How to Draft a Co-founders Agreement?

What is meant by Addition of Partner?

The addition of a partner involves introducing a new member into an existing partnership firm. This decision requires the unanimous consent of all current partners unless the partnership agreement stipulates otherwise. The incoming partner must possess the legal capacity to enter into a contract, as outlined in the Indian Contract Act, 1872. New partners bring specialised skills and industry expertise, enhancing operational efficiency. Their networks open doors to new business opportunities and markets. Overall, this flexibility enables firms to bring in fresh capital, skills, and expertise to support growth and expansion.

Process Of Addition Of Partners

The process of introducing a new partner involves several key steps:

1. Agreement on terms and conditions: The existing and incoming partners must mutually agree on aspects such as profit sharing ratio, capital contribution, roles and responsibilities.
   
2. Execution of deed of admission: A supplementary agreement containing the terms of admission should be drafted and signed by all partners, including the new entrant.
   
3. Capital contribution: The incoming partner must bring in the agreed capital.
   
4. Intimation to Registrar: Form 3 along with the prescribed fee should be filed with the Registrar within 30 days of the change.
   
5. Notification to stakeholders: The firm must inform its bank, tax authorities, and vendors/suppliers about the new partner's admission.
   

Documents Requirement For Addition of Partners

The following documents are typically required for the addition of a partner:

• A Digital Signature Certificate (DSC) is necessary for e-filing with the Registrar of Companies (ROC).
  
• Form 3 must be filed to update the LLP agreement, reflecting the new partner’s inclusion.
  
• Form 4 is used to notify the ROC about the appointment and obtain the partner’s consent.
  
• A Limited Liability Partnership Identification Number (LLPIN) is essential for all filings.
  These documents ensure the smooth onboarding of a new partner while maintaining regulatory compliance under the LLP Act, 2008. of Admission/Supplementary Partnership Deed
  

Advantages Of Adding Partners in Partnership Firms

The introduction of a new partner offers several benefits to a partnership firm:

• Capital infusion to support business growth and expansion
  
• Fresh expertise and skills to enhance the firm's capabilities
  
• Shared responsibilities and decision-making
  
• Potential for increased profitability and market share
  

What is meant by Removal of Partner?

Partner removal in a partnership firm or LLP occurs when an existing partner exits, either voluntarily or by a decision of other partners, as per the partnership agreement. The process must comply with the Indian Partnership Act, 1932, which allows removal only if expressly stated in the agreement and with the consent of all partners (except the one being removed). In LLPs, removal must also adhere to the Limited Liability Partnership Act, 2008 and LLP agreement terms.

Why Removal of a Partner May Become Necessary?

The removal of a partner may become necessary due to several reasons:

• Voluntary retirement or withdrawal
  
• Breach of partnership agreement or trust
  
• Incapacity or inability to perform duties
  
• Misconduct or negligence detrimental to the firm
  
• Insolvency or bankruptcy
  
• Death of the partner
  

Steps Involved In Removing a Partner

The process of removing a partner typically involves:

1. Serving notice: A notice of the proposed removal, specifying the grounds, should be served on the concerned partner.
   
2. Considering reply: The concerned partner must be allowed to submit a response to the notice.
   
3. Majority approval: Obtain at least 75% approval from the remaining partners through a resolution.
   
4. Executing deed of retirement/reconstitution: The change in partnership should be documented through a formal deed.
   
5. Intimating Registrar: Form 4 with the applicable fee should be filed with the Registrar within 30 days.
   
6. Settlement of accounts: The outgoing partner's accounts should be settled as per the partnership deed or mutual agreement.
   

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Section 31: Introduction of a New Partner

Section 31 of the Indian Partnership Act, 1932, governs the introduction of a new partner into an existing firm. It stipulates that a new partner can only be admitted with the consent of all existing partners unless the partnership agreement provides otherwise.

Rights and Liabilities of a New Partner

Upon admission, the new partner becomes entitled to share in the profits and is liable for the losses and debts of the firm from the date of their entry, unless agreed otherwise. They have the right to access the firm's books of accounts and to participate in the management of the business. However, they are not liable for any acts of the firm before their admission, unless they expressly assume such liability.

