What Is an LLP (Limited Liability Partnership) and How Does It Work?

Aug 14, 2025
Private Limited Company vs. Limited Liability Partnerships

In today’s dynamic business landscape, the Limited Liability Partnership (LLP) has emerged as a compelling choice for entrepreneurs, startups, and professional service providers. Offering the legal strengths of a company alongside the flexible governance of a partnership, LLPs are gaining remarkable popularity across India.

  • In the financial year 2023-24 alone, the number of LLP registrations soared by a striking 39%, reaching 58,990—a clear reflection of growing confidence in this structure.
  • The upward momentum continued into 2025, with May witnessing a 37% year-on-year jump in new LLP incorporations—outpacing the 29% growth seen in company registrations

These figures underscore a powerful trend: LLPs are fast becoming the go-to vehicle for professionals and small businesses seeking liability protection, compliance ease, and operational flexibility.

Table of Contents

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.

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Limited Liability Partnership
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  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

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Frequently Asked Questions

What should an LLP agreement include?

Typical clauses cover the registered office, business nature, rights and duties of partners, contributions and profit-sharing, voting rights, process for adding or removing partners, transfers, and dispute resolution mechanisms.

Who can become a partner, and what are the rules around it?

  • A minimum of two partners is required. If the number drops below two for over six months, the remaining partner can be held personally liable.
  • Partners can be individuals or corporations. Foreign partners must adhere to FDI norms and make contributions through approved banking channels at fair market value.
  • What are the compliance obligations for LLPs?

    Every LLP must file:

    • Form 8 (Statement of Account & Solvency), and
    • Form 11 (Annual Return)
      within 60 days from the end of the financial year (by May 30th for FY ending March 31).

    How is an LLP taxed?

    LLPs are taxed at a flat rate of 30% (plus surcharge and cess). They are exempt from dividend distribution tax, and partners are taxed individually when profits are distributed.

    Can existing businesses convert to an LLP?

    Yes, existing structures like private companies or partnership firms can convert to an LLP by following specific processes laid out in the LLP Act.

    Swagatika Mohapatra

    Swagatika Mohapatra is a storyteller & content strategist. She currently leads content and community at Razorpay Rize, a founder-first initiative that supports early-stage & growth-stage startups in India across tech, D2C, and global export categories.

    Over the last 4+ years, she’s built a stronghold in content strategy, UX writing, and startup storytelling. At Rize, she’s the mind behind everything from founder playbooks and company registration explainers to deep-dive blogs on brand-building, metrics, and product-market fit.

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    Proprietorship Tax Return Filing Procedure and Its Compliance

    Proprietorship Tax Return Filing Procedure and Its Compliance

    A sole proprietorship is the simplest form of business ownership in India. It is not considered a separate legal entity from its owner, which means the business income is treated as the personal income of the proprietor.

    As such, tax compliance and return filing are governed by the Income Tax Act for individuals. Filing income tax returns (ITR) is not only a legal requirement but also essential for accessing financial benefits like business loans and expansion opportunities, as well as maintaining a credible financial history.

    In this blog, we’ll break down the tax return filing procedure for proprietors, explain key compliances, and highlight the benefits of timely filing.

    Table of Contents

    Overview of Taxation for Proprietorships in India

    In India, proprietorships are taxed as individual taxpayers under the Income Tax Act. The business income is added to the proprietor's total income and taxed according to the applicable individual tax slabs. Proprietors typically file their income tax returns using:

    • ITR-3: For individuals and HUFs having income from a proprietary business or profession
    • ITR-4 (Sugam): For those opting for the presumptive taxation scheme under sections 44AD, 44ADA, or 44AE

    Taxpayers can choose between the old tax regime (with deductions and exemptions) or the new one (with lower tax rates but no exemptions).

    Do Proprietorship Firms Need to File Income Tax Returns?

    Yes, proprietors are legally obligated to file ITRs if their total income exceeds the basic exemption limit, which for FY 2024-25 is:

    • ₹2.5 lakh for individuals below 60 years
    • ₹3 lakh for senior citizens (60-80 years)
    • ₹3.5 lakh for super senior citizens (above 80 years)

    Even if the income is below the exemption limit, filing returns is necessary to carry forward business losses, to claim TDS refunds and if there are any foreign assets or income involved.

