Introduction
A limited liability partnership (LLP) is a business structure that combines the flexibility and tax benefits of a partnership with the limited liability protection of a corporation. An LLP is typically governed by a set of legal documents that outline the structure and management of the business. In this blog post, we’ll take a closer look at the legal documents that are typically used in an LLP, including their purpose and content.
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Partnership agreement
The partnership agreement is the most important legal document in an LLP. It sets out the rights and obligations of the partners and outlines the management and governance of the business. The partnership agreement typically includes the following provisions:
- Name and purpose of the LLP
- Contributions and ownership percentages of each partner
- Roles and responsibilities of each partner
- Allocation of profits and losses
- Decision-making processes and voting rights
- Transfer of ownership and buyout provisions
- Dissolution and liquidation provisions
The partnership agreement is a private document and is not required to be filed with the state.
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Certificate of formation
The certificate of formation is a legal document that must be filed with the state to form an LLP. It typically includes the following information:
- Name and address of the LLP
- Registered agent and office
- Purpose of the LLP
- Duration of the LLP, if not perpetual
- Name and address of each partner
The certificate of formation is a public document and is available for anyone to view.
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Operating agreement
An operating agreement is a supplementary document that outlines the day-to-day operations of the LLP. It typically includes the following provisions:
- Management structure and decision-making processes
- Meeting procedures
- Accounting and recordkeeping procedures
- Taxation and financial reporting
- Dissolution and liquidation provisions
The operating agreement is a private document and is not required to be filed with the state.
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Tax documents
LLPs must file certain tax documents with the state and federal government. These documents include:
- Partnership tax return (Form 1065)
- Schedule K-1, which reports each partner’s share of the LLP’s income, deductions, and credits
- Annual report, which reports the LLP’s business activities and financial status to the state
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Amendments
The legal documents in an LLP are not set in stone – they can be amended to reflect changes in the business or the partners. The process for amending the partnership agreement, operating agreement, or certificate of formation typically involves the following steps:
- Proposal: A partner proposes a change to one of the legal documents.
- Notice: All partners are given notice of the proposed change.
- Approval: The proposed change is approved by a majority vote of the partners.
- Amendment: The legal document is amended to reflect the change.
It is important to follow the proper procedure for amending the legal documents to ensure that the changes are valid and enforceable.
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Indemnification and liability protection
One of the main benefits of an LLP is the limited liability protection it provides to the partners. This means that the personal assets of the partners are generally protected from the debts and liabilities of the business. However, it is important to have indemnification provisions in the legal documents to ensure that the partners are protected in the event of a lawsuit or other legal action. Indemnification provisions typically provide for the reimbursement of legal fees and other expenses incurred by the partners in defending against a legal claim.
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Intellectual property
LLPs often have valuable intellectual property, such as trademarks, copyrights, and patents. The legal documents should include provisions for protecting and managing this intellectual property, such as:
- Ownership and transfer of intellectual property
- Licensing agreements
- Use of intellectual property by partners
- Protection against infringement
It is important to have clear and enforceable provisions for managing intellectual property to avoid disputes and protect the value of the business.
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Dispute resolution
Disputes can arise in any business, and LLPs are no exception. The legal documents should include provisions for resolving disputes between partners, such as through mediation or arbitration. These provisions should set out the process for initiating and conducting a dispute resolution procedure and the roles of the parties involved.
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Governing law
LLPs are subject to state law, and the legal documents should clearly specify the state law that governs the partnership. This is important because different states have different laws governing partnerships, and it is important to ensure that the legal documents comply with the applicable state law.
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Confidentiality and non-compete agreements
Partners in an LLP often have access to confidential information, such as customer lists and business strategies. The legal documents should include provisions for protecting this confidential information, such as through non-disclosure agreements or non-compete agreements. These provisions should set out the scope of the confidentiality or non-compete obligation and the consequences for violating these obligations.
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Termination and dissolution
LLPs can be terminated or dissolved for various reasons, such as the retirement or death of a partner or a decision to discontinue the business. The legal documents should include provisions for the termination or dissolution of the partnership, including the process for winding up the affairs of the business, distributing assets, and paying off debts.
Conclusion
The legal documents that are used in an LLP play a crucial role in setting out the structure and management of the business. It is important for partners to carefully review and understand these documents to ensure that the LLP operates smoothly and efficiently. If you are considering forming an LLP, it is recommended that you consult with an attorney or other legal professional to ensure that your legal documents are properly drafted and filed.
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Frequently Asked Questions (FAQ’s)
Q1.) What legal documents are required to form an LLP?
The legal documents required to form an LLP can vary by state, but typically include a certificate of formation, partnership agreement, and operating agreement. These documents establish the structure and management of the partnership and set out the rights and responsibilities of the partners.
Q2.) What is the difference between a partnership agreement and an operating agreement?
A partnership agreement is a legal document that sets out the rights and responsibilities of the partners in a partnership, while an operating agreement is a similar document that sets out the rights and responsibilities of the members in an LLC. Both documents serve similar purposes, but they are used in different types of business entities.
Q3.) Can the legal documents in an LLP be amended?
Yes, the legal documents in an LLP can be amended to reflect changes in the business or the partners. The process for amending the documents typically involves proposal, notice, approval, and amendment.
Q4.) Do I need a lawyer to draft the legal documents for my LLP?
While it is possible to draft the legal documents for an LLP without a lawyer, it is highly recommended that you work with a legal professional to ensure that the documents are properly drafted and comply with state law. A lawyer can also help you identify and address any legal issues that may arise.
Q5.) Can the partnership agreement in an LLP override state law?
No, the partnership agreement in an LLP cannot override state law. The legal documents must comply with state law, and any provisions that violate state law are unenforceable.
Q6.) What is the liability protection for partners in an LLP?
Partners in an LLP are generally protected from personal liability for the debts and obligations of the business. However, this liability protection can vary by state and may not apply to certain types of claims, such as claims arising from the partner’s own negligence or malpractice.
Q7.) Can partners in an LLP be held liable for each other’s actions?
Partners in an LLP are generally not held liable for each other’s actions, unless they personally participate in or direct the wrongful conduct. However, the partnership as a whole can be held liable for the actions of any partner in the course of the partnership’s business.
Q8.) How are profits and losses allocated among partners in an LLP?
The allocation of profits and losses in an LLP is typically set out in the partnership agreement or operating agreement. The allocation can be based on factors such as the partner’s capital contributions, participation in the business, or a predetermined formula.
Q9.) Can an LLP have more than one class of partners?
Yes, an LLP can have more than one class of partners with different rights and obligations. For example, one class of partners may have voting rights, while another class may not.
Q10.) What happens if a partner wants to leave an LLP?
The process for a partner to leave an LLP is typically set out in the partnership agreement or operating agreement. This process may involve the transfer of the partner’s ownership interest to another partner or the dissolution of the partnership if a replacement partner cannot be found.
