6 Differences Between the Default LLP Rules (First Schedule) and a Written Agreement

Here is a fact that surprises most partners: you already have a rulebook for your LLP, whether or not you ever signed one. Section 23 of the Limited Liability Partnership Act, 2008 says your agreement governs how partners deal with each other and with the LLP. Then it adds the quiet line that runs many firms: where there is no agreement on a matter, the First Schedule of the Act decides it for you. It is a bit like moving into a rented house on the landlord's standard lease. You can live there. Nothing is illegal. But every term was written for a stranger, and you will feel that the first time you disagree about money. Partners who filed in a rush — our complete LLP registration guide covers that rush — often discover these defaults years later, mid-argument.

The short answer: the First Schedule gives you equal profit shares, no pay for working partners, one partner one vote, new partners only by unanimous consent, no power to expel anyone, and disputes sent straight to arbitration. A written agreement lets you replace every one of those with terms fitted to your firm. Six differences matter most, and they are the six below.

1. Profit share: equal slices, or your own ratio

The default is blunt. Every partner shares equally in the capital, the profits and the losses of the LLP — paragraph 2 of the First Schedule. One partner funds the office and works six days a week. The other joins with a small contribution and a Rolodex. Fifty-fifty, says the Schedule. A written agreement replaces that single line with the ratio you actually bargained for, and it can split profits one way and losses another. It can also say how much profit stays back as working capital before anyone draws. This clause settles more arguments than any other in the document.

2. Pay for running the firm: nothing, or a designed salary

Under the default, no partner is entitled to any remuneration for acting in the business or its management. Read that again. The partner who opens the office, chases clients and signs the filings gets, by default, exactly nothing for the work itself — only the equal profit share. A written agreement can fix a monthly remuneration for working partners and interest on capital. It also opens the tax door: the LLP can claim those payments as expenses only where the agreement authorises them, inside the section 40(b) limits. Silence costs you twice — no pay, and no deduction either.

3. Decisions: one partner, one vote — or votes that match the stake

The Schedule decides ordinary matters by a majority in number. Each partner carries one vote, whatever their contribution, and changing the very nature of the business needs every partner's consent. For a two-partner firm, majority in number means any split is a deadlock. For a firm where one partner holds most of the capital, it means the smallest partner can outvote the largest on routine spending. A written agreement sorts decisions into layers: day-to-day calls for the managing partner, a money limit above which partners decide together, and a short reserved list — borrowing, selling property, changing the business — that always needs a stated majority or everyone.

4. New partners: everyone must say yes, or a rule you set

Paragraph 7 is strict: nobody may be introduced as a partner without the consent of all the existing partners. One holdout blocks a hire your firm genuinely needs, perhaps the senior who brings a whole practice area with her. A written agreement can keep unanimity — many small firms should — or soften it to a stated majority, and it can settle the joining terms in advance: what the incoming partner contributes, how their share is carved out, and whose share shrinks to make room. Agreeing that formula while no candidate is waiting is easy. Agreeing it with a candidate in the corridor is not.

5. Expulsion and exit: a partner you cannot remove, or a worked-out door

This default shocks people. No majority of partners can expel a partner at all, unless an express agreement gives them that power. A partner who stops working, poaches clients or simply vanishes stays a partner — entitled to accounts, entitled to a share. A written agreement builds the door the Schedule leaves out: retirement on notice, exit on death or insolvency, expulsion for stated misconduct with a hearing, and a valuation rule for the departing share, settled by a formula rather than by lawyers. Each of these routes is drafted through in our guide to LLP agreement clauses.

6. Fights and side businesses: straight to arbitration, or a ladder first

Two defaults sit together here. A partner who runs a competing business without consent must hand its profits over to the LLP, and benefits taken from the LLP's property or name must be accounted for. On disputes, the Schedule sends unresolved fights to arbitration under the Arbitration and Conciliation Act, 1996 — a formal proceeding, with real cost, as the very first step. A written agreement keeps the accounting duties, sharpens them into a clear non-compete, and builds a ladder first: written notice, a partners' meeting, mediation, arbitration only if the ladder fails. Most partner fights are one broken promise, not a war. A ladder lets you end them cheaply.

A word on the defaults I have not counted, so the picture stays honest. The Schedule also carries kind terms: the LLP indemnifies a partner for payments made in the proper conduct of business, partners must render true accounts to each other, and decisions must be minuted within thirty days. Keep those. A good agreement adopts them and changes only what does not fit.

None of this makes the First Schedule badly written. It is a fair set of terms for partners who are truly equal in money, work and risk — a rare species. The trouble is that it applies by silence, to firms that never chose it. If your LLP is running on defaults today, the fix is a short, honest drafting exercise: read each of the six gaps, decide your own term, sign, stamp for your state, and file the agreement in Form 3 within 30 days. Do it while the partners still like each other. That is when this document is cheap.

If your agreement is a borrowed template, an unsigned draft, or missing altogether, the ComplyKart LLP team will draft it around the six decisions in this guide — your ratio, your pay design, your exit door — and file it in Form 3 within the 30-day window, so the rules running your firm are the ones you actually chose.