Section 32: Retirement of a Partner

Rights of Outgoing Partner

Section 36: Right to Conduct a Competing Business

Unless restricted by an agreement, a retiring partner has the right to carry on a business competing with that of the firm and to advertise such business. However, they cannot use the firm's name or represent themselves as carrying on the firm's business.

Right To Share

The retiring partner is entitled to receive their share of the firm's assets, including goodwill, as per the terms of the partnership agreement or mutual understanding. They also have the right to share in the profits of the firm until the date of their retirement.

Section 37: Entitled to Claim

The outgoing partner has the right to claim their due share from the continuing partners. If not paid outright, they are entitled to interest at 6% per annum on the amount due.

Liabilities of Outgoing Partner

Section 32(3) and (4): Liability to the third party

The retiring partner remains liable to third parties for all acts of the firm until public notice of their retirement is given. They are also liable for any obligations incurred by the firm before their retirement unless discharged by agreement.

Section 32(2): Agreement of Liability

The retiring partner and the continuing partners may agree to discharge the retiring partner from all liabilities of the firm, but such an agreement is not binding on third parties unless they are aware of it.

Section 33: Expulsion of a Partner

A partner may be expelled from the firm by a majority of partners if such power is conferred by an express agreement between the partners. The power to expel must be exercised in good faith. Unless agreed otherwise, the expelled partner can claim the value of their share as if the firm were dissolved on the date of expulsion.

Section 34: Insolvency of a Partner

If a partner is adjudicated as insolvent, they cease to be a partner from the date of the insolvency order. Their share in the firm vests with the Official Assignee or Receiver appointed by the court. The firm is dissolved unless the solvent partners buy the insolvent partner's share and continue the business with proper intimation.

Section 35: Death of a Partner

In the event of a partner's demise, their legal heirs or executors step into their shoes. The firm dissolves from the date of death unless the partnership deed provides for continuity. The deceased partner's share in the firm's assets, goodwill, and profits is settled as per the partnership agreement or mutual understanding.

Section 38: Continuing Guarantee Revocation

The estate of a deceased or insolvent partner, an expelled or retired partner, is not liable for the firm's debts contracted after their death, insolvency, expulsion or retirement. A continuing guarantee given to a firm or a third party in respect of the firm's transactions is revoked as to future transactions by any change in the firm's constitution.

Conclusion

Changes in the composition of a partnership firm through the addition or removal of partners are significant events. While new partners can infuse capital and expertise, the exit of partners due to retirement, expulsion, insolvency or death can impact the firm's continuity and harmony. The Partnership Act provides a framework for inducting and removing partners. The terms of entry and exit should be clearly documented in the partnership agreement to minimise disputes. Intimations to the Registrar and third parties should be made promptly. With some foresight and planning, partnership firms can manage changes in their constitution smoothly and continue their business journey.

Frequently Asked Questions

What is LLP?

An LLP or Limited Liability Partnership is a business structure where business partners share limited liability, meaning their personal assets are protected in case the business incurs debts or liabilities.

LLPs are commonly used by professionals like lawyers, accountants, and consultants but are increasingly popular among small and medium-sized enterprises (SMEs).

An LLP is an ideal structure for businesses seeking operational flexibility, protection for partners' personal assets, and minimal compliance requirements. It is particularly attractive for professionals and small enterprises looking for a formal and efficient business framework.

This business structure also allows businesses to make use of the benefits of economies of scale, since LLPs can pool resources, expertise, and capital from multiple partners. By sharing operational responsibilities and costs, LLPs can reduce per-unit expenses, streamline processes, and negotiate better terms with suppliers.

This collaborative approach enables businesses to grow efficiently, expand their market presence, and achieve cost advantages typically associated with larger organizations.

How an LLP (Limited Liability Partnership) Works?

1. Hybrid Business Structure

A Limited Liability Partnership (LLP) is a flexible business structure that operates with a mix of partnership and corporate elements.

2. Limited Liability Advantage

The main advantage of an LLP is that it provides limited liability to its partners. This means that, unlike a general partnership, your personal assets (such as your home or car) are typically protected in case of legal action.

3. Lawsuit and Liability Rules

In an LLP, if the business faces a lawsuit, the partnership itself becomes the primary target, not the personal property of the individual partners. However, if a partner personally engages in wrongdoing (e.g., fraud), they could still be held liable for their actions.

