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Removal of Partner from LLP

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Overview of Removing a Partner in LLP in India

Over the years, Limited Liability Partnerships (LLPs) have become a popular form of business structure in India as they offer the flexibility of a partnership with the benefit of limited liability. Partners in LLP are not personally responsible for the debts of the business. One of the significant benefits of establishing an LLP in India is the ability to add or remove partners. A change in partners in the LLP can occur for several reasons, such as a change in terms of the partnership, raising capital in the firm, retirement or exit of existing partners, dispute resolution, or a lesser number of designated partners.

The removal of a partner from an LLP in India is an important decision that impacts the overall business, and it requires careful consideration of the LLP Agreement, its clauses, and reasons for removal. The process of removing a partner includes multiple steps: passing a resolution by the remaining partners, giving notice to the partner to be removed, settling finances with the partner to be removed, and filing the necessary forms with the Ministry of Corporate Affairs (MCA). By adhering to the terms of the LLP Agreement and following the legal procedures, partners can minimise the risk of disputes and ensure a fair and efficient transition when removing a partner from an LLP.

What is an LLP?

A Limited Liability Partnership (LLP) is a business structure that combines a company and a partnership. It is registered with the MCA, and details of an LLP are available at the MCA Portal. Unlike a Partnership, in an LLP, the partners have limited liability, which means that their liability is limited to the extent of their contribution to the business, meaning that they are not personally liable for liability(s), debt(s), or loss(s) of the business. LLP is governed by the Limited Liability Partnership Act of 2008.

Types of Partners in an LLP

There are two types of partners in an LLP:

Designated Partners: As defined under Section 7 of the LLP Act, 2008, they are responsible for the day-to-day functions and management of an LLP. They are authorised to act on behalf of the LLP and represent it legally. An LLP must have at least two designated partners and one of them must be a resident of India. There is no limit on the maximum number of partners in an LLP. They are personally liable for filing annual returns, maintaining records, etc.
Non-Designated Partners: Also known as silent partners, they contribute capital and other resources to the LLP but are not involved in its day-to-day business or management. Their liability is limited to their contribution to the LLP, and they cannot be held personally liable for actions of the LLP beyond their investment.

Reasons for Removal of Partner

Partners are the backbone of the LLP, who not only run a business but are also responsible for its growth. However, just as with any business entity, there may be instances when a partner needs to be removed from an LLP. The removal of a partner from an LLP in India is governed by the provisions of the Limited Liability Partnership Act, 2008 (LLP Act), the Limited Liability Partnership (Amendment) Act, 2021, and the specific terms of the LLP Agreement. Some common reasons for the removal of a partner include:

Breach of LLP Agreement: The LLP is formed according to the terms and conditions of the LLP agreement. The agreement clearly defines roles, Responsibilities, Liabilities, and Duties of Partners. If a partner violates the terms and conditions of the agreement, it amounts to a breach of the agreement. A breach of the agreement has its own consequences, and it can lead to the removal of the partner.
Incapacity: If a partner becomes mentally or physically incapable of performing their duties.
Misconduct: Partnership is based on mutual trust and unethical behaviour or conduct by a partner can significantly impact the reputation and operations of the LLP.
Inactivity: When a partner is no longer contributing to the business, fulfilling their obligations or engaging in conduct that is not helping the business to grow.
Voluntary Decision: A partner may wish to exit the LLP for personal or professional reasons.

LLP Agreement and Removal of a Partner

The LLP Agreement is the primary document that governs the rights and obligations of the partners. The agreement itself is a whole and contains conditions and procedures, including a notice period for the removal of a partner in the form of clauses:

Exit Clause: This clause lays down conditions for voluntary exit and removal of a partner in an LLP.
Resolution Procedure: It contains whether a simple majority or unanimous consent of the remaining partners is required to remove a partner.
Buyout Clause: This clause outlines in detail how the departing partner’s share and rights will be compensated or bought out by the remaining partners.

Documents Required for Removal of a Partner in LLP

Removing a partner is not like a formal removal of an employee from the company. LLP is built on mutual trust, where each partner is entrusted with some responsibility for the business. Some documents are essential for the removal of a partner in an LLP:

LLP Agreement/Partnership Deed: The whole business structure of the LLP is based on this agreement. It defines the partnership terms & conditions, roles, and responsibilities of the partners, as well as conditions and the procedure for removing a partner.
Resolution for Removal of Partner: This is a decision by the remaining partners formalised in written form to remove a partner. It is essential to mention the reason(s) for the removal of partner(s) in the resolution.
Consent of Remaining Partners: If the LLP agreement requires consent from the remaining partners, the removal of partner(s) is required.
Form 4: It is a legal form filed with the Ministry of Corporate Affairs to officially record the partner's removal.
Declaration of Compliance (Form 12): A declaration filed with the authorities to confirm that all legal requirements have been followed during the removal process.
Form-4: It is a legal form filed with the Ministry of Corporate Affairs to officially record the partner's removal.
Notice of Removal (if applicable): A formal notice must be sent to the partner being removed, informing them of the decision and the effective date of removal.
Amended LLP Agreement (if applicable): When a partner is removed, the LLP agreement is amended and updated to include a change of responsibilities and profit-sharing of the remaining partners.
Acknowledgement of Debt or Financial Settlement (if applicable): It confirms the financial settlement between the LLP and the removed partner.
Partner's Resignation Letter (if applicable): This letter is required when a partner voluntarily resigns.