    Importance of Filing Income Tax Returns for Proprietorship Firms

    Beyond legal compliance, filing ITR offers several advantages:

    • Financial Credibility: Enhances your chances of securing loans, credit lines, or business investments
    • Business Growth: Essential for bidding in tenders and expanding operations
    • Avoiding Penalties: Non-filing attracts penalties and interest under the Income Tax Act
    • Refund Claims: Enables claiming refunds on excess TDS deducted

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    Tax Audit for Proprietorship

    A tax audit is a review of accounts to ensure accuracy and compliance with tax laws. For proprietorships, audit requirements apply if:

    • Turnover exceeds ₹1 crore (business)
    • Gross receipts exceed ₹50 lakh (profession)
    • Turnover exceeds ₹10 crore if 95% of payments and receipts are digital

    Non-compliance with tax audit provisions can attract a penalty under Section 271B, which can be up to 0.5% of turnover or a maximum of ₹1.5 lakh.

    Presumptive Taxation Scheme: A Simplified Option for Small Proprietors

    To ease compliance for small taxpayers, the Income Tax Act offers presumptive taxation schemes:

    • Section 44AD: For small businesses with turnover up to ₹2 crore (to be extended to ₹3 crore from AY 2025-26 if cash transactions are below 5%)
    • Section 44ADA: For professionals with receipts up to ₹50 lakh
    • Section 44AE: For those involved in the business of transportation

    ITR Guidelines for Proprietorship Firms – Union Budget 2024–25 Insights

    The Union Budget 2024 brought several important changes aimed at easing compliance, promoting transparency, and offering relief to taxpayers, especially for salaried individuals and businesses.

    Here's a quick overview of key updates relevant to individual taxpayers and proprietorships:

    1. Increased Standard Deduction Under the New Tax Regime

    To offer more relief to salaried individuals, the standard deduction under the new tax regime has been increased from ₹50,000 to ₹75,000.

    2. Reduced TDS Rates on Specified Payments

    The budget has also reduced the Tax Deducted at Source (TDS) rates on certain specified payments to improve ease of doing business and simplify compliance for both payers and recipients. This change will benefit small and mid-sized businesses by easing their cash flow and lowering the burden of upfront tax deduction.

    3. Government Scheme for First-Time Entrepreneurs

    The Union Budget 2024 introduced a new loan scheme to support first-time entrepreneurs. The scheme aims to promote inclusive entrepreneurship and boost India’s startup ecosystem.

    Proprietorship Tax Rate & Surcharge AY 2025-26 | FY 2024-25

    Under the New Regime

    Income Tax Slab Income Tax Rate under the New Regime Surcharge
    Up to ₹ 3,00,000 Nil Nil
    ₹ 3,00,001 – ₹ 7,00,000 5% above ₹ 3,00,000 Nil
    ₹ 7,00,001 – ₹ 10,00,000 ₹ 20,000 + 10% above ₹ 7,00,000 Nil
    ₹ 10,00,001 – ₹ 12,00,000 ₹ 50,000 + 15% above ₹ 10,00,000 Nil
    ₹ 12,00,001 – ₹ 15,00,000 ₹ 80,000 + 20% above ₹ 12,00,000 Nil
    ₹ 15,00,001 – ₹ 50,00,000 ₹ 1,40,000 + 30% above ₹ 15,00,000 Nil
    ₹ 50,00,001 – ₹ 100,00,000 ₹ 1,40,000 + 30% above ₹ 15,00,000 10%
    ₹ 100,00,001 – ₹ 200,00,000 ₹ 1,40,000 + 30% above ₹ 15,00,000 15%
    Above ₹ 200,00,001 ₹ 1,40,000 + 30% above ₹ 15,00,000 25%

