What Should Your LLP Agreement Actually Say? The Clauses That Prevent Partner Fights

Your LLP agreement should say, in writing, who puts in what, who takes out what, who can decide what, and how a partner joins, leaves or gets removed. That is the whole answer. Section 23 of the Limited Liability Partnership Act, 2008 makes this one document the rulebook of your business — and if the rulebook is silent on a point, the Act fills the blank for you, on terms most partners would never have chosen. I have read LLP agreements that were twelve pages of borrowed template and one page of actual decisions. The fights I later watched those partners have were never about the twelve pages. They were about the blanks.

If you write nothing, the First Schedule writes it for you

This is the trap, and it catches careful people. Section 23(4) says that where there is no agreement on a matter, the First Schedule of the Act decides it. Read what that means in practice:

Picture two partners. One puts in ₹9 lakh and works in the business full-time. The other puts in ₹1 lakh and checks in on Sundays. Under the defaults, they split profits fifty-fifty, the full-time partner gets no salary for the work, and neither can be removed. Nobody would sign that deal if it were put to them plainly. Yet that is exactly the deal a thin agreement gives them. Treat the First Schedule as a floor you are standing on, not a safety net. Every clause below is you choosing your own terms instead.

The money clauses: capital and profit share are two different decisions

Start with contribution. State what each partner is putting in — cash, assets, or a mix — when it comes in, and whether a partner can be asked to bring in more later. Your contribution is also the figure your liability is capped at, and it drives the government fee slabs, so a vague line here poisons three other places.

Then decide the profit share on its own. It does not have to match the contribution ratio. A partner bringing clients and full-time hours may fairly take a larger share than a partner bringing only money. Say the ratio plainly. Say also how losses are borne, when profits can be drawn, and how much must stay back in the business as working capital before anyone draws a rupee. Most partner bitterness I have seen starts with drawings — one partner pulling money out in a thin month while the other was holding back for a tax payment. A drawings rule, even a simple monthly cap, kills that argument before it starts. These are the decisions the LLP registration page lists under what must be decided before filing, and the agreement is where each one becomes binding.

The pay clauses: salary and interest pass through a tax gate

Partners often assume the agreement can promise any salary and any interest rate, and the LLP simply pays. It can promise. The tax deduction is another matter. An LLP is taxed as a firm, so section 40(b) of the Income-tax Act, 1961 decides how much of that pay the LLP may claim as an expense.

Three rules matter at the drafting table:

• Remuneration needs a working partner and a written promise. Salary, bonus or commission is deductible only when paid to a partner who is actively engaged in the business, only where the agreement authorises it, and only in line with what the agreement says. No clause, no deduction — even if the money was genuinely paid.
• Interest is capped at 12%. Interest on a partner's capital or loan is deductible only up to 12% per annum, simple interest, and again only if the agreement authorises it. Write 15% into the agreement if you wish; the excess will be disallowed in the LLP's hands.
• The remuneration ceiling is a formula, not a figure you pick. Since 1 April 2025, the deductible ceiling on remuneration to working partners is ₹3,00,000 or 90% of book profit, whichever is more, on the first ₹6,00,000 of book profit (or in a loss), and 60% of the balance. Pay above the ceiling is not illegal. It is simply taxed back.

One more line worth knowing while you draft: a partner's share of the LLP's profit is exempt in the partner's hands under section 10(2A), but salary and interest received from the LLP are taxed as that partner's business income. So the mix between profit share and pay is a tax decision, not just a fairness decision. Draft it with both eyes open.

Decision rights: who can sign, spend and borrow

The default is majority in number, one vote each. For a two-partner LLP that means deadlock on every split vote — and two-partner LLPs are the most common kind. Your agreement should do better. Set out who runs day-to-day operations, who operates the bank account, and above what amount a payment, a loan or a contract needs both partners, or a stated majority. Name the decisions that always need everyone: changing the nature of the business, admitting a partner, selling a major asset, borrowing beyond a set limit, winding up.

Designated partners carry the filing duties and the personal exposure that goes with them, so record who holds that role, how the role rotates or changes, and who keeps the books, the minutes of partner decisions and the compliance calendar. Put the two annual dates in the diary while you are at it — Form 11 by 30 May and Form 8 by 30 October, covered in our Form 11 annual return guide. An agreement that assigns these jobs by name saves the October scramble I watch firms go through every year.

Joining, leaving and the clause nobody wants to draft

Admission first. The default needs every partner's consent for a new partner. Keep it, soften it to a majority if you prefer, but say which. When a partner joins, the agreement should fix how their contribution and share are set, because the day a third partner walks in is the wrong day to argue about the first two partners' ratios.

Exit is where agreements earn their fee. Cover retirement with a notice period, a partner's death or insolvency, and — the hard one — expulsion. Remember the default: a majority cannot expel a partner at all unless the agreement expressly gives that power. If you want an expulsion route for fraud, wilful misconduct or a competing business, write it, with the grounds, the notice, and a chance to be heard. The First Schedule already makes a partner account to the LLP for profits from a competing business run without consent, and for any benefit taken from the LLP's property, name or business connections. Your clause can go further and say what happens to that partner's place in the firm.

Every exit route needs a valuation rule. How is a departing partner's share worked out — book value, a multiple of profits, an independent valuation? Who pays it, over how many months, and what happens to their capital in the meantime? Partners who agree a valuation formula while they still like each other rarely fight about money when they part. Partners who leave it open almost always do.

Dissolution triggers and where a fight actually goes

Name the events that end the LLP or give partners the right to call for its winding up: a partner's death with no successor arrangement, a deadlock that survives a stated cooling period, loss of a licence the business cannot run without, or a simple vote at a stated majority. Settle in advance how assets and liabilities are divided on the way out, and who finishes the pending work and the pending filings.

On disputes, the default sends unresolved fights to arbitration. Many partners prefer a step before that — a written negotiation window, then mediation, then arbitration — because arbitration is a formal proceeding with real cost, and most partner fights are really one unpaid invoice of trust. Whatever ladder you choose, name the seat of arbitration and the law that governs. A clause that just says "disputes will be resolved amicably" resolves nothing. I have seen that exact sentence in a real agreement. It resolved nothing.

Executing it: stamp duty, signatures and the 30-day Form 3 clock

Drafting ends in a small, strict routine. All partners sign the agreement. It is executed on stamp paper of the state where the LLP is registered — stamp duty is a state subject and is generally linked to the partners' total contribution. Two checked examples show how wide the spread runs: Maharashtra charges 1% of the contribution, with a minimum of ₹500 and a cap of ₹15,000; Delhi charges 1%, capped at ₹5,000. Other states run their own schedules, and the figures change, so confirm your state's duty before you buy the stamp paper — the documents checklist for LLP registration walks through the paperwork that sits around this step.

The executed agreement is then filed with the Registrar in Form 3 within 30 days of incorporation. Miss that window and a slab-based additional fee applies, rising with the length of the delay. Every later change to the agreement gets its own Form 3 within 30 days of the change. Keep the signed original with the LLP's records; the filed copy is what the outside world will ask for when a bank, a landlord or a large customer does its diligence.

A last word of advice, from the files on my desk rather than the Act. Read your draft agreement once as if you were the partner who wants to leave, and once as if you were the partner being left. If either reading frightens you, the drafting is not finished. If your agreement is still a borrowed template — or worse, still unwritten — the ComplyKart LLP registration team will draft it around the decisions in this guide and file it in Form 3 within the 30-day window, so the terms governing your partnership are the ones you actually chose.