Comprehensive Guide to LLP Management – Key Provisions | Partner Rights | LLP Agreement

LLP Management involves the administration and oversight of a Limited Liability Partnership (LLP), including:

– Daily Operations: Managed by all partners unless specified otherwise in the LLP Agreement
– Delegation: Management powers can be delegated to specific partners, such as a Managing Partner, per the LLP Agreement
– Decision-Making: Decisions are made by majority vote unless the LLP Agreement specifies different arrangements
– Record Keeping: Maintaining a minute book for all decisions
– Partner Rights and Duties: Governed by the LLP Agreement or default rules if unspecified
– Remuneration: Partners are paid only if the LLP Agreement allows
– Agency: Partners act as agents of the LLP but not of each other
– Financial Transactions: Partners can conduct business and lend money to the LLP
– Transfer of Rights: Profit/loss sharing rights can be transferred but do not confer management rights
– Contributions: Can include money, property, or services, disclosed in accounts
– Changes in Partners: Managed per the LLP Agreement, with notifications to the Registrar
– Liability: LLP is liable for partners' actions within their authority; individual partners are not personally liable except for personal wrongdoing

Table of Contents

1. Management of LLP
2. Contribution and loans by each partner
3. Partner in LLP
4. Change in partner
5. Change in name or address of partner
6. Extent of liability of limited liability partnership for acts of partners

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1. Management of LLP

Statutory provisions are briefed below. The provisions can be altered by making provisions in LLP Agreement, as discussed in a later chapter.

Day to day management of LLP – Every partner may take part in management of LLP. However, LLP agreement may provide to contrary [clause 5 of First Schedule to LLP Act].

If LLP has large number of partners, LLP Agreement may provide for delegation of powers of management of LLP. It is not essential that power to conduct business should be given to designated partner/s. The LLP Agreement can provide for delegating such powers to another partner/s who may be termed as ‘Managing Partner’ or ‘Executive Partner’ or by any other name as specified in LLP Agreement.

Decisions of LLP by majority – All decisions relating to LLP (except decision relating to change of business) shall be decided by resolution passed by majority of partners. Each partner will have one vote. However, LLP Agreement can make different provisions on this issue e.g. differential voting or veto power to some partner/s. The decisions have to be written in minute book kept at registered office of LLP [clauses 8 and 9 of First Schedule to LLP Act].

Of course it is not possible to take each and every decision by majority of partners. Hence, LLP Agreement can and indeed should provide for delegation of powers to some partner/s.

Minute book by LLP – Each LLP is required to maintain minute book containing minutes of decisions taken. Minutes should be written within 30 days.

Rights and duties of partner – Rights and liabilities of LLP will be as per LLP agreement. In absence of any provision, the provisions as specified in First Schedule to LLP Act will apply [Section 23(4) of LLP Act, 2008].

Remuneration to partner – Remuneration to partner can be only as specified in LLP agreement. Otherwise, partner of LLP is not entitled to any remuneration [clause 6 of First Schedule to LLP Act].

1.1 Partner can bind LLP but not other partners

Every partner of LLP is agent of LLP but not of other partners. Thus, he can bind LLP by his acts but not other partners.

Partner can take part in management of LLP but LLP Agreement can curtail his authority. Partner of LLP is entitled to remuneration only if LLP Agreement so provides. No partner is personally liable to liabilities of LLP except in case of fraud [Sections 27 and 28 of LLP Act, 2008]

Partner as agent – Every partner of a limited liability partnership is, for the purpose of the business of the limited liability partnership, the agent of the limited liability partnership, but not of other partners – section 26 of LLP Act.

1.2 Business transaction between partner and LLP

Partner can give loans to LLP and transact any business with LLP as if he is an independent person and not partner of LLP [Section 66 of LLP Act, 2008]. Even in absence of such provision, it is obvious that partner and LLP are independent legal entities and can have business transactions with each other.

1.3 Business transactions of partner with limited liability partnership

A partner may lend money to and transact other business with the limited liability partnership and has the same rights and obligations with respect to the loan or other transactions as a person who is not a partner – section 66 of LLP Act.