    Under the Old Tax Regime

    Income Tax Slab Income Tax Rate under the Old Regime Surcharge
    Up to ₹ 2,50,000 Nil Nil
    ₹ 2,50,001 – ₹ 5,00,000 5% above ₹ 2,50,000 Nil
    ₹ 5,00,001 – ₹ 10,00,000 ₹ 12,500 + 20% above ₹ 5,00,000 Nil
    ₹ 10,00,001 – ₹ 50,00,000 ₹ 1,12,500 + 30% above ₹ 10,00,000 Nil
    ₹ 50,00,001 – ₹ 100,00,000 ₹ 1,12,500 + 30% above ₹ 10,00,000 10%
    ₹ 100,00,001 – ₹ 200,00,000 ₹ 1,12,500 + 30% above ₹ 10,00,000 15%
    ₹ 200,00,001 – ₹ 500,00,000 ₹ 1,12,500 + 30% above ₹ 10,00,000 25%
    Above ₹ 500,00,000 ₹ 1,12,500 + 30% above ₹ 10,00,000 37%

    Deadline for Proprietorship ITR Filing

    • Non-audited firms: July 31st of the assessment year (AY)
    • Audited firms: October 31st of the assessment year (AY)

    For AY 2025-26:

    • Non-audited deadline: July 31, 2025
    • Audited deadline: October 31, 2025

    List of Documents Needed for Proprietorship Income Tax Return Filing

    • PAN card of the proprietor
    • Aadhaar card
    • Bank account statements
    • Profit & Loss statement
    • Balance sheet
    • GST returns (if registered)
    • TDS certificates (Form 16A/26AS)
    • Sales invoices and purchase bills
    • Expense receipts
    • Investment proofs for claiming deductions (under the old regime)

    How to File an Income Tax Return for a Proprietorship (Step-by-Step Guide)

    Here's a simple, step-by-step guide to help you file accurately and on time:

    Step 1: Choose the Right ITR Form

    • ITR-3: For proprietors with regular business or professional income
    • ITR-4: For those opting for the Presumptive Taxation Scheme under Sections 44AD, 44ADA, or 44AE

    Step 2: Prepare Financial Information

    • Compile key documents
    • Calculate your total income and tax liability
    • Claim eligible deductions (only under the old regime).
    • Verify TDS credits and advance tax paid.

    Step 3: Log into the Portal

    Step 4: Submit the Return

    • Select Assessment Year 2025–26 and the appropriate ITR form (ITR-3 or ITR-4)
    • Enter all relevant details—income, deductions, taxes paid, etc
    • Validate and submit the return
    • E-verify using Aadhaar OTP, bank account, or DSC

    Step 5: Download

    • Download the acknowledgement (ITR-V) and save it for your records.

    Conclusion

    Running a proprietorship already comes with a long to-do list, and filing your income tax return might feel like just another box to check. But here’s the truth: Filing your ITR on time helps you stay on the right side of the law, but it also unlocks serious advantages like improved loan eligibility, smoother business expansion, and better financial credibility.

    That’s why choosing the right ITR form (like ITR-3 or ITR-4), keeping your documents ready, and understanding your tax regime can save you a lot of future headaches.

    Don’t wait until the last minute- start organising your financials today and file your ITR on time to stay ahead, stay compliant, and build a more credible, growth-ready business.

    Frequently Asked Questions

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    Frequently Asked Questions

    What is proprietorship compliance?

    Proprietorship compliance refers to the set of legal, financial, and tax-related requirements that a sole proprietorship must fulfil. This includes:

    • Income tax return (ITR) filing
    • GST registration and returns (if applicable)
    • Tax audit (if turnover crosses prescribed limits)
    • Maintenance of books of accounts
    • Maintenance of books of accounts
    • TDS deductions and filings (if applicable)
      Business licenses like FSSAI, trade license, etc., depending on the nature of the business

    Since a proprietorship is not a separate legal entity, all compliances are fulfilled in the name of the individual (proprietor).

    Which ITR is applicable for a proprietorship firm?

    The applicable ITR forms for proprietorship firms are:

    • ITR-3: For proprietors who maintain books of accounts and have regular business or professional income.
    • ITR-4: For proprietors who opt for the Presumptive Taxation Scheme under Section 44AD, 44ADA, or 44AE.

