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Capital-Contribution-by-Partners-to-LLP

Capital Contribution by Partners to LLP

Capital Contribution by Partners to LLP

The Limited Liability Partnership (LLP) is a business entity that provides limited liability to its partners. The partners are allowed to make a capital contribution to the entity, which determines their ownership level in the LLP. This article deals with the details of the capital contribution done by the partner to the LLP.

Form of Consideration

The capital contribution does not have ot involve cash. The contributions can include the following either singly or in a combination 

  • Tangible assets
  • Intangible property
  • Movable assets 
  • Immovable assets

The other benefits for the LLP include

  • Promissory notes
  • Money
  • Other agreements in contributing cash or property
  • Contract for the services that are performed or to be performed

The Registered Valuers will value the contributions made by the partners. The valuers should be registered with the Insolvency and Bankruptcy Board of India. The monetary value of every partner’s contribution will be accounted. The amount and the nature of the contribution must be disclosed to all the partners in the LLP.

The promise to perform services in the future or contribute cash in the future for the current partnership interest cannot be enforced. Such a promise can be implemented only in writing, along with the signature of the partner.

Reasons for Adjustments in Contribution

The amount contributed by the partner is subject to adjustments if the partner

  • Has drawn out previously or has taken back the amount
  • Takes out the amount or receives it back during 5 years of the contributed date
  • Has the power to draw out the amount but does not take the amount
  • Has the power to seek from another partner in the LLP

Payment through Instalments

The partner can pay the capital contribution in instalments. At the time of registration, the partner can mention the amount he intends to contribute. The partner is responsible for paying the agreed amount of contribution, even if he has not followed the instalment schedule.

Capital Clause

There is no specific amount for the initial capital. The capital amount fixed by the partner should be inserted in the capital clause of the LLP agreement. The clause can specify the manner of the capital contribution. The partners can contribute the future capital, and the contribution can be the same percentages as the initial capital. The future capital contribution should be mentioned in the sub-clause of the Capital Main Clause. 

Interest Payment

The LLP Act, 2008 does not state any restrictions on the payment of the interest on the capital account. The LLP agreement can state the payable interest to the partners on the capital contributions.

Additional Capital Contribution

The capital clause should have the possibility of additional capital contribution. The clause can provide that the additional capital can be borrowed from the LLPs bank if the partners make loans. The loans will be in the same percentage as the initial capital contribution. If the partners make any loans to the LLP, then an agreement should be set upon which the loans will be repaid.

Distribution of Profit and Loss

The profits, losses and the distributions should be allocated among the members based on their individual contribution. The capital account balance will be the base for distributing the profits. The profits can also be distributed based on the volume of business brought by each partner, hours billed, principal’s seniority or any other way the partners consider to distribute through the LLP agreement. Apart from that if there are any other contrary provisions in the LLP agreement, then the distribution of the profits and losses will vary.

Right to Capital on Insolvency of Partner

When a partner dies or withdraws from the LLP, then his share would be entitled to the one trusted by the partner. The entitled person will receive the same initial capital contributed by the partner.

Obligation to Contribute

As per the LLP Act, 2008, the obligation to contribute money, property or benefits for LLP shall be as per the LLP agreement implemented at the time of incorporation of the LLP. 

When the partner contributes excess of the obligation, then there are 3 ways to deal with the excess amount.

  • The excess amount will be refunded by the LLP at the earliest.
  • The total capital contribution will be increased. The LLP will file form 3 to the concerned Registrar of the companies. The filing should be done within 30 days of receiving the receipt of the contribution.
  • If the above two ways are not dealt with the LLP, then the excess amount will be considered as a loan from the partner to the LLP. Such a partner will be ranked equal to the creditors of the LLP.

A creditor can enforce his obligation against the partner to contribute the capital amount to the LLP without any notice of compromise between the partners.

Promotion and Reduction of the Contribution

If the LLP needs to increase the capital contribution of the partners, then it should file and submit Form 3 to the Registrar. The LLP is required to pay the difference amount between the fees payable increased slab and the fees paid on proceeding slab. 

If the LLP needs to decrease the capital contribution of the partners, then it should file and submit Form 3 to the Registrar. The LLP is required to pay the regular filing fee. The Registrar will not refund the difference amount between the fees paid on increased slab and the fees payable on reduced slab. LLPRulesasnotified (1)

Voting Rights and Refund of Contribution

If the LLP agreement is silent, then the partner is provided to vote, regardless of his contribution. The partner will receive an equal amount of his contribution, at the time of his resignation from the LLP.

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