1.4 Assignment and transfer of partnership rights

Rights of profit or loss in partnership firm can be assigned. However, assignee does not become partner on such assignment and does not get any right to inspect accounts of LLP [Section 42 of LLP Act, 2008]

1.5 Partner’s transferable interest

The rights of a partner to a share of the profits and losses of the limited liability partnership and to receive distributions in accordance with the limited liability partnership agreement are transferable either wholly or in part – section 42(1) of LLP Act.

Partner continues to have full rights in LLP even if interest in LLP assigned – The transfer of any right by any partner pursuant to section 42(1) does not by itself cause the disassociation of the partner or a dissolution and winding up of the limited liability partnership – section 42(2) of LLP Act.

The transfer of right pursuant to this section 42 does not, by itself, entitle the transferee or assignee to participate in the management or conduct of the activities of the limited liability partnership, or access information concerning the transactions of the limited liability partnership – section 42(3) of LLP Act.

2. Contribution and loans by each partner

‘Contribution’ in LLP is similar to ‘authorised capital’ under Companies Act. The ‘contribution’ of LLP is required to be indicated in Incorporation Document.

The fees for filing any document depend on ‘contribution of LLP’ [Annexure A of LLP Rules, 2009].

In absence of any provision to contrary in LLP Agreement, all partners of LLP are entitled to share equally in capital, profits and losses of LLP [clause 2 of First Schedule to LLP Act].

Contribution of each partner shall be disclosed in accounts.

It is not clear whether entire ‘contribution’ is required to be committed at the stage of incorporation or it can be done later. In my view ‘contribution’ as indicated in Incorporation Document is in nature of authorized capital. Entire ‘contribution’ need not be committed at the time of singing of LLP Agreement. It can be committed later and actual funds can be brought later.

However, this is a grey area.

‘Contribution’ is in nature of ‘authorised capital’ and hence committed amount to ‘contribute’ can be brought subsequently also.

Thus, LLP agreement must provide for share of each partner in capital, profit and loss, if the intention is not to share ‘contribution’ equally.

2.1 Contribution in money or in other form

A partner can contribute to capital of LLP either in terms of money, tangible movable or immovable property, intangible property, or by contracts for services performed or to be performed. Monetary value will be accounted for in accounts of LLP. Obligation of each partner to contribute will be as per LLP agreement [Sections 32 and 33 of LLP Act, 2008]

A contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, other agreements to contribute cash or property, and contracts for services performed or to be performed – section 32(1) of LLP Act.

The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed – section 32(2) of LLP Act.

If the contribution is in form of tangible movable or immovable property, intangible property, or agreement for services, it shall be valued by practising CA/ICWA or by approved valuer from panel maintained by Central Government [Rule 23(2) of LLP Rules, 2009]

Contribution of each partner shall be accounted for and disclosed in accounts of LLP along with nature of contribution and amount [Rule 23(2) of LLP Rules, 2009].

2.2 Obligation to contribute

The obligation of a partner to contribute money or other property or other benefit or to perform services for a limited liability partnership shall be as per the limited liability partnership agreement – Section 33(1) of LLP Act.

A creditor of a limited liability partnership, which extends credit or otherwise acts in reliance on an obligation described in that agreement, without notice of any compromise between partners, may enforce the original obligation against such partner – Section 33(2) of LLP Act.

3. Partner in LLP

Any individual (who is of sound mind and is solvent) and any body corporate can be partner of LLP. There should be minimum two partners. Personal liability if number falls below two. There is no upper limit on number of partners [Sections 5 and 6 LLP Act, 2008].

Any individual or body corporate may be a partner in a limited liability partnership. – – However, an individual shall not be capable of becoming a partner of a limited liability partnership, if –

• he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force
• he is an undischarged insolvent; or
• he has applied to be adjudicated as an insolvent and his application is pending – section 5 of LLP Act.

Meaning of ‘partner’ – “Partner”, in relation to a limited liability partnership, means any person who becomes a partner in the limited liability partnership in accordance with the limited liability partnership agreement – section 2(1)(q) of LLP Act.

3.1 Minimum number of partners

Every limited liability partnership shall have at least two partners – section 6(1) of LLP Act.

Consequence if number of partners fall below two – If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period – section 6(2) of LLP Act.

3.2 Partner by subscription to incorporation document or later by admission

On the incorporation of a limited liability partnership, the persons who subscribed their names to the incorporation document shall be its partners and any other person may become a partner of the limited liability partnership by and in accordance with the limited liability partnership agreement – section 22 of LLP Act.