    Note: ITR-4 is only applicable if your turnover is within the prescribed limit (currently ₹3 crore for businesses opting for digital payments).

    What are the requirements for a tax audit for a proprietorship?

    A tax audit under Section 44AB is mandatory for a proprietorship if:

    • Turnover exceeds ₹1 crore (for business) in a financial year
    • Turnover exceeds ₹10 crore for businesses where 95% of payments and receipts are digital

    Also, if a proprietor opts out of the presumptive taxation scheme after opting in (under 44AD/44ADA), a tax audit becomes applicable for the next five years, regardless of turnover.

    What is the turnover limit for a proprietorship?

    There is no fixed turnover limit to run a proprietorship, but there can be certain turnover limits for tax compliance purposes.

    Is GST required for a sole proprietorship?

    GST registration is mandatory for a sole proprietorship if:

    • Turnover exceeds ₹40 lakh (for goods) or ₹20 lakh (for services) in most states
    • You are involved in the interstate supply of goods
    • You sell on e-commerce platforms (like Amazon, Flipkart)

    Akash Goel

    Akash Goel is an experienced Company Secretary specializing in startup compliance and advisory across India. He has worked with numerous early and growth-stage startups, supporting them through critical funding rounds involving top VCs like Matrix Partners, India Quotient, Shunwei, KStart, VH Capital, SAIF Partners, and Pravega Ventures.

    His expertise spans Secretarial compliance, IPR, FEMA, valuation, and due diligence, helping founders understand how startups operate and the complexities of legal regulations.

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    How to Draft a Co-founders Agreement? A complete Guide

    How to Draft a Co-founders Agreement? A complete Guide

    Starting a company with one or more co-founders is one of the most exciting parts of the entrepreneurial journey. But amidst the rush of building products, finding customers, and chasing early traction, one foundational step often gets overlooked: putting a co-founders agreement in place.

    The Co-founders Agreement lays out how the founding team will operate, make decisions, handle equity, resolve disagreements, and plan for the unexpected. Without it, even the strongest partnerships can run into miscommunication, conflict, or costly misunderstandings down the road.

    In this article, we’ll break down the key elements of a co-founders agreement, explain why it’s essential from day one, and guide you through the decisions you’ll want to document before your startup grows.

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    Understanding the Importance of a Co-Founder Agreement

    A co-founders agreement is a governance framework. It provides clarity on expectations, defines legal boundaries, and establishes protocols for decision-making and dispute resolution.

    Without it, startups risk misalignment, equity disputes, or founder exits that can derail momentum. Having this agreement from day one ensures:

    • Legal protection for all founders
    • Clear accountability
    • Faster resolution in case of conflicts
    • Long-term business stability

    How to Determine Roles?

    Before you split the equity or assign job titles, align on why you’re building this company. Once your mission is clear, it becomes easier to define what roles each founder should play.

    Not all founders are the same, and not all will lead the same functions. Role clarity prevents overlap, power struggles, and decision-making delays.

    Here’s a quick overview of typical leadership roles:

    • CEO (Chief Executive Officer): Sets vision, makes high-level decisions, and manages investors.
    • COO (Chief Operating Officer): Manages day-to-day operations, hiring, and internal workflows.
    • CFO (Chief Financial Officer): Oversees finances, fundraising, and budgeting.
    • President: Often works alongside the CEO, focusing on strategy execution or external relations.
    • CMO (Chief Marketing Officer): Leads branding, marketing, and growth strategy.
    • CTO (Chief Technology Officer): Drives product development and tech architecture.

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    How to Split Equity?

    One of the trickiest parts of a co-founder agreement is deciding who gets what percentage of the company.

    Spoiler alert: Equal splits are often unfair. While it might feel diplomatic to go 50/50 (or 33/33/33), it rarely reflects the actual contributions of each founder. Equity should reward value creation, not just presence.

