What is LLP Agreement? Limited Liability Partnership Chapter 2
LLP Agreement is an agreement which binds and governes the mutual rights and duties of partners among themselves and that with other LLP.
The various default rules are mandated in Schedule I of LLP Act regarding any mutual rights and liabilities.
IMPORTANT : Its not mandated to enter into an LLP Agreement, in which case the default rules are applied.
LLP is customizable while drafting same as partnership agreement, providing changes to different rules in Schedule I of LLP Act.
Note: Any changes in the LLP Agreement shall have to be filed in Form 3.
LLP Agreement vs Partnership Agreement
In traditional partnership firm all the partner are liable jointly for any act or decision of a firm, while are alone as individual capacity in some powers that must be taken only as a unanimous decision. While in LLP the individual are free to take the decisions on behalf of the firm but at his own sole responsibility. One partner is not liable for other partners act.
Different states have different provisions in Partnership Act whereas the LLP is central provisioned where enforcement laws are made by central government
Since a partnership firm involves full joint and several liability of the partners, firms/enterprises engaged in biotech, information technology, intellectual property and other knowledge based sectors find traditional partnerships unsuitable. Also, businesses that needs to take credit regularly from suppliers or vendors (such as retail business or restaurants, for instance) or is likely to incur significant debt in course of business should avoid traditional partnership. LLP can be useful particularly for such businesses.
Business more suitable for LLP
Any start-up need to know what organization structure that want to carry forward your startup. Your decision to choose a Company or a LLP will determine who can share ownership of the business, management of the business, how the business is taxed and who will be held liable for the business’s debts
LLP is a structure which gives the benefits of a limited company and flexibility of a partnership firms.
Considering on the scalability of the operation of the firm, and its requirement to infuse additional stake holders and professionals in the management from outside to manage the day to day affairs of the business the LLP looses its value, LLP can be a good option to carry small business ideas execution or at early stage where your startup wants enough time to settle and capture market cap.
If you are looking for quick investment and funding options than LLP shouldn’t be your choice, as stringent compliances under Company Law, Income Tax rules out the possibility sometimes for investor as their funding option.
It can be better if you aims at establishing a joint venture coaching in multiple cities where you can get enough turnover and not looking for the quick outside investment
If your initial paid up capital is very less and don’t want to carry on much legal processes then LLP can be the option you might be looking for, which require just a max of INR 800 to get into an LLP Agreement and incorporation .
Thus, LLP is suitable for startups, where the business is to be managed by few initial partners as main objective of the founders is to have direct control over the affairs of the business to execute them properly once got the momentum they can switch the mode of organization.
LLP and Social Entrepreneurship
The social entrepreneurship is something two way road with same set of traffic rules, The social entrepreneurship venture may be catering the bottom line of the pyramid through its unique good and services through either motive, profit or the non profit. So its becomes important founders to format and finalize their business structure either as profit or non-profit. If non-profit then the LLP structure won’t be ale to server the purpose, because,
- Firms that operate on no-profit no loss basis and their prime funding is donation, can’t be structured as LLP as their main motive is to carry on lawful business for profit.
- They are now allowed to provide the tax benefit to donors through charitable trusts and societies,