LLP Agreement under LLP Act – Key Provisions | Filing | Guidelines

LLP Agreement is a written agreement between the partners of a Limited Liability Partnership (LLP) or between the LLP and its partners. It outlines the mutual rights, duties, and obligations of the partners as well as their rights and duties in relation to the LLP.

Table of Contents

1. Agreement Among Partners
2. Standard Conditions of LLP
3. When to Execute Agreement
4. General Comments on LLP Agreement
5. Various Clauses of Agreement
6. Model Draft of LLP Agreement

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1. Agreement Among Partners

LLP Act, 2008 provides great operational flexibility. In many cases, provisions as contained in LLP Agreement prevail.

LLP Agreement is comparable with ‘Articles of Association’ under Companies. Such agreement is not mandatory but highly advisable. In absence of LLP Agreement, general provisions as specified in First Schedule to LLP Act apply.

After incorporation, LLP may have Limited Liability Partnership Agreement. This agreement will govern mutual rights and duties of partners of LLP and mutual rights and duties of LLP and its partners. The agreement can be changed and details should be filed with ROC [Section 23 of LLP Act, 2008].

‘Limited liability partnership agreement’ means any written agreement between the partners of the limited liability partnership or between the limited liability partnership and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that limited liability partnership [Section 2(1)(o) of LLP Act].

Interestingly, LLP agreement and its extracts as given in e-form 3 are not available for public inspection.

1.1 Relationship of Partners As Apecified in LLP Agreement

Save as otherwise provided by LLP Act, the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners, shall be governed by the limited liability partnership agreement between the partners, or between the limited liability partnership and its partners – section 23(1) of LLP Act.

Agreement has to be ratified by all the partners – An agreement in writing made before the incorporation of a limited liability partnership between the persons who subscribe their names to the incorporation document may impose obligations on the limited liability partnership, provided such agreement is ratified by all the partners after the incorporation of the limited liability partnership  – section 23(3) of LLP Act.

Matters in Schedule to LLP Act apply if no agreement – In the absence of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and the partners shall be determined by the provisions relating to that matter as are set out in the First Schedule to LLP Act – section 23(4) of LLP Act.

Many of the standard clauses in first schedule to LLP Act will not be acceptable in majority of the cases. Further, fees payable for filing a document depend on ‘contribution’ of partners.

Hence, practically, each LLP will be required to have LLP Agreement.

The provision of rules are such that the agreement can be signed and executed either before incorporation or after incorporation of LLP.

1.2 Filing of LLP Agreement and Changes

The agreement and any change in the agreement shall be filed with ROC [Section 23(2) of LLP Act].

The limited liability partnership agreement and any changes, if any, made therein shall be filed with the Registrar in such form, manner and accompanied by such fees as may be prescribed – section 23(2) of LLP Act.

Information with regard to LLP Agreement shall be filed in form 3 with ROC within 30 days from date of agreement with prescribed fees. Change shall also be informed within 30 days with fees, in form 3 within 30 days of ratification by all members [Rule 21 of LLP Rules, 2009].

The prescribed details are to be given in form 3 and copy of LLP agreement is required to be attached.

Same procedure is to be followed for change in LLP agreement.

1.3 Pre-incorporation Contracts

Pre-incorporation contracts (i.e. agreements made before formation of LLP) by subscribers to incorporation document may impose some obligations on LLP. Such agreement is binding on LLP if ratified by all partners after incorporation of LLP [section 23(3) of LLP Act].

Such ratification shall be done immediately after incorporation and shall be informed to ROC in form 3 within 30 days from date of incorporation of LLP with prescribed fees [rule 21(2) of LLP Rules, 2009].

2. Standard Conditions of LLP

Following provisions relating to mutual rights and duties of partners apply to each LLP in absence of any agreement to contrary [First Schedule to LLP Act, read with section 23(4) of LLP Act].

• The mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and its partners shall be determined, subject to the terms of any limited liability partnership agreement or in the absence of any such agreement on any matter, by the provisions in this Schedule.
• All the partners of a limited liability partnership are entitled to share equally in the capital, profits and losses of the limited liability partnership.
• The limited liability partnership shall indemnify each partner in respect of payments made and personal liabilities incurred by him –

1. 1. in the ordinary and proper conduct of the business of the limited liability partnership; or
   2. in or about anything necessarily done for the preservation of the business or property of the limited liability partnership.

