an Limited Liability Partnership agreement. Let’s delve into the points and help you sail a smooth business journey!
Key Components of LLP Agreement
The list below covers all important aspects that make an Limited Liability Partnership agreement complete and effective:
Name and Registered Office
Just like all other types of agreements, a Limited Liability Partnership Agreement also begins with the name of the LLP. Besides, this name must comply with the Registrar of Companies (RoC) guidelines. Hence, you will first have to check LLP company name availability and then, reserve the unique LLP name. You can only enter the name in an LLP agreement once it is approved by the ROC. Besides, the name you choose must be unique and distinctive. It should:
- Not be similar to any existing LLP names;
- Not infringe upon existing trademarks; and
- Must not infringe the existing domain names.
Apart from the name, you also need to mention the registered office address of the LLP in the first paragraph of the LLP agreement. The registered office address is the official communications address for an LLP.
Nature and Objectives of the LLP
The purpose of having an LLP agreement is to safeguard the interests of the LLP as well as all its owners in case of any disputes. So, the nature and the business objective of the LLP must be clearly defined in the LLP Agreement. This includes the specification of goals and the scope of work that an LLP can engage in. It is very important to craft these with extreme care since any action that an LLP takes, outside of the scope defined in the LLP Agreement, is void.
Contributions by Partners
The contribution that each partner makes to the Limited liability partnership collectively forms the entire capital of the LLP. In this section of the LLP agreement, you can define the contribution of each partner towards the LLP. This does not only include the monetary contributions but also the other details such as assets, any IP, or any other property that the partner brings in. Apart from the amount etc, you also need to mention the deadlines by which the complete contributions will be made by the partners and designated partners.
Profit and Loss Sharing
An LLP contains at least 2 partners. Usually, the profit and loss sharing depends highly on the capital contribution made by each partner. So, to avoid any future disputes among the partners, the LLP Agreement must also include details on how profits and losses will be allocated amongst the partners. Apart from that, you also need to include the details on how the profits and losses will be allocated among the partners of the LLP, ie., the method of profit distribution, equal sharing or capital contribution, etc.
Management and Decision-Making
The LLP agreement also defines the management structure of an LLP. This includes the roles and responsibilities of all partners and designated partners. Here, you can also outline the Standard Operating Procedure, the entire flow of how decisions will be made within the partnership. Varied modes of decision-making include unanimous consent, majority voting, etc
Financial and Accounting Procedures
Another important section of an LLP agreement is the way the firm will be handling its finances. Here, the partners can pre-decide the financial and accounting procedures that the LLP will follow. You can address matters like bookkeeping, financial reporting, appointment of auditors, etc.
Withdrawal and Retirement of Partners
Ownership in a limited liability partnership is freely transferable. However, it should be by the Limited Liability Partnership Agreement. Hence, the LLP agreement, amongst other important details, must also include the process for different partners who want to either withdraw their status as a partner or want to resign from the partnership firms. Besides, you can also include the varied provisions related to dealing with the valuation of their remnant share in the partnership.
Admission of New Partners
The process for when you want to add a partner to your LLP must also be an integral part of the LLP agreement. The process you enter in this section will help you determine the new partners’ contributions and profit-sharing.
Dispute Resolution is an integral part of the LLP Agreement. Including this in the agreement will help you avoid long-running legal actions against the LLP partners in the future, in case of any disputes. This section needs to address a mechanism for dispute resolution. There are options to select from such as mediation, arbitration, and more. Additionally, this clause provides security and stability in the LLP.
Duration and Dissolution
All legal agreements contain a specific term or duration of the Agreement. The Limited Liability Partnership Agreement is no different. In this section, you can state the intended duration of the LLP. This can be indefinite as well. Besides, you also need to include the methods and conditions under which the LLP will dissolve. This also includes the distribution of assets and settlement of liabilities.
To conclude, it is pretty evident that an Limited Liability Partnership agreement is the backbone of LLP operations. All the components of an LLP agreement, collectively govern the entire operations of the business.
Many online service providers provide the best draft LLP agreement along with registration services. Get your registration from the comfort of your home!