3.3 Body corporate can be partner in LLP

A ‘body corporate’ can become member of LLP.

‘Body corporate’ means company under Companies Act. It also includes LLP incorporated in India, LLP incorporated outside India and even a company incorporated outside India. However, it does not include a corporation sole or a cooperative society [Section 2(1)(d) of LLP Act, 2008].

3.4 Foreign LLP or foreign company can be partner

Foreign LLP or foreign company can be a partner in LLP incorporated in India [However, there would be difficulties in repatriation of profits or capital, unless FEMA provisions are complied with].

3.5 Company as member

Company can be member. It has to ensure that investment is within limits of Companies Act, 2013. Further, legally, business of LLP should not be outside the objects as indicated in Memorandum of the company.

3.6 Partnership firm or HUF cannot be partner

A partnership firm (registered or formed under Indian Partnership Act) or an HUF is not a legal entity. It is not a ‘body corporate’. Hence, any partnership firm or HUF cannot be partner of LLP.

A karta of HUF can be member of LLP in his individual capacity. If he invests HUF funds, the income may be that of HUF. However, so far as LLP is concerned, he is a partner in his individual capacity.

3.7 Registered Cooperative Society can be partner

Registered Cooperative Society is a body corporate and can be a member. A registered cooperative society is a body corporate with perpetual succession and common seal (just like a company). It can hold property, enter into contracts, institute and defend suit and other legal proceedings and do all things necessary for the purposes of its constitution. [section 18 of Co-operative Societies Act]. A registered cooperative society is a body corporate with power to hold property and is capable of entering into contracts. Property in law is the property of the society. The society is a person. – Enfield India v. Co-operative Canteen (1968) 21 STC 317 (SC). – – Thus, a cooperative society can be a member of company (but not a society registered under Societies Registration Act).

Interestingly, section 2(7) of Companies Act, which defines ‘body corporate’ specifically excludes ‘registered cooperative society’ from definition of ‘body corporate’. It is not clear why it has been specifically excluded.

Society registered under Societies Act cannot be partner – Society registered under Societies Act cannot be a member as it is not a ‘body corporate’.

As per section 5 of Societies Registration Act, property, movable and immovable, belonging to society registered under Societies Registration Act, if not vested in trustees, shall be deemed to be vested in the governing body of the society. – – Thus, shares of society registered under Societies Registration has should be held in name of trustees, who will hold it for benefit of society.

Society registered under Societies Registration Act is not a juristic person. It is not a ‘body corporate’. It is an association of persons. Mere fact of registration of society under Societies Registration Act will not make the society distinct from association of persons – Illachi Devi v. Jain Society 2003 AIR SCW 4824.

In Board of Trustees v. State of Delhi AIR 1962 SC 458, it was held that a society registered under Societies Act is not an incorporated body, even though it is conferred with a legal personality. – – The property of society vests with governing body, if not vested in trustees. – quoted and followed in All India Skins & Hides Tanners Assn v. CTO (2002) 127 STC 491 (TNTST) [However, Society registered under Cooperative Societies Act is a corporate body].

3.8 Trust cannot be a partner

A trust is not a ‘legal person’. A trust is a legal obligation annexed to a ownership of property and arising out of a confidence reposed in and accepted by the owner. The person who reposes the confidence is called ‘author of trust’ (testator), the person who accepts the confidence is called ‘trustee’ and the person for whose benefit the confidence is accepted is ‘beneficiary’. The subject matter of trust is called ‘trust property’. Thus, when a property is held by one person as trustee for the benefit of another, it can be regarded as a trust. A trust can be created by deed, will or even word of mouth. – – Trusts are governed by Indian Trust Act, as may be modified by State Governments.

In Duil Chand v. Mahavir Prasad Charitable Trust AIR 1984 Del HC DB 145, it was observed – ‘A trust is not a legal entity -. – All trustees in law are owners of property but they are obliged to us the same in a particular manner. -. – They are joint owners of the property. – It is not like a corporation which has legal existence of its own and, therefore, cannot appoint an agent. A trust is not in this sense a legal entity. It is the trustees who are legal entities’.

4. Change in partner

A person can be admitted as partner.

He can resign. He ceases to be partner on his death or if he is declared as of unsound mind or adjudged as insolvent [Section 24 of LLP Act, 2008].

