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What is an LLP Agreement?

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  • Written By: Terry Masters
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 01 September 2016
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A limited liability partnership (LLP) agreement is a contract between the partners in a company that establishes their respective rights and obligations and also provides a framework for the company’s operation. The agreement is not required by law to be in writing in most jurisdictions to protect the substantive interests of the partners, primarily because there are often default legal standards that will apply. It is commonly considered a best practice to adopt a written LLP agreement, however, as it will supersede any default legal provisions that may be imposed by the jurisdiction.

An LLP is a business entity type that is created by an authorizing statute in jurisdictions in many countries. It is typically used by professionals, such as lawyers or accountants, to protect each practitioner in a practicing group from unlimited liability for business activities. The LLP has elements of both the partnership and the corporation entity structures. Once the professionals form a LLP, they are afforded the limited liability of a corporation but still maintain the benefits of being taxed as individuals under a partnership. If the partnership is sued in its professional capacity in the ordinary course of business, the partners are only liable to the extent of their investment in the partnership.

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Another benefit of the LLP structure is the ability to manage affairs as a partnership. Compared to a corporation, a partnership has the freedom to determine how it will be managed by majority vote of the partners. It doesn’t have to conform to regulatory requirements, disclose information to investors, or subject itself to oversight through a board of directors. Instead, the partners vote on organizational and operational matters and draw up a contract, called an LLP agreement. This agreement governs the matters contained within it, just like any enforceable contract, to the extent that the activities do not conflict with the law.

An LLP agreement can address any topic of interest to the partners, but there are some typical sections of a standard agreement that attempt to address basic issues and make provisions for common business occurrences. Some of the more important standard parts of an agreement include how profits and losses will be handled, how daily operations will be managed, how new members will be added to the partnership, and what will happen if a partner wants to leave.

Most countries that allow LLPs also have a Uniform Partnership Act (UPA) that can be used by local jurisdictions as a model for an authorizing statute. Within the UPA, and included in many local statutes, are default provisions that address various issues relating to partners and partnerships. If a partnership does not adopt a written LLP agreement, a court will apply these default legal standards to decide any matter of contention between the partners.

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