4. Example: Meena and Shalini’s Case

• Starting Out: Consider a scenario where two professionals, Meena and Shalini, decide to start a business offering consulting services in India. They have a shared interest in providing management consulting to small and medium enterprises (SMEs). Initially, they start with a mutual agreement and an informal arrangement.
• Formalizing the Structure: However, as the business grows, they realize the need to formalize the structure to protect themselves from legal and financial risks. Meena and Shalini choose to form an LLP (Limited Liability Partnership) to safeguard their personal assets from any potential legal liabilities that may arise in the course of business. They register the LLP with the Ministry of Corporate Affairs (MCA) in India, creating an LLP agreement that outlines their responsibilities, profit-sharing ratios, and other operational details.
• Facing a Legal Dispute: A few months later, the consulting firm faces a legal dispute due to an issue with one of their clients. The client sues the LLP for professional negligence, claiming that the advice given led to a loss in business.
• Outcome of the Lawsuit: Since Meena and Shalini have formed an LLP, their personal assets—such as their homes, personal savings, or vehicles—are protected. The lawsuit can only target the assets of the LLP itself, not their personal belongings. However, if it is proven that either Meena or Shalini acted negligently or fraudulently in a personal capacity, that partner could still be held accountable for their individual actions.

LP (Limited Partnership) vs General Partnership

An LP (Limited Partnership) and a General Partnership are both business structures involving two or more partners, but they differ in terms of liability and management roles.

Limited Partnership (LP)

• In an LP, there are two types of partners: general partners and limited partners.
• General partners have full control over the management of the business and bear unlimited liability, meaning they are personally responsible for the business's debts and obligations.
• Limited partners, on the other hand, contribute capital but do not participate in day-to-day management. Their liability is limited to the amount they invest in the business, protecting their personal assets beyond that contribution.

General Partnership

• In a General Partnership, all partners share equal responsibility for managing the business and have unlimited liability.
• This means they are personally liable for the debts and obligations of the business.
• There is no distinction between the roles of partners—each partner participates in both the management and the liabilities of the business.

Key Difference

The key difference between the two is the level of liability protection and management involvement.

• An LP offers limited liability to some partners (limited partners).
• A General Partnership places full responsibility on all partners, making it a riskier option for individuals seeking protection from personal liability.

Related Read: What is the Difference Between LLP and Partnership?

LLP vs LLC

Ownership and structure

LLP refers to Limited Liability Partnership, where two or more partners collaborate to run the business. The partners can be individuals or corporate entities, and the number of partners can vary.

In an LLP, all partners share the management responsibilities and decision-making processes, unless the partnership agreement specifies otherwise. Partners have limited liability, meaning their personal assets are protected from business debts or legal claims.

LLC refers to a Limited Liability Company, which is a separate legal entity that can have one or more owners, known as members. The ownership can be divided among individual or corporate members, and the structure is more flexible than a corporation.

LLCs can be managed either by members (member-managed) or by designated managers (manager-managed). The members are not personally liable for the company’s debts or liabilities, providing them with protection similar to that of an LLP.

Liability protection

Partners in an LLP enjoy limited liability, meaning they are not personally liable for the debts or obligations of the business beyond their contribution to the partnership. However, if a partner engages in fraudulent or wrongful activities, they could still be personally liable for their actions.

LLC members also have limited liability, meaning they are generally not personally responsible for the company’s debts or liabilities. The LLC itself is a separate legal entity, so any financial obligations fall on the company, not the individual members. Similar to an LLP, members are protected unless they personally guarantee a debt or engage in illegal activities.

Decision making and management

In an LLP, all partners typically have a say in the management and operation of the business, unless otherwise specified in the LLP agreement. It is a more flexible structure in terms of decision-making since there is no requirement for a formal management team.

LLCs can be either member-managed or manager-managed. In a member-managed LLC, all members participate in managing the business, while in a manager-managed LLC, the members appoint managers to run the operations. This offers more structure compared to an LLP, especially for larger businesses.

Ownership transfer

Ownership in an LLP is typically not as easily transferable as in an LLC. Partners usually need to approve the admission of new partners or the transfer of ownership. This limits the liquidity and transferability of ownership interests.

Ownership in an LLC can be transferred more easily than in an LLP, depending on the terms of the operating agreement. LLCs can issue membership interests that can be bought or sold, making it easier to bring in new investors or transfer ownership.

