If you’re starting a business using a Limited Liability Partnership (LLP) or already managing one, you’ve probably wondered:
“Do we need an LLP agreement?”
It’s not legally required under the Limited Liability Partnerships Act 2012, but with no written agreement, the LLP is subject to the Act’s default provisions.
As you may not want to rely on cookie-cutter terms for topics like profit-sharing or partner exits, this guide explains the value of an LLP agreement and how it shields businesses from avoidable risks.
What is an LLP Agreement?
In essence, it’s a legally binding contract between a Limited Liability Partnership and its partners that defines how the business will run, rather relying on default rules.
A similar concept applies to unincorporated partnerships and the Partnership Act 1961 as covered in our guide to conventional partnerships.
Default LLP Act 2012 provisions
If you don’t have an LLP agreement, or if it skips certain matters, the provisions under the Second Schedule of the LLP Act 2012 fill the gaps., and here’s what the law assumes by default:
| Area of Partnership | What the 2nd Schedule Says |
| Matters not covered in the LLP agreement | The Second Schedule will apply to anything your agreement doesn’t expressly deal with provided it is covered under the Second Schedule |
| Profit-sharing | Equally among partners regardless of capital contribution |
| Partner remuneration and salaries | No, unless agreed in writing |
| Participation in management | All partners have an equal right to manage the LLP |
| Admission of new partners | Yes but all existing partners must agree |
| Transfer or sale of partnership interest | Yes but all existing partners must agree |
| Decision-making process | One partner, one vote. Decisions are passed by majority resolutions based on number of partners |
| Competing business activities | Without LLP consent, profits from that business must be paid over to the LLP |
| Use of LLP name or property | Without LLP consent, any benefit must be accounted to the LLP |
| Expulsion of partners | Not by majority unless it is expressly agreed between the partners |
If you want to change anything, you’ll likely need a customised LLP agreement.
Benefits of a tailored agreement
Based on the previous section, a well-drafted LLP Agreement offers significantly more control in these areas compared to the Second Schedule of the LLP Act:
- Tying profit-sharing to capital/ownership. Many LLPs prefer profits to track capital contribution/ownership, common in shareholder arrangements.
- LLP as an investment holding vehicle. Profit-sharing usually follows ownership percentage, with investor rights detailed in the agreement.
- Partner remuneration. If working partners expect compensation for operational roles, the LLP agreement should state the amount and terms clearly.
- Voting that matches ownership: The Act gives each partner one vote, but weightage by ownership / capital can be preferrable to avoid deadlocks.
- Dispute resolution mechanism. The Act is silent on deadlocks, while every business agreement should have clear dispute resolution mechanisms.
- Planned exits and transfers. Customised routes (e.g., right of first refusal) help keep the exits predictable and fair.
- Contractual restrictions: The LLP may want to restrict the partners from certain acts without the prior consent of the LLP.
A customised LLP Agreement lets you align finances and operations with how your LLP actually operates.
When to sign an LLP Agreement
Ideally, it should be before incorporation of the LLP or before admitting any partners, so you are not defaulting to the Second Schedule from the start.
However, post-incorporation agreements are still perfectly possible, and you can still get the partners to sign one and formalise the parties’ understanding so that everyone is on the same page.
Let us tailor your LLP agreement for you
We regularly advise SMEs, founders and investors on LLP setups and agreements in Malaysia.
Whether you’re looking to review your current LLP agreement or to draft a new one for your LLP, we are here to help align the terms with your business, so it serves as a proper safeguard against disputes and misunderstandings.
