Suppose two friends start an LLP together; one contributes capital of Rs.9 Lakh and the other Rs.1 Lakh. They did not write an LLP agreement because they believed they trusted each other and didn’t need one. After two years, the firm makes a good profit, and one assumed profits would be divided as per capital, while the other thought equally.
Who is right here? Well, Indian law has an answer to this, but it’s what neither of them had chosen. An LLP agreement to avoid these kinds of situations, partners sign an LLP agreement which clearly states the capital, profit ratio, the rules, and other relevant clauses.
This blog is a complete guide to what an LLP agreement is, key clauses, stamp duty, Form 3 and Form 4 fees, and how to avoid partner disputes. For drafting help, speak to our corporate lawyers.
What is an LLP Agreement?
An LLP agreement is a written contract between the parters of the LLP, and the partners and the LLP itself. This agreement states the mutual rights and duties of all the partners, and same of the LLP towards them. The concept comes from the Limited Liability Partnership Act, 2008, mainly Section 23.
Think of it as the rulebook of your business. It decides who invests how much, how profits are shared, who can sign on behalf of the LLP, how decisions are made, how a partner can join or leave, and how disputes are settled.
An LLP is a separate legal entity where the partners have limited liabilities. The agreement helps maintain clarity between partners and the LLP, reducing the chances of uncertainty in future.
Is an LLP Agreement Mandatory in India?
This is the question that most of people ask, and this has two answers.
As per Section 23 of the LLP Act, 2008, an LLP agreement oversees the mutual rights and duties of the partners, and of the LLP and its partners. And in the absence of the agreement the rights and duties of the partners and of the LLP and its partners are governed by the corresponding provisions of the First Schedule apply (Section 23(4)). If an agreement exists, it and any later change to it must be filed with the Registrar through Form 3 within 30 days.
In short, an LLP can exist without a detailed agreement, but it then runs on statutory defaults written for the average case. And it raise the chances of disputes between partners and sudden exits of partners which can cause trouble in the firm.
Expert Advice from Adv. Raj L Mehta: Do not treat the agreement as a formality to be completed during incorporation. Most partner disputes we see start because one important point was never written down.
What Happens if an LLP has No Agreement?
If an LLP does not have an agreement, then the First Schedule fills the gap. Its defaults are simple, and they assume that partners are equal in every way. Here’s how it works:
| Issue | If the agreement is silent | What a drafted clause lets you do |
|---|---|---|
| Profit sharing | Equal for all partners, whatever their capital | Fix any ratio you agree on |
| Removing a partner | A majority cannot expel a partner | Set grounds and a fair procedure for expulsion |
| Management | Every partner can take part; ordinary matters by majority | Assign roles and decision-making powers |
| Remuneration | No partner is entitled to a salary | Agree remuneration and interest on capital |
| Admitting a partner | Needs the consent of all existing partners | Choose a suitable approval threshold |
| Disputes | Referred to arbitration, with no seat or rules fixed | Decide the seat, rules and number of arbitrators in advance |
In our example, the partner who invested Rs.9 lakh would share profits equally with the partner who invested Rs.1 lakh. The table shows the difference on a profit of Rs.10 lakh (illustrative figures).
| Partner A | Partner B | |
|---|---|---|
| Capital contributed | Rs.9 lakh | Rs.1 lakh |
| Profit share if the agreement is silent | 50% (Rs.5 lakh) | 50% (Rs.5 lakh) |
| Profit share if the agreement fixes 70:30 | 70% (Rs.7 lakh) | 30% (Rs.3 lakh) |
What is the Difference Between an LLP Agreement and A Partnership Deed?
People often use the two terms as if they mean the same thing. They do not.
| Point | LLP agreement | Partnership deed |
|---|---|---|
| Governing law | LLP Act, 2008 | Indian Partnership Act, 1932 |
| Legal identity | LLP is a separate legal entity | Firm is not separate from its partners |
| Liability | Limited to the agreed contribution | Unlimited and shared by the partners |
| Filing | Filed with the Registrar via Form 3 | Registration with the Registrar of Firms is optional |
| Continuity | Continues despite changes in partners | Can be affected by a partner leaving, unless the deed provides otherwise |
An LLP agreement is also different from a company’s Memorandum and Articles of Association. In a company, those documents and a separate shareholders’ agreement share the work. In an LLP, one agreement carries most of the load.
What Clauses Should an LLP Agreement Include?v
The law does not prescribe a fixed format, but a good agreement covers the following:
| Clause | What it should cover |
|---|---|
| Name, office and business | The LLP's name, address and a clear description of its activity |
| Partners and designated partners | Names, addresses and the designated partners, whose compliance duties arise under Section 7 of the Act |
| Capital contribution | Amount, form and timing. State how non-cash contributions, including services, are valued |
| Profit and loss sharing | The exact ratio, which can differ from the capital ratio, and when profits are distributed |
| Management and voting | Who can sign, and which decisions need all partners, a majority or one partner |
| Remuneration and interest on capital | What partners can draw, if anything |
| Admission, retirement and expulsion | How partners join and leave, with grounds, process and settlement |
| Confidentiality and non-compete | Protect client information and set clear restrictions during the partnership. Post-exit restraints are generally void under Section 27 of the Indian Contract Act, 1872, apart from narrow exceptions, so take advice before relying on one. |
| Dispute resolution | Mediation or arbitration, with the seat, language and number of arbitrators |
| Accounts, winding up and amendment | How books are kept, how assets are distributed on closure and how the agreement can be changed |
Expert Advice from Adv. Raj L Mehta: Avoid copying a template from the internet. Templates often leave out the expulsion clause and keep the dispute clause to a single line, which leaves both problems open.
