LLP agreement is a legal document that must be filed within 30 days of LLP registration. LLP agreement details the rights and responsibilities of Partners in an LLP. In case of failure to file an LLP agreement, a penalty of Rs.100 per day will be levied by the MCA and the first schedule of the LLP Act will apply. In this article, we look at the LLP agreement and First Schedule of LLP Act in detail.
LLP agreement determines the rights and duties of partners in an LLP. The partners may enter into an LLP agreement upon registration of LLP and file it with the MCA before 30 days. The participants of the agreement can be the partners who have signed the incorporation agreement, and any other person who wishes to be a partner of LLP. An agreement executed before incorporation would be endorsed by the partners.
Drafting of LLP Agreement
For the proper functioning of LLP, and to avoid any friction among the partners, an agreement must be proper and flawless. The following are the aspects to be considered while drafting an agreement:
- Nature of business.
- Duration of the business, if any.
- Admission and removal of partners.
- Contribution to capital.
- Consequences of death of a partner.
- Transfer of interest in the firm.
- Sharing of profit and loss.
- Interest to partners capital.
- Remuneration to partners.
- Selection of designated partners.
- Duties of partners.
- Undertaking new business.
- Discounting some of the existing business.
- Dispute resolution among partners.
- Amendment to LLP agreement.
- Opening of bank accounts.
- Operation of bank accounts.
- Management .
- Partner’s duties and responsibilities.
- Mode of distribution of profit.
Remuneration and Interest
If the partners desire to claim remuneration, interest of capital and loan provided by them as deduction for arriving the taxable income in the hands of Limited Liability Partnership, the LLP agreement must contain provisions permitting the same. The maximum interest deductible is 12%.
First Schedule of LLP Agreement
In the absence of an LLP agreement, the relationship between the partners and LLP will be governed by the First Schedule to the LLP Act. The Schedule can be enforced even in the existence of an agreement if the agreement doesn’t specify any matters dealt with in the First Schedule.
Provisions in the First Schedule are listed below:
- The mutual rights and duties of the LLP and its partners shall be determined, subject to the terms of the LLP agreement, (if any), or by the provisions in this schedule.
- The partners of an LLP are entitled to equal share of capital, profits and losses.
- Every partner in the LLP shall be indemnified with respects to payments made and liabilities incurred. The indemnity is also applicable on fraud in the conduct of business of the LLP.
- Every partner may take part in the management of an LLP.
- No partner will be benefited with remuneration for acting in the business or management of an LLP.
- Prior permission must be obtained from the existing partners before the induction of a new partner.
- Any issues revolving the LLP shall be solved by a resolution passed by majority of the partners. However, no ultimatum will be reached without the consent of all the partners.
- Every LLP shall ensure that all its decisions are recorded in the minutes within thirty days of taking such decisions. The minutes should be kept and maintained at the registered office of the LLP.
- Each partner shall render true and accurate accounts, and provide complete information of all things relating to the LLP to any of his partners or legal representatives.
- If a partner pursues any competitive business of the same nature without the consent of the LLP, he/she must account for the same, and pay over to the LLP all profits made by him in the particular business.
- Every partner should account for any benefit, which is derived without consent, from an LLP through a transaction which pertains to the firm.
- Majority of the partners cannnot expel any partner unless the agreement confers the right to do so.
- Any disputes between the partners arising out of the LLP agreement shall be referred for arbitration as per the provisions of Arbitration and Conciliation Act, 1966.