4.1 Admission of partner

A partner can be admitted only with consent of all existing partners. However, LLP Agreement can provide otherwise, e.g. LLP Agreement may provide that partner can be admitted with consent of designated partners or by consent of 51%/66%/75% partners [clause 7 of First Schedule to LLP Act]. Change is to be filed within 30 days in form 4 with prescribed fees.

Notice of change of partner or even change of his address should be filed with ROC.

Meaning of ‘Address’ – “Address”, in relation to a partner of a limited liability partnership, means –

1. if an individual, his usual residential address; and
2. if a body corporate, the address of its registered office – section 2(1)(a) of LLP Act.

4.2 Cessation as partner

A partner can cease to be so by resignation, death, insolvency, or if he is of unsound mind.

Cessation by resignation – A person may cease to be a partner of a limited liability partnership in accordance with an agreement with the other partners or, in the absence of agreement with the other partners as to cessation of being a partner, by giving a notice in writing of not less than thirty days to the other partners of his intention to resign as partner – section 24(1) of LLP Act.

Cessation if partner dies, is insolvent or is of unsound mind – A person shall cease to be a partner of a limited liability partnership—

• on his death or dissolution of the limited liability partnership; or
• if he is declared to be of unsound mind by a competent court; or
• if he has applied to be adjudged as an insolvent or declared as an insolvent – – section 24(2) of LLP Act.

Former partner will be treated as partner unless others know or details of cessation informed to Registrar -Where a person has ceased to be a partner of a limited liability partnership (hereinafter referred to as “former partner”), the former partner is to be regarded (in relation to any person dealing with the limited liability partnership) as still being a partner of the limited liability partnership unless—

• the person has notice that the former partner has ceased to be a partner of the limited liability partnership; or
• notice that the former partner has ceased to be a partner of the limited liability partnership has been delivered to the Registrar – section 24(3) of LLP Act.

Thus, it is advisable to issue public notice if a person ceases to be partner.

Partner continues to be liable for obligations prior to cessation – The cessation of a partner from the limited liability partnership does not by itself discharge the partner from any obligation to the limited liability partnership or to the other partners or to any other person which he incurred while being a partner – section 24(4) of LLP Act.

Former partner entitled to accumulated profit and capital contribution, after deducting losses – Where a partner of a limited liability partnership ceases to be a partner, unless otherwise provided in the limited liability partnership agreement, the former partner or a person entitled to his share in consequence of the death or insolvency of the former partner, shall be entitled to receive from the limited liability partnership—

• an amount equal to the capital contribution of the former partner actually made to the limited liability partnership; and
• his right to share in the accumulated profits of the limited liability partnership, – – after the deduction of accumulated losses of the limited liability partnership, determined as at the date the former partner ceased to be a partner – section 24(5) of LLP Act.

Former partner cannot interfere in management of LLP – A former partner or a person entitled to his share in consequence of the death or insolvency of the former partner shall not have any right to interfere in the management of the limited liability partnership – section 24(6) of LLP Act.

4.3 Intimation of resignation as partner others and to Registrar

A partner may give 30 days notice in writing to other partners and cease as partner. Such notice may be in form No. 13 (Notice to other partners and not to ROC).

A partner can resign from LLP by giving 30 days notice (unless LLP Agreement provides otherwise). Resignation of partner shall also be informed to ROC in e-form 4.

The partner who has resigned can himself file notice to Registrar, if he has reasonable cause to believe that LLP itself may not file such return. If such notice is filed by a partner, notice will be sent by Registrar to LLP for confirmation, if LLP itself has not filed similar notice. If no confirmation is given by LLP within 15 days, the Registrar shall register the notice made by a person ceasing to be a partner [Section 25(6) of LLP Act, 2008]

4.4 No restriction on partner on competing business after he retires, unless LLP agreement provides

There is no specific provision in LLP Act for restrictions on activities of the outgoing partner [Partnership Act does make provision for reasonable restrictions under section 36(2) of Partnership Act].

In my view, any restriction in LLP Agreement on retiring partner will be restraint of trade and may be void under section 27 of Contract Act, unless the restrictions are considered reasonable in given situation and some consideration is shown for such restriction.

4.5 Expulsion of partner

A partner cannot be expelled from LLP unless there is specific provision in LLP agreement [clause 13 of First Schedule to LLP Act].