How Do You Draft an LLP Agreement Step-by-Step?
Here’s the complete process of how to draft an LLP agreement, get is reviewed and verified by a professional corporate lawyer to avoid future mistake:
- List the partners and their roles: First step, decide the designated partners. An LLP needs at least two, and at least one must be resident in India.
- Decide capital contributions: Record the capital each partner brings and form of each contribution.
- Agree the profit ratio: All the partners can mutually decide the profit ratio, and any remuneration or interest on capital.
- Set the management structure: Decide the decision making mechanism, like what needs unanimity, what needs a majority and who can sign.
- Plan the exits: Cover retirement, expulsion, death and how a partner’s share is valued.
- Draft the clauses: Draft all the important clause in clear, precise format and number them clearly.
- Get it reviewed: Once the draft is ready get it reviewed by a lawyer, company secretary or chartered accountant.
- Stamp, sign and file: The agreement must get stamped and filed within 30 days of incorporation.
Before you start, make sure all partners have discussed the money and exit points openly. These are the topics people avoid, and also the ones that cause disputes later.
How Do You File the LLP Agreement with the MCA (Form 3)?
Form 3 is the form used to file the LLP agreement, and later changes to it, with the Registrar. The agreement must be filed within 30 days of the LLP’s incorporation. The usual process on the MCA V3 portal is:
- Log in to the MCA portal and open the LLP Form 3 web form.
- Enter the LLP details and the key particulars of the agreement, such as contribution and profit-sharing ratio.
- Attach the stamped and signed agreement as a PDF.
- Sign the form with the Digital Signature Certificate of a designated partner.
- Pay the filing fee, which depends on the LLP’s contribution.
- Submit and save the SRN and acknowledgement as proof of filing.
Check the screens before filing: The portal changes from time to time, so confirm the current fields and fee on the MCA website.
What is the Penalty for Filing Late?
Older articles still quote a flat Rs.100 per day. Since 1 April 2022, the delay fee is a multiple of the normal fee that rises with the delay. For LLPs that are not small LLPs:
| Delay in filing | Additional fee (other than small LLPs) |
|---|---|
| Up to 15 days | 1 time the normal fee |
| 16 to 30 days | 4 times |
| 31 to 60 days | 8 times |
| 61 to 90 days | 12 times |
| 91 to 180 days | 20 times |
| 181 to 360 days | 30 times |
| Beyond 360 days | 50 times |
Small LLPs (generally contribution up to Rs.25 lakh and turnover up to Rs.40 lakh, limits that can change by notification) pay lower multiples, for example 2 times instead of 4 times for a delay of 16 to 30 days.
How much Stamp Duty is Payable on an LLP Agreement?
Stamp duty is a state subject, so the amount depends on the state where the agreement is signed and is often linked to the capital contribution. Rates and slabs differ from state to state and change from time to time.
Two points are worth remembering:
- Stamp duty and the MCA filing fee are two different payments. One goes to the state and the other to the MCA.
- An agreement that is not properly stamped may not be accepted as evidence in court until the shortfall and penalty are paid. This is the time you will need the agreement most.
A supplementary deed that changes the agreement also needs to be stamped under the state’s law.
How Do You Amend an LLP Agreement?
If you want to make certain changes in the agreement, you don’t need to rewrite the whole agreement. Instead, you sign a supplementary deed that reorganizes the existing agreement and mentions the clauses that are being changed, and confirm it with all the partners’ consent. Then get it stamped and filed.
The form depends on what changed:
| What changed | Form |
|---|---|
| Terms of the agreement (contribution, profit ratio, business activity, clauses) | Form 3 |
| Partners or designated partners (joining, leaving, change of details) | Form 4 |
| Both | Both forms |
It’s important to know that both forms have a 30-day window from the date of the change, which many LLPs miss because it looks like a minor update.
What should you check before signing an LLP agreement?
Here is a list of things that you should check before signing an agreement:
- Whether the partners and designated partners are named correctly
- All the capital contributions are clearly stated, including the non-cash contributions
- The profit and loss ratio is written down
- Reserved matters and signing powers are clear
- Admission, exit, expulsion and valuation are covered
- Deadlock and dispute resolution steps are defined
- The amendment procedure is included
- Stamp duty is checked for your state, and every partner has signed
- A reminder is set to file Form 3 within 30 days
How can Kamal & Co. Advocates Assist You With an LLP Agreement?
A good LLP agreement works like a foundation; it helps understand how the partners actually plan to work together. At Kamal & Co. Advocates, we first collect the details regarding the capital, the roles, and the exit plans, and then turn that information into clear clauses. Our team can help with:
- Drafting a customised LLP agreement and supplementary deeds
- Stamping and filing Form 3 and Form 4
- Reviewing an existing agreement for gaps
- Handling partner disputes and arbitration
You can also explore our company registration and regulatory compliance services if you are setting up a new LLP.
