What is a borrowing clause? What details should be included in the borrowing clause of an LLP agreement?

Introduction

An LLP can borrow money from its partners, banks financial institutes, etc. The partners of the LLP should include a borrowing clause in the LLP agreement. A borrowing clause is also known as cash flow because it allows the partners to borrow money for LLP. In this blog, we will discuss about ‘ What is an LLP agreement?’ What is a borrowing clause of an LLP agreement?’ What details should be included in the borrowing clause?’.

What is an LLP agreement?

An LLP (limited liability partnership) agreement is a written document defining the agreement between the partners of a Limited Liability Partnership. It describes the roles and responsibilities of all partners towards each other and the firm. It contains provisions for profit sharing, admission of new members, management and decision-making, retirement, and removal from the LLP. It also contains the rights and liabilities of departing members. It is mandatory to make and execute the agreement within 30 days of the establishment of the Limited Liability Partnership.

What is a borrowing clause of an LLP agreement?

A borrowing clause in an LLP agreement is a clause that allows the partners of a Limited Liability Partnership to borrow money from banks, financial institutions, or other sources for business purposes. It outlines the conditions under which partners can borrow funds, who can borrow funds, who can sign loan documents, and who is responsible for the debt incurred. The clause is an essential component of the LLP agreement and must be included to protect the assets of the firm.

What details should be included in the borrowing clause of an LLP agreement?

The following is the clause to be included in the borrowing clause of an LLP agreement:

1. Allows partners to borrow money for LLP

The borrowing clause of an LLP agreement allows the partners to borrow money from banks, financial institutions, etc. It is important because it helps with funding and allows the partners to take debt if needed. For instance, when you are starting as an entrepreneur and do not have much income, then cash flow can be an issue, especially when it comes to paying bills or buying inventory. That is why having this type of flexibility is essential.

2. Specifies who can borrow money for LLP

The borrowing clause of an LLP agreement may specify that only one partner can borrow money, or who can give approval to all the partners. It should also insert a clause in the agreement, which limits who can sign documents and whether they have to get support from any other partner before they take money.

3. Specifies who can sign the loan documents

The borrowing clause of an LLP agreement should also specify which partner or person can sign loan documents and whether they need approval from any other partners before taking a loan. Moreover, the clause should also mention if one of the partners dies while the firm is still operating, then all his/ her interest in the firm will be transferred to his/ her estate.

4. Responsibility for debts

The clause also includes that if an LLP incurs any debt then it would be the responsibility of the LLP and not its members to pay off the debt. Similarly, if a partner has an obligation or any debt incurred by the partner outside the partnership with others, then those will be handled by the partner himself as an individual.

5. Borrow money without authorization

The clause should also include that if a partner borrows money without authorization, the other partners have recourse. In other words, if a partner of an LLP takes a loan without the knowledge or approval from all the partners (if required) by law and LLP agreement, then the partners can sue them for breaking the clause.

Conclusion

An LLP agreement must include a borrowing clause to protect the assets of the firm. While drafting the borrowing clause of an LLP agreement, the partner must ensure that it includes all the information needed and it should comply with state laws and regulations.