There are many businesses that are founded on a partnership basis or on the basis of an LLP agreement. Also, there are various aspects to such a document. According to an LLP agreement, the different partners are subject to liabilities that are in sync with the amount of finance they have invested into the business. An LLP deed is beneficial to the extent that though the firm is liable to pay income tax, the individual share of the partners who have formed the firm does not have to pay income tax.
The skills and experience of individual partners help mitigate the risks if any. This type of partnership is very flexible in its functioning. In the event there is any change that occurs in the said partners, the LLP functions seamlessly. This type of agreement or contract clearly lists all details about the responsibilities of the partners. This document includes the details of the organisation, the partners, their amount of investments in the LLP, how profits will be distributed, and other particular details. It is then duly signed by all the partners of the business and serves as valid proof of their consent towards their individual role in the business. The details of this article will help you understand what LLP is governed by.
Did you know?
A married couple can function as individual partners in an LLP agreement.
Key Contents of LLP Agreement
For the efficient functioning of a Limited Liability Agreement, the LLP deed has to be documented in a flawless manner. According to the rules established by LLP, you require at least two individuals to start a business on these grounds. Once it is established, the rules of Schedule One laid down in the LLP Act apply to the business. However, if the partners in question decide to form an LLP agreement, the rules applied will differ and are more beneficial to the interests of the partners. It outlines the processes for making decisions, what the joining of a new partner entails, and how an existing partner can part ways with the LLP. Given Below is a list of the key contents of the LLP Agreement:
- LLP name: As per the conditions laid out in the LLP Act, the LLP name has to end with either the Limited Liability Act or the acronym LLP.
- Details of the agreement date and the agreement: The LLP agreement has to be implemented within a time frame of 30 days of it being established as per the legal requirements. The LLP Act has made this mandatory.
- Background of the business: This will include the details of the company’s incorporation, details of registration as well as the activities of the LLP. This section will also state the various rules of the organisation and how they apply to the partners. It will also state the conditions under which new partners will get associated and how existing ones may disassociate with the firm. All the functions of the LLP will be clearly detailed, the possibility of a name change, if any, in the future, and various financial details.
- The contribution made by various partners and the manner in which they are made: This part of the document gives clarity on the contribution made by individual partners, the probable interest as well as the proportion of profits they will be entitled to. Details of the timeframe when a partner or partners will be able to make a withdrawal of the capital invested by them.
- Maintenance of all the business records of LLP as well as other banking documentation: The guidelines to be followed in the maintenance of all business records, banking, and bank-related documents are mentioned in this section. This also clarifies the methods involved in the secure storage of all the documents.
- Allocation of profits and losses, if any, and the manner in which they will be distributed: This section will indicate the manner in which the profits that accrue will be apportioned to the partners in the short-term as well as the long-term period. In case the business plans to wind up, how will the final distribution of profits be made to the individual partners is also clarified in this section.
- Details of the banking accounts namely current as well as the capital account: This part of the content will indicate the exact amounts that are debited to the current as well as capital accounts. It also details the exact amounts that are credited to the capital as well as current accounts.
Also Read: A Guide to Online LLP Registration
Dissolving of the Business and Disassociation of the Partners
Here you furnish details of:
- The timeframe when the business could get dissolved
- What are the conditions that apply to the partners to part ways from the LLP
- The process or methodology of separation of the partners from the LLP
- The rights to which the partners are entitled
- The rights which the partners may still enjoy after withdrawing from the LLP
- The submission of a withdrawal notice to the partners who are actively running the LLP
Rights of Partners and How They Can Be Redeemed
- This will help understand how the partners can seek redemption of their rights, and the processes involved in the same.
- The various processes involved in gaining admission after the first withdrawal from the LLP
- Whether the right can be cross-purchased and if yes, the procedures for the same.
Partnership Rights and the Methods of Issuing the Same
This section clarifies the various methods in which partners can make a sale of their rights or even transfer their rights to the active partners or even to the new partners who have joined the LLP. This segment also indicates the meeting that has to be organised for the purchase of transfer of rights, its duration, the decisions involved for the purchase or transfer as well as the right to vote of each partner.
Right to the Recording of Documents and Other Important Proceedings
Every partner of the LLP is entitled to a minute study of all the records that are maintained as well as the documentation that is prepared for the establishment, operations, profit, and loss-sharing as well as the closure of the firm. This will help prevent any misuse of the funds of the LLP.
Also Read: Difference Between Company vs Partnership Firm vs LLP
Appointment of a Fiduciary Individual and Overall Management of the LLP
This section includes:
- The accountability of the management towards the organisation
- Appointment of an individual to manage all the legal affairs and other matters related to the finances of the organisation
- A manager – for managing the everyday affairs of the organisation
Appointment of an Arbitrator
The responsibilities of such a person would involve resolving any discrepancies or non-agreement between the partners in an amicable manner. The LLP deed is signed by all the partners after they have gone through the details. The documentation is done on stamp paper and is notarised.
Conclusion
The details of this article would have given you an insight into the various sections of the LLP agreement. It also indicates the rights to which the partners are entitled and how the profits are allocated to them. We hope that after reading this post, it’ll be very easier for you to start an LLP partnership!
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