5. Change in name or address of partner

If there is change in partner or change in name or address of a partner, every partner shall inform change in his name or address to LLP (and not to ROC) in form 6 within 15 days [section 25(1) of LLP and rule 22(1) of LLP Rules, 2009].

Every partner shall inform the limited liability partnership of any change in his name or address within a period of fifteen days of such change – section 25(1) of LLP Act.

‘Name’ in relation to a partner – “Name”, in relation to a partner of a limited liability partnership, means—

1. if an individual, his forename, middle name and surname; and
2. if a body corporate, its registered name – section 2(1)(p) of LLP Act.

5.1 Notice of change in partners to Registrar

A limited liability partnership shall—

• where a person becomes or ceases to be a partner, file a notice with the Registrar within thirty days from the date he becomes or ceases to be a partner; and
• where there is any change in the name or address of a partner, file a notice with the Registrar within thirty days of such change – section 25(2) of LLP Act.

A notice filed with the Registrar under section 25(2)—

• shall be in such form and accompanied by such fees as may be prescribed;
• shall be signed by the designated partner of the limited liability partnership and authenticated in a manner as may be prescribed; and
• if it relates to an incoming partner, shall contain a statement by such partner that he consents to becoming a partner, signed by him and authenticated in the manner as may be prescribed – section 25(3) of LLP Act.

Partner himself can inform details of change to Registrar – Any person who ceases to be a partner of a limited liability partnership may himself file with the Registrar the notice referred to in sub-section 25(3) if he has reasonable cause to believe that the limited liability partnership may not file the notice with the Registrar and in case of any such notice filed by a partner, the Registrar shall obtain a confirmation to this effect from the limited liability partnership unless the limited liability partnership has also filed such notice. – – Where no confirmation is given by the limited liability partnership within fifteen days, the Registrar shall register the notice made by a person ceasing to be a partner under section 25 – section 25(6) of LLP Act.

5.2 Procedure for filing of change with Registrar

LLP shall electronically file with ROC notice in form 4 with prescribed fees if a person becomes a partner or ceases to be a partner. The charge should be filed within 30 days with fees as prescribed in Annexure A to LLP Rules. If a person is becoming a partner, his consent to become a partner shall be attached [section 25(3)(c) read with rule 22(3) of LLP Rules, 2009].

The form shall be certified by practising CA/CS/CMA [Rule 22(4) of LLP Rules, 2009] .

5.3 Penalty for contravention of provisions relating to change of partner

If the limited liability partnership contravenes the provisions of section 25(2), the limited liability partnership and its every designated partner shall be liable to a penalty of ten thousand rupees – Section 25(4) of LLP Act, substituted vide LLP (Amendment) Act, 2021 w.e.f. 1-4-2022.

If the contravention referred to in section 25(1) is made by any partner of the limited liability partnership, such partner shall be liable to a penalty of ten thousand rupees – Section 25(5) of LLP Act, substituted vide LLP (Amendment) Act, 2021 w.e.f. 1-4-2022.

6. Extent of liability of limited liability partnership for acts of partners

LLP is liable to acts of partners.

LLP liable even if partner exceeds his powers, unless other person knows that partner has no authority – A limited liability partnership is not bound by anything done by a partner in dealing with a person if-

• the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and
• the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership – section 27(1) of LLP Act.

LLP liable for wrongful acts of partner in course of business – The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority – section 27(2) of LLP Act.

Obligation of LLP is only of LLP and not its partners – An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership – section 27(3) of LLP Act.

The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership – section 27(4) of LLP Act.

6.1 Partner liable to other partners for his wrongful acts

A partner is not personally liable, directly or indirectly for an obligation referred to in section 27(3) solely by reason of being a partner of the limited liability partnership – section 28(1) of LLP Act.

The provisions of section 27(3) and section 28(1) of LLP Act shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership – section 28(2) of LLP Act.

6.2 Proper provision LLP Agreement for admission or cessation of partner

LLP Agreement specifies mutual rights and duties of each partner. His share in capital, profit and loss is also specified. This will change on admission or cessation of a partner. Hence, supplementary LLP Agreement will be required and hence its e-filing will also be required.

However, if LLP agreement itself makes provisions for share in capital, profit and loss, then such amendment may not be required. If there are large number of partners, this aspect should be kept in mind while drafting LLP Agreement.