• Every partner shall indemnify the limited liability partnership for any loss caused to it by his fraud in the conduct of the business of the limited liability partnership.
• Every partner may take part in the management of the limited liability partnership.
• No partner shall be entitled to remuneration for acting in the business or management of the limited liability partnership.
• No person may be introduced as a partner without the consent of all the existing partners.
• Any matter or issue relating to the limited liability partnership shall be decided by a resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. However, no change may be made in the nature of business of the limited liability partnership without the consent of all the partners.
• Every limited liability partnership shall ensure that decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office of the limited liability partnership.
• Each partner shall render true accounts and full information of all things affecting the limited liability partnership to any partner or his legal representatives.
• If a partner, without the consent of the limited liability partnership, carries on any business of the same nature as and competing with the limited liability partnership, he must account for and pay over to the limited liability partnership all profits made by him in that business.
• Every partner shall account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property, name or any business connection of the limited liability partnership.
• No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.
• All disputes between the partners arising out of the limited liability partnership agreement which cannot be resolved in terms of such agreement shall be referred for arbitration as per the provisions of the  Arbitration and Conciliation Act, 1996.

Some standard conditions not practicable – Some of the standard conditions specified are not practical. Hence, practically, every LLP will be required to have a written LLP agreement.

3. When to Execute Agreement

Normally, any agreement by or with LLP can be executed only after incorporation of LLP. However, the LLP agreement is not by or with LLP. It is agreement among partners of LLP about LLP. Hence, it can be executed before incorporation of LLP, though it can as well be executed after incorporation of LLP.

The agreement can be amended any number of times. Any amendment has to be filed with Registrar of Companies with filing fee.

3.1 Stamp Duty Payable on LLP Agreement

Since LLP Agreement is a new instrument, obviously, it will not find place in any schedule of State Stamp Act. If the entry in schedule simply reads ‘Partnership Deed/Agreement’, then LLP Agreement can fall under that entry. However, if entry reads ‘Partnership deed/agreement under Indian Partnership Act’, then obviously LLP Agreement will not fall in that heading. In that case, it should fall under residual entry i.e. ‘Any other agreement’, and stamp duty will be payable accordingly.

Of course, in due course, Stamp Acts of all States will be amended.

e-payment of stamp duty – Provision for e-payment of stamp duty has been made under Companies Act. Till parallel provision is made under LLP Act, the existing provision of physical stamps and physical submission of documents will continue.

4. General Comments on LLP Agreement

Just as a shirt cannot fit all persons, there cannot be a standard LLP agreement which will fit requirements of all types of LLPs.

LLP can be of different sizes and for different purposes. Some LLPs may have few partners while some may have huge number of partners. Some LLPs may be in form of family partnerships while some may be in form of Joint Ventures.

Flexibility in agreement – These aspects have to be kept in mind while drafting LLP agreement. The agreement should not be rigid and should provide as much flexibility as possible. More the rigidity, more the problems of operations.

Interests of all parties should be kept in mind. Chances of oppression and mismanagement by some partners cannot be ruled out. There can be oppression of majority. These factors should be considered and proper care should be taken.

Rules are for gentlemen – Of course, ultimately, the fact remains that all rules and regulations are for gentlemen (who really do not need them). Crooks will always find ways and means to hoodwink the system.

4.1 Types of Partners

Under LLP, authority of a partner can be restricted by way of LLP agreement. Such restriction may not be required in case of small family managed LLP but should be provided in large firms.

LLP Agreement can provide for different categories of partners. Some may be termed as Senior/Managing/Executive Partners, some may be termed as ‘Partner’ and some may be even ‘Junior Partner’.

Veto powers to one or more partners – If one or more partner/s intend to control LLP, the agreement can provide them veto power i.e. LLP agreement can provide that in any meeting of Partners or Senior/Managing/Executive Partners, there will be no quorum if they are not present and no resolution can be passed without their affirmative note.

4.2 Executive/Managing Committee in Case of Large LLP

In case of LLP with large number of partners, it is unworkable to give executive or operational powers to all partners. Hence, it may be advisable to form a committee of senior partners which may be termed as Executive/Managing Committee. In my opinion, the number should not exceed five or seven to make it manageable.

4.3 Number of Partners to Execute LLP Agreement

Two persons are sufficient to incorporate LLP. If number of partners are expected to be large, it may be advisable to incorporate LLP with two partners and then increase the number of partners later on. This will be more convenient than to incorporate LLP with large number of partners.