LLP vs LP

An LP refers to a Limited Partnership, which is different from an LLP.

An LLP (Limited Liability Partnership) and an LP (Limited Partnership) are both business structures that involve multiple partners but differ in terms of liability and management.

In an LLP, all partners share equal responsibility for managing the business and enjoy limited liability, meaning their personal assets are protected from business debts. However, all partners are involved in decision-making unless specified otherwise in the agreement.

In contrast, an LPconsists of general partners and limited partners. General partners manage the business and have unlimited liability, while limited partners are only liable up to the amount of their investment and do not participate in the day-to-day operations.

The key difference lies in the roles and liabilities of the partners. In an LLP, all partners have equal liability protection and management control, whereas, in an LP, the general partners hold the management responsibility and are personally liable, while limited partners have liability protection but no management involvement.

The choice between the two structures depends on the desired level of involvement in business operations and the type of liability protection needed.

What are the advantages of LLP?

Wondering why you should choose LLP over other business registrations? Have a look:

• Easy & quick to build: Building an LLP is a simple process. It does not have complicated steps and requirements and neither does it take months of waiting time. The minimum amount of fees for incorporating an LLP is INR 500 and the maximum that can be spent is INR 5,600
• Continuity in succession: The life of the LLP is not affected by the death or retirement of any of the partners. If one of the partners withdraws because of any reasons, it does not mean that the LLP gets wound up. An LLP can only be shut down on the basis of the provisions of the Limited Liability Protection Act  of 2008
• Limited liability: All the partners of the LLP have limited liability, which means that the partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner’s misbehaviour or misconduct
• Streamlines management: All the major decisions and management activities in an LLP are taken care of by the board of directors hence the shareholders receive very less power in making decisions
• Hassle-free transfers: There are no restrictions on joining and leaving an LLP. One can easily admit as a partner and transfer the ownership to others
• Taxation benefits: An LLP is exempt from various taxes such as dividend distribution tax and minimum alternative tax. Also, the rate of tax is less when compared to other business types
• No compulsory audit requirements: There is no mandatory audit requirement for an LLP until the company exceeds the annual turnover of INR 40 lakhs

What are the disadvantages of LLP?

• Not covered in all States: In India, there are certain variations in tax benefits from State to State. There are also cases when States restrict the formation of LLP. This is one of the major disadvantages of an LLP
• Less credibility: An LLP has many benefits but the fact is that people do not consider LLPs to be a credible business. People still trust companies or partnerships over LLPs
• Differences amongst partners: Since each partner is responsible for their own part, there are cases when partners do not consult each other before proceeding with a decision or agreement
• Transfer of interest: Though interest and ownership can be transferred, it usually is a long procedure. Various formalities are required to comply with the provisions of the Limited Liability Partnership Act

Related Read: LLP Advantages and Disadvantages

Documentation requirements for registering an LLP (2025)

Before you start with the procedure of registering an LLP or make changes in an existing LLP, have a look at the list of documents you might need:

• Form 7 is required to obtain a Designated Partner Identification Number (DIN) while registering your LLP. It may be sought from the MCA website. Along with the duly completed form, a registration fee of INR 100 must also be paid
• Form 1/ RUN-LLP is required to register a name for the LLP and reserve it. It may be used to christen an LLP or to alter the present name. The fee for submitting this form is Rs 10,000
• A request must also be filed by the partners for their DSC to be registered if it hasn’t already been done before
• Form 2/FiLLiP is required for incorporating a registered LLP. This form must be sent to and acknowledged by the concerned State’s Registrar
• An LLP agreement must be made, which outlines the duties of each partner involved. This requires the filling and submitting of Form 3
• In the case of changing, altering, adding or removing partners, the partners must submit Form 4
• Form 11 must be used to file the IT returns of the LLP
• If the office address of the LLP is to be changed, then Form 15 must be filed

How to form a Limited Liability Proprietorship

As mentioned earlier, forming an LLP is easy and quick. Before you get started, obtain a DSC or Digital Signature Certificate as the following steps will require it. File for one if you don’t already have one. Further, here are the steps involved in forming an LLP. You can visit mca.gov.in and follow the steps listed below:

1. Issue a Designated Partner Identification Number for yourself, which serves as an ID card
2. File Form 7 and pay the required fees
3. Register a name for your LLP using Form 1 and pay Rs 200
4. Incorporate the LLP via Form 2. The LLP agreement must also be made at this stage
5. File the LLP Agreement as per Section 2(o) of the LLP Act, 2008 using Form 3

With the above-mentioned steps, you are all set to start an LLP of your own.

