What is the Limited Liability Partnership (LLP) Agreement ?
LLP agreement is a written contract made between the partners to governing the function and opearation of LLP including how the LLP should be run, how profits should be shared, how new partners should be introduced, how to resolve disputes amongst ther partners, what should happen if a partner want to quit and etc.
Why You need a LLP Agreement?
We strongly recommend you to have a LLP agreement when you register the LLP. Some banks require you to submit the LLP agreement during bank account opening application. LLP agreement also required in certain business license application.
If there is no LLP agreement adopted, the LLP will be governed by the provisions of the LLP Act 2012. The following are the sample of default provisions that which may not suitable for your LLP:-
Capital Contribution and Profit Sharing
Without the LLP agreement, all the partners of an LLP are entitled to share equally in the capital and profits of the LLP pursuant to LLP Act, 2012. However, this may not fit all LLP as it is common for different partners would contribute different capital and therefore receive different proportions of profit, a LLP agreement can set this out.
LLP Act 2012 stated that no partner shall be entitled to any remuneration. In additional, the patners' remenuration would not be tax deductible if it is not documented in LLP agreement.
The provisions in LLP Act 2012 doestn't clearly define the procedures when a partner choose to quit from the business. Generally, it stated that in the absence of LLP agreement, the exiting partner just need to give thirty (30) days' notice to the other partners of his/her intention to resign as a partner and shall be entitled to receive the capital contributions and share of profits from the LLP.
The LLP Act is silent few important issues such as whether the withdrawal as partners need consent from other partners, whether the exiting partner must sell his interest in the partnership to the existing partner before offering to third parties, and when the LLP need to make payment to the exiting partner. Most importantly there is no clause prevents the outgoing partner to solicit business, client or employee from the LLP.
Transfer of Patnership Interest
The LLP Act 2012 sets no restrictions to the partners of a LLP to transfer his/her interest to others. This could be worrying where the exiting partner selling or transferring his/her interest to another party whom the other partners may not wish to be in business with.
Expulsion of Partners
What happens if one of your partner is fundamentally dishonest or incompetent and the other partners want to remove him? The LLP Act 2012 provided that no majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. This mean even you are the partner(s) who have majority interest in the LLP, you can't make any one of the partner leave the LLP.
In such a deadlock situation, you could only choose to wind up the LLP with court order which would be very costly.
What is included in the Standard LLP Agreement ?
We understand it may be too costly for a new start-up to engage a lawyer to draft a LLP agreement. Yau & Co. works with our associated lawyer and come with this standard LLP agreement template that would covers most startup needs, including :-
- business nature of the LLP
- each partner’s contribution and profit sharing
- management and decision-making
- partner's duties and entitlements (including salaries)
- accounting and general adminisration matter
- members leaving