In such case, Incorporation document and LLP Agreement may be executed by two partners. Of course, legally, there is no limit on number of partners who can sign Incorporation document and LLP agreement.

5. Various Clauses of Agreement

Considering the flexibility required in LLP, comments on various clauses are given in following paragraphs. LLP agreement should be drafted considering the requirements and business model of proposed LLP. In following discussions, XYZ is taken as name of LLP. This should be replaced with the name of LLP under formation.

5.1 Main Clauses of LLP Agreement in Form 3

Columns 7 to 20 of Form 3 are in respect of information with regard to LLP agreement. It is highly advisable to draft LLP Agreement in same sequence as far as possible, so that filling form 3 and its checking by Registrar will be easy.

5.2 Model LLP Agreement

Model draft of agreement is given in Annex 4.1. This may be suitably amended to meet requirements of individual LLP.

5.3 Sample Amendment to LLP Agreement to Admit Partner

Sample amendment to LLP Agreement to admit partner is given in Annex 4.2

If there are more than one amendments to LLP Agreement, serial numbers of amendments should be given and each amendment should give brief reference of previous amendments made to LLP Agreement.

6. Model Draft of LLP Agreement

XYZ LLP Agreement

This LLP Agreement made at _________ (place) on _________ (date) between the following (hereafter collectively referred to as ‘parties to LLP agreement’) –

1. A
2. B
3. C

Notes –

1. If partner is LLP or body corporate, that name should be mentioned and not of authorised signatory who is signing the LLP agreement.
2. The agreement will be signed by nominee/authorised representative of such company. It is advisable that in opening paras of the agreement, the person who is signing on behalf of such company/LLP and authority under which he is signing should be mentioned).
3. In case of partners who are individuals, their full name, full name of father/husband, full address with PIN code, age, PAN number (and DIN number if available) should be given. If partner is company, LLP, foreign company or foreign LLP, its name address of registered office, law under which it is incorporated, its registration number should be given.

Effective Date of LLP Agreement – This agreement shall be effective from date of incorporation of the LLP and without need of any further ratification or adoption by the signatories to this agreement (If executed before incorporation) or

This agreement will be effective from date of execution of this agreement (if executed after incorporation of LLP).

Whereas –

1. The parties to LLP Agreement have decided and agreed to incorporate a Limited Liability Partnership to be known as ‘XYZ LLP’.
2. The proposed name has been reserved by Registrar of Companies, __________ vide his letter No. __________ dated __________.
3. The Incorporation Document for LLP has been executed by all the parties to LLP agreement.
4. The Incorporation Document and other connected papers are being submitted to Registrar of Companies with necessary filing fees.
5. Mr. J has been authorised by Y Company Ltd. to sign this LLP agreement on its behalf vide its Board resolution dated __________.
6. Mr. K has been authorised by X LLP to sign this LLP agreement on its behalf vide resolution of its executive committee dated ________.

(If the LLP Agreement is executed after incorporation, the aforesaid preamble may be altered suitably)

Now, therefore, it is decided and agreed by all parties to LLP agreement as follows –

1. Name of LLP – Name of LLP shall be XYZ LLP.

1.1 Business of LLP – The business of LLP will be as specified in the Incorporation Document. The business shall commence on from date of incorporation of LLP.

1.2 Incidental or Ancillary Powers – Following powers shall be incidental or ancillary to attainment of main business of LLP as indicated in Incorporation Document. LLP can exercise those powers as and when required.

(a) Obtaining rights, privileges, contracts, licenses, intellectual property rights, authorisations, permissions from Government or any other authority, company or person to carry out the business of LLP.

(b) Take over any running firm, concern, LLP or body corporate carrying on similar business at a price mutually agreeable or to amalgamate with any other LLP or company or body corporate having objects similar or compatible to those of the LLP

(c) Become partner of another LLP or member of any company

(d) Enter into compromise with any person.

(e) Enter into arrangement for sharing profits, union of interest, cooperation or joint venture with any person, LLP or Company or body corporate.

(f) Appoint, deal with or act as agents, sub-agents, dealers, sub-dealers, distributors for selling or purchasing or dealing with the products or services related to the business of LLP.

(g) Acquire or dispose of movable and immovable property, enter into agreements for purchase, sale or disposal of movable or immovable property.

(h) Open, operate and close bank accounts, give and obtain guarantees, borrow from banks, financial institutions or any other person on providing security or without security, invest surplus funds of LLP in appropriate avenues.

