Brief Introduction About Limited Liability Partnership Agreement
Limited liability partnership (LLP), as the name suggests, is a partnership where the corporate liability of the partners in a business is limited. The partners decide only to be liable to a limited extent. This means that their assets in the business will be held liable in a lawsuit. Their assets will be protected. It is established through a limited liability partnership agreement. This agreement governs the LLP and contains provisions regarding its business, functioning, member’s contribution, their responsibilities, and the distribution of profits.
A limited liability partnership differs from a limited partnership. In a limited partnership, there is one general partner who undertakes unlimited liability for its obligations. Apart from him, there are other limited partners. Their liability is limited to the extent of their investment in the partnership.
The general partner controls the daily management of the partnership while the limited partners get a share in profits. But they do not have managerial control. This partnership is governed by a limited partnership agreement. If the agreement allows a transfer of limited partnership interest and the general partner agrees, a limited partner can transfer his interest to another limited partner.
Purpose of a Limited Liability Partnership Agreement
This agreement sets the rules for the LLP. Its business has to be conducted according to these rules. It guides the partners and clarifies their duties. They can mutually decide the terms that are most suited to them. In the absence of this agreement, the provisions of federal law will apply. These may not be suitable for the partners. Therefore it is vital to have an agreement. Besides explaining the partners’ responsibilities, it contains details about their contribution to the partnership.
This is very important to determine their liability and share of profits. It also contains provisions relating to taxation and voting rights of the members that help in the smooth functioning of the LLP. In case there is a dispute, partners can refer to this agreement and sort it out according to its terms. This avoids the need to go to court, which can be time-consuming and costly.
Contents of a Limited Liability Partnership Agreement
A sample limited liability partnership agreement will have the following key terms:
- Name of the LLP
- Date of the agreement
- Definition of terms used in the agreement
- Constitution of the LLP
- The business of the LLP
- Duration- The agreement usually continues until it is terminated by the partners.
- Members of the LLP
- Contribution of each member
- Accounts of the LLP
- Distribution of profits and losses
- Rights of the partners
- Obligations of partners
- Meetings of partners- It includes a recording of the minutes to maintain a record.
- Management and voting rights
- Addition and removal of partners
- Non-compete/ non-solicitation clause
- Dispute resolution
- Governing law
- Signature of the parties
How to Draft a Limited Liability Partnership Agreement?
The provisions of the LLP partnership agreement must comply with the Uniform Partnerships Act and the relevant state laws. The drafting process generally involves the following steps:
- The partners come together and decide to form an LLP. They discuss their contributions and how the partnership will be managed. This stage involves multiple rounds of discussions and consensus-building.
- After all the partners agree with the terms of the partnership, the agreement is drafted. The drafting must be carried out carefully as any mistake in the text can give a different meaning to the intended purpose.
- It is important to define every term used in the agreement so that partners interpret it in the same way. This avoids confusion between them.
- The agreement should state the names and addresses of all the partners. Their contributions must be mentioned carefully. Care should be taken to avoid any ambiguity when writing them.
- Another significant provision is that dealing with the distribution of profits and losses. This will be according to the contribution of each partner. The entire process should be explained coherently.
- Terms such as management, meeting, and addition/removal of partners should be clearly drafted for the partnership’s efficient functioning.
- The dispute resolution clause must explain the process that is to be followed in case there is an issue between the partners about any provision of the agreement.
Partners in the LLP will have a common goal to carry out the business. Therefore, they must negotiate in good faith and come to a consensus. Each partner can negotiate the amount of his contribution that will determine his liability in the partnership. Based on this, he may negotiate for his rights under the agreement. The essential point to remember is that the discussions should lead to a fruitful collaboration between the partners.
Benefits and Drawbacks of a Limited Liability Partnership Agreement
- It serves as a guide to the partners to conduct the LLP’s business.
- It limits the partners’ liability, thereby protecting their assets.
- It states how situations such as the removal of a partner and disputes are to be handled.
- It can only be used for specific professions in some states. This limits its application.
- Some of the obligations required under this agreement, such as holding meetings and recording its minutes, can be burdensome for a small business.
[ Also Read: LLC Agreement ]
What Happens if it is Violated?
The agreement carries a dispute resolution clause(1) that states how a dispute or a breach will be handled. In case of a violation, usually, the partners first negotiate to address the issue. If negotiations fail, they can proceed for the chosen mode of dispute resolution (mostly arbitration). If relief is required from the court, a claim can be filed in the court of the state whose law governs the agreement.
This agreement is a fundamental document of an LLP. It lists important information about the partnership, right from its incorporation to its management. If you plan to use a template, it is important to use one that has been reviewed by an attorney.