Procedure for Removal of a Partner in LLP

In general, an LLP agreement lays down the procedure for the removal of a partner. The process of removing a partner in an LLP is as follows:

Step-1 Pass a Resolution

The first step to remove a partner in an LLP begins with passing a resolution for removal by the remaining partners. The reason for removal must be legal and valid, and the process should adhere to the terms specified in the LLP Agreement. This resolution can either be:

Unanimous Approval is when all the remaining partners agree to the removal of partner(s).
Majority-Based Approval, where resolution is approved by the majority votes of the remaining partner

Note: In case there is a dispute among the partners regarding the removal of partner(s), the matter needs to be resolved through mediation or external legal intervention.

Step-2 Notice to the Partner

Once the resolution for removal is passed, a written notice for removal shall be sent to the partner who is being removed. This notice should clearly state the reasons for removal. It is mandatory to provide an opportunity for the partner to be heard and respond to the decision to remove. The notice must comply with the notice period requirements mentioned in the LLP Agreement.

Step-3 Settle Financial Interests

Upon removal of a partner from the LLP, the financial interests of the departing partner of the LLP need to be settled. It includes calculating the partner's share in the LLP’s assets and liabilities. The financial settlement can be outlined in the LLP Agreement under the buyout clause. If not, it will need to be agreed upon by all the partners.

Step-4 Amend the LLP Agreement and File documents with MCA

Once the removal process is complete, the LLP Agreement needs to be amended to reflect the departure of the partner. Two forms, namely Form 3 and Form 4, shall be filed with the Ministry of Corporate Affairs (MCA) to intimate update the details of the LLP’s partners and change of responsibilities.

Form 3 (Amendment of LLP Agreement): The form is filed to intimate the changes in the LLP agreement.
Form 4 (Change in Partner Details): This form is filed to notify the MCA about the change in the partnership in the LLP.

Legal Implications of Removal

The removal of a partner in an LLP may lead to several legal and financial implications:

Rights and Obligations of the Removed Partner:

The removed partner may still have certain rights or obligations. There might be some prior liabilities of the removed partners.

All the assets and earnings of the removed partner prior to removal must be handled properly as per the LLP Agreement.

Dispute Resolution:

If the removed partner does not agree with the decision to be removed, there is a possibility that they may sue the LLP or remaining partners or both for such a decision of removal. In these cases, a dispute resolution clause exists in the LLP that shall help the partners settle the issue amicably.

Tax Implications

The removal of a partner can have tax repercussions on the LLP business especially if the partner is compensated for their stake in the LLP. If the partner removed is a Designated Partner, the remaining partner should consult tax professionals to understand the upcoming tax implications arising from the departure of partner(s).

Cases Where Removal is Challenging

While the removal of a partner is a simple process in many cases, there are some cases where it becomes complex and challenging:

Absence of Clear Terms: If the LLP Agreement lacks clear terms about the removal process, legal intervention may be required to avoid any conflict.
Disputes Among Partners: In cases where there is a dispute regarding the grounds for removal, the process can become lengthy and contentious and can lead to disputes among the partners, which has the potential to harm the business of the LLP.
Unilateral Action: If the removal is done without proper legal grounds or the consent of the other partners, it could lead to legal actions such as lawsuits or arbitration.

Why Choose Kanakkupillai?

Kanakkupillai is a trusted name in the industry, offering seamless and reliable services for business registration, removal of partners, conversion, and compliance. With over more than 50,000+ satisfied clients, choosing Kanakkupillai for removing a partner from your LLP, you benefit from:

Expert Advice: The team of experts at Kanakkupillai guarantees a seamless addition procedure by guiding you at every step.
End-to-End Services: Our team of experts are trained to understand concepts in depth and take care of every step for the removal of a partner in an LLP. We are here to cover everything, i.e., from preparing documents to filing.
Timely Completion: We guarantee that the removal process is finished as soon as possible, without interruptions and delays. We make sure that the documents are filed with the appropriate authorities on time.
Reasonably priced: Kanakkupillai provides all services at cheap prices, making it affordable for new and expanding companies.
Client-Centric Approach: We offer personalized services based on the needs of clients. We guarantee that all of your questions and doubts are answered.

Frequently Asked Questions

What is the primary document that governs the removal of a partner in an LLP? +

The LLP Agreement outlines the procedure and conditions for removing a partner.

What form must be filed with the Ministry of Corporate Affairs (MCA) to notify a change in the LLP’s partnership? +

Form 4 is required to officially record the removal of a partner and is filed electronically on the MCA portal.

What are some common reasons for removing a partner from an LLP? +

Common reasons include breach of the LLP agreement, incapacity, misconduct, inactivity, or voluntary exit.

Is it necessary to amend the LLP Agreement when a partner is removed? +

Yes, the LLP Agreement has to be amended to reflect changes in responsibilities and profit-sharing after a partner’s removal.

What is the role of a Designated Partner in an LLP? +

Designated Partners are responsible for managing the day-to-day operations and are legally authorized to act on behalf of the LLP.

What happens if a partner disputes their removal from the LLP? +

Disputes may be resolved through mediation or legal intervention, depending on the terms of the LLP Agreement.

What financial settlement is required when a partner is removed from an LLP? +

The departing partner’s financial interests, including their share of assets and liabilities, need to be settled as per the buyout clause in the LLP Agreement.