(i) Appoint, promote remove or suspend employees and workmen, to take disciplinary actions and impose punishments on workmen and employees, to represent before labour courts, industrial tribunals, High Court and Supreme Court in labour matters.

(j) To institute or defend any suit or show cause notice before any adjudicating authority, appellate authority, Tribunal or Court, to appoint consultants, advocates and authorised representatives for representing LLP.

(k) To grant general or special power of attorney to any person for purpose of business of LLP.

(l) Do all such acts and things as may be necessary to carry out businesses of the LLP.

1.3 Change, Suspension or Modification in Nature of Business – The nature of business can be changed or new business can be commenced or existing business can be suspended or modified or business can be completely closed with –

• consent of all partners
• consent of 75% of partners
• consent of 75% of Senior/Executive/Managing Partners

(keep as appropriate).

1.4 Registered Office of LLP

The registered office of LLP shall be at the following place –

_______________________________

_______________________________

_______________________________

The registered office can be changed as provided in subsequent clauses of this agreement.

1.5 Place of Business – LLP can conduct business and have place of business anywhere in India.

1.6 Liability of Partners – Liability of each partner towards LLP shall be limited to his contribution to LLP.

1.7 Categories of Partners – There shall be following categories of partners – Senior/Managing/Executive Partners, ‘Partner’ and ‘Junior Partner’. Keep as appropriate. Omit the clause if such categories are not envisaged or not required]

2. Designated Partners – Following are presently designated partners

They have given their consent to act as designated partners.

The designated partners may be changed and new partners may be appointed as Designated Partners with their consent. It will not be necessary to amend the LLP Agreement for this purpose.

2.1 Acts To Be Done By Designated Partners – The designated partners shall be responsible for all acts specified in section 8(a) and all other statutory requirements of Limited Liability Partnership Act and other provisions. The designated partners shall be responsible for authenticating and signing of Statement of Account and Solvency as required under LLP Act and LLP Rules.

2.2 Other Powers As Per LLP Agreement – The designated partners will exercise other powers relating to management of LLP only as per provisions of this agreement and subject to powers as given to executive/managing partners and general body of partners as specified in this LLP agreement.

2.3 Appointment/Removal of Designated Partners – Designated partners will be appointed and/or removed

• Unanimously by all partners.
• By executive/managing committee of LLP.

(keep as appropriate)

3. Contribution

The total monetary value of contribution of LLP shall be Rs. ___________ (state as specified in Incorporation Document). Obligation of each partner to contribute is as follows –

Persons, who have consented to be the partner of LLP, shall be bound by the terms of this LLP agreement, as may be amended from time to time. They shall be bound to contribute as specified above.

(Note – If number of partners is large, this clause will require amendment every time a new partner is added or a person ceases to be a partner. Hence, in such cases, this clause may be suitably redrafted e.g. on basis of categories of partners).

3.1 Increase or Reduction in Contribution – The Contribution can be increased or reduced with consent of –

• all partners
• 75% of partners
• 75% of Executive/Managing Partners
• Resolution of Executive/Managing Committee

(keep as appropriate).

The increase in contribution shall be in the existing ratio of the contribution, unless all other partners agree for different proportion. Contribution of any partner shall not be increased without his express consent.

Share of each partner in contribution in case of subsequent increase – The share of each partner in the Contribution will be as decided with consent of all partners/consent of 75% of partners/consent of 75% of Executive/Managing Partners (keep as appropriate).

No Interest on capital contribution – Interest shall not be paid on capital contribution.

3.2 Other Provisions Relating to Contribution

Share of profit of each year shall not form part of contribution – Share of profit of each partner shall not form part of contribution of the partner. The amount will be credited to a separate account of the partner.

Refund of Contribution – The contribution of partner will be fully refundable in the following situations –

• in case of death, resignation, expulsion or cessation for any other reason of the partner.
• winding up of LLP.

The partner’s contribution may be partly or fully refunded if –

• at least 75% of the remaining partners
• with consent of Executive/Managing Committee of LLP

(keep as appropriate).

Refund of contribution in case of closure of business – When it is decided that business of LLP be closed, all secured and unsecured creditors should be first paid. All liabilities of LLP shall be cleared. Balance, if any, shall be distributed among partners in the ratio of their contribution at the time of closure of business.

4. Partners’ Powers and Duties

4.1 Types of Partners

Partners shall be of following types –

• Executive/Managing Partner
• Salaried Partner
• Non-Executive Partner
• Partner