Frequently Asked Questions

Key Difference Between MOA and AOA

Here’s a simple comparison to clarify how the MOA and AOA differ:

What is a Memorandum of Association (MOA)?

The Memorandum of Association (MOA) acts as a company's legal charter. It defines your company's scope of operations and its relationship with the outside world. Think of it as the “birth certificate” of your business; without it, your company cannot legally exist.

Key points about the MOA:

• It outlines the company's name, registered office, objectives, share capital, and liability.
• It is a mandatory document required for incorporation under the Companies Act, 2013.
• It must be signed by all initial shareholders (also known as subscribers) and filed with the Registrar of Companies (ROC).
• The MOA becomes a public document, accessible via the Ministry of Corporate Affairs (MCA) portal.

In short, the MOA defines what your company is legally allowed to do.

Here is a complete guide on MOA with templates. 

Benefits of MOA

A well-drafted MOA benefits a company in several ways:

• Establishes Legal Identity: It acts as the legal document that brings the company into existence.
  
• Defines Scope of Business: It sets clear boundaries for what the company can and cannot do.
• Protects Shareholder Rights: Investors can see the company’s stated objectives before deciding to invest.
• Builds Credibility: A publicly available MOA adds transparency and helps build trust with stakeholders.
• Ensures Regulatory Compliance: It ensures the company remains within the ambit of applicable laws and regulations.

Main Clauses of MOA

The MOA typically contains the following six main clauses:

1. Name Clause: States the legal name of the company.
2. Registered Office Clause: Specifies the location of the company's registered office.
3. Object Clause: Defines the company’s business objectives (main and ancillary).
4. Liability Clause: Clarifies whether shareholder liability is limited or unlimited.
5. Capital Clause: Details the company’s share capital structure.
6. Subscriber Clause: Lists the names of the initial shareholders and their shareholdings.

What are Articles of Association (AOA)?

The Articles of Association (AOA) outline the internal rules and governance structure of the company. While the MOA defines your company’s external identity, the AOA governs its internal workings.

Key points about the AOA:

• It specifies how the company will be managed and run day-to-day.
• It outlines the rights and responsibilities of shareholders and directors.
• It is customised for each company and signed by the initial shareholders.
• It is submitted along with the MOA to the ROC during incorporation.
• The AOA is legally binding on both the company and its members.

In simple terms, the AOA serves as the “rulebook” for how your company will operate.

Read More: Articles of Association Template - INC 34 Form Download

Benefits of AOA

A good AOA brings several operational advantages:

• Establishes Governance Rules: It provides a clear framework for managing internal operations.
• Defines Director Roles: It outlines powers, duties, appointment, and removal of directors.
• Facilitates Decision-Making: It guides how decisions are made at the Board and shareholder levels.
• Prevents Internal Conflicts: It sets clear expectations around rights and responsibilities, helping to resolve disputes.
• Supports Operational Efficiency: By providing detailed procedures for meetings, share transfers, and other processes.

Contents of an AOA

A typical AOA contains the following key components:

• Meeting Procedures: Guidelines for conducting Board and shareholder meetings.
• Share-Related Rules: Terms for share issuance, transfer, conversion, and forfeiture.
• Director Responsibilities: Appointment, removal, powers, duties, and compensation of directors.
• Audit and Accounts: Procedures for maintaining accounts and conducting audits.
• Conflict Resolution: Rules for resolving disputes among members or between members and the company.
• Winding Up: Processes to be followed if the company is dissolved.

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Conclusion

Both the Memorandum of Association (MOA) and Articles of Association (AOA) are essential legal documents for every company in India. While the MOA defines the company's legal identity and permitted scope, the AOA lays down the internal rules for managing the company.

So take the time to draft them carefully (with professional advice!) and align them with your vision for the company. A strong MOA and AOA will give you the legal clarity and operational confidence to scale your business smoothly.

Frequently Asked Questions