What Is an LLP Agreement?
An LLP agreement is a contract that sets out how your limited liability partnership will run. It’s usually made between all the members of the LLP, and sometimes the LLP as well.
This document explains what everyone’s rights and obligations are, so there’s much less room for confusion or disputes later on.
You’ll use an LLP agreement to decide things like profit sharing, how new members join, and what happens if someone leaves.
It also covers important details about decision making, management roles, and handling disagreements.
Here are some key areas you’ll see in an LLP agreement:
- Profit and loss sharing
- Appointment and removal of members
- Members’ duties and powers
- Meetings and decision-making
- Retirement, resignation, or expulsion of members
With an LLP, your business is a separate legal entity and, under the Limited Liability Partnerships Act 2000, you and the other members aren’t personally liable for the debts beyond your investment.
An LLP agreement is not legally required; however, not having one can leave the rules subject to default regulations, which may not suit your business.
If you want flexibility in how your LLP operates, having a written agreement lets you set the terms that work best for everyone.
When Is an LLP Agreement Needed?
You don’t have to make an LLP agreement by law, but doing so is usually a smart move in most cases.
If you’re starting a new LLP with others, you’ll want a clear agreement to sort out how profits are shared, what everyone’s roles are, and what happens if someone leaves.
If you’re planning to add or remove members in the future, or if you expect roles and responsibilities to change, an agreement becomes even more important.
Without one, you’re left with default rules under the law, which might not suit your business or personal preferences.
LLP agreements are especially needed in situations where:
- You have more than two members
- You want flexibility for profit sharing
- There’s potential for disagreements on decision-making
- Members have different duties or levels of involvement
- Someone might want to retire or exit the LLP
Setting up complex arrangements, such as different voting rights or management structures, also means you’ll need a proper written agreement.
Otherwise, you could face confusion, disputes, or decisions being made in a way that’s not fair to everyone.
How to Write an LLP Agreement
If you’re looking to write a limited liability partnership agreement, you can follow these steps.
Step 1: Identify the Basic Business Information
Start by clearly defining the foundational details of the LLP. This includes choosing the legal name of the LLP, identifying the registered office address, and listing the full legal names and addresses of all partners involved.
These details serve as the legal identifiers of the entity and must match any information provided during official registration. Be precise and consistent, as these details will be referenced throughout the agreement and must be correct to avoid legal complications later.
Step 2: Define the Nature and Scope of Business
After establishing the basic information, define what the LLP will actually do. Clearly describe the type of business the LLP will carry out, including its main objectives, markets served, and core services or products offered.
This section sets the scope within which all partners will operate and make decisions. It's important to be specific but flexible enough to allow the LLP to evolve without rewriting the agreement every time the business expands.
Step 3: Outline the Capital Contributions
Next, specify the capital contributions that each partner is making to the LLP. These contributions can be in the form of cash, property, services, or any other assets.
Detail how much each partner is contributing, when the contribution is due, and whether it is a one-time or ongoing commitment. You should also clarify what happens if additional capital is required later and how those obligations will be distributed.
This section is essential for ensuring fairness and transparency among the partners.
Step 4: Set the Profit and Loss Sharing Ratio
Once contributions are clear, decide how profits and losses will be shared among the partners. The default might be equal distribution, but many LLPs use a ratio based on capital contributions or responsibilities.
Clearly document the formula or percentages, and also explain when and how profits will be distributed, i.e. monthly, quarterly, or annually.
Address whether losses will be carried forward or distributed immediately, and how each partner’s capital account is affected.
Step 5: Define Management and Decision-Making Powers
The next step is to determine how the LLP will be managed on a day-to-day basis and how major decisions will be made.
Clarify which decisions can be made by individual partners and which require unanimous or majority consent. You should also state how meetings will be called, who will chair them, and what voting rights each partner has.
If some partners are silent or non-managing, specify their role in strategic decisions, if any. This step ensures clarity in leadership and avoids conflicts later on.
Step 6: Detail the Roles, Duties, and Restrictions of Each Partner
At this stage, you’ll define what each partner is responsible for within the LLP. Assign roles such as managing finances, overseeing operations, handling marketing, or representing the LLP in legal matters.
If any restrictions apply, such as non-compete clauses or limitations on entering into certain contracts, include those as well.
This section is important for accountability and helps prevent disputes about who is responsible for what in the daily functioning of the LLP.
Step 7: Include Rules for Admission, Retirement, and Expulsion of Partners
You now need to address what happens when a new partner wants to join, an existing partner wants to retire, or a partner needs to be removed.
Explain the process for admission, such as consent requirements and capital contribution terms. For retirement or exit, outline notice periods, buyout clauses, and asset valuation methods.
Also include the grounds and procedures for expulsion, such as misconduct, violation of agreement terms, or inactivity. These provisions provide structure and protection for the LLP's continuity.
Step 8: Specify Dispute Resolution Procedures
In the event of a disagreement among partners, there should be a defined way to resolve disputes.
Specify whether disputes will be handled through mediation, arbitration, or legal proceedings, and name the jurisdiction or governing law that will apply.
You can also consider a tiered approach, starting with internal resolution, followed by mediation, and then legal action. This section is critical for maintaining professional relationships and minimising business disruptions.
Step 9: Address Taxation and Accounting Methods
Indicate how the LLP will handle accounting, record-keeping, audits, and tax filing. State the fiscal year, the method of accounting (cash or accrual), and whether a professional accountant will be hired.
Clarify how each partner’s income will be reported for tax purposes, and ensure this section complies with local tax laws.
This part ensures transparency and regulatory compliance in financial matters.
Step 10: Finalise, Review, and Execute the Agreement
Once all sections have been drafted, review the document carefully. Ideally, have each partner read and confirm their understanding.
It's advisable to have a legal professional review the agreement to ensure it complies with local laws and protects all parties involved.
Once finalised, all partners should sign the document, and it should be dated. Each partner should retain a signed copy, and one should be stored in the official records of the LLP.
Only once signed does the agreement become legally enforceable, so accuracy and clarity are key.
To help you in this process, it’s helpful to use an LLP agreement template and look at other LLP examples, if possible.