    Consider these factors:

    • Who initiated the idea?
    • Level of early involvement and contribution
    • Full-time vs part-time commitment
    • CEO or leadership responsibilities
    • Prior experience, networks, and domain expertise

    It’s advisable to use structured frameworks or equity calculators and ensure all discussions are documented. Vesting schedules (typically four years with a one-year cliff) should also be agreed upon and reflected in the agreement.

    Compensation and Salary Expectations

    Most early-stage startups operate with limited capital. Founders often defer salaries or draw nominal compensation. However, clarity on current and future remuneration is essential.

    The agreement should include:

    • Initial salary (if any) or deferred compensation model
    • Milestones or triggers for compensation reviews (e.g., seed funding, profitability)
    • Equity-to-cash trade-offs, especially for operational founders
    • Provisions for salary revisions approved by a board or mutual consent

    Decision-Making and Dispute Resolution

    Defining decision rights helps prevent operational gridlock and ensures strategic alignment. The co-founders agreement should outline the following:

    • Voting rights: Specify which decisions require a majority, supermajority, or unanimous consent (e.g., capital raise, hiring key executives, M&A decisions).
    • Dispute resolution mechanisms: Include mediation and arbitration clauses to resolve disagreements outside of court.
    • Deadlock provisions: Outline how to handle situations where founders are split, potentially via third-party adjudicators or rotating authority.
    • Exit protocols: Determine how decisions are made in case a founder decides to leave or is asked to step down.

    Exit Strategies and Buyout Clauses

    Exit events, whether planned or unforeseen, can significantly impact the startup’s equity structure. A co-founders agreement should detail:

    • Voluntary exit protocols: Including share sale rights, notice periods, and replacement planning.
    • Involuntary exit terms: For cause (e.g., misconduct) or no-fault exits (e.g., health issues).
    • Buyout clauses: How shares are valued (e.g., pre-agreed formula, external valuation), who has the first right to buy, and what triggers a forced sale.
    • Non-compete clauses: Restrictions on joining or starting competing ventures post-exit.

    Without a clear exit plan, founder departures can become messy, expensive, and emotionally draining.

    Non-Disclosure Agreements (NDAs)

    Startups thrive on ideas, data, and speed. A loose-lipped founder or ex-founder can derail all of that. To protect your IP, customers, and strategy, include a strong non-disclosure clause in the co-founder agreement. It should cover:

    • What qualifies as “confidential information”?
    • How long the NDA lasts (often 1–3 years post-exit)
    • Consequences of breaching the NDA

    Founders should also agree on how sensitive materials like business plans, prototypes, and user data are handled upon exit.

    Death, Disability, and Divorce Clauses

    Contingency planning for life events is often overlooked but is essential to safeguard the business. Your agreement should include:

    • Death clause: Specifies who inherits equity, buyback options for the company, and whether heirs receive any operational role.
    • Disability clause: Details how long a founder can be inactive before reevaluation and whether shares can be repurchased or roles reassigned.
    • Divorce clause: Ensures founder shares don’t get transferred to a spouse, with provisions for company buyback to retain control.

    These clauses protect both the business and surviving founders from unforeseen legal and financial disruptions.

    Frequently Asked Questions

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    Frequently Asked Questions

    What are the points of a co-founder agreement?

    A co-founder agreement typically includes the following key components:

    • Equity Ownership & Vesting Schedule
    • Roles & Responsibilities
    • Compensation & Salary Terms
    • Decision-Making Protocols
    • Dispute Resolution Mechanisms
    • Exit Clauses & Buyout Terms
    • Confidentiality (NDA) Provisions
    • IP Assignment
    • Death, Disability, and Divorce Clauses

    What are the 3 main reasons you should want a co-founder?

    1. Complementary Skills
      A strong co-founder brings expertise you may not have, be it in tech, operations, sales, or strategy, helping you build faster and smarter.

    2. Shared Responsibility & Emotional Support
      Entrepreneurship is a rollercoaster. Having someone equally invested in the highs and lows provides mental resilience and shared accountability.

    3. Stronger Investor Appeal
      Many investors prefer teams over solo founders. A balanced co-founding team signals collaboration, diverse thinking, and execution capability.

    Is a founder's agreement legally binding?

    Yes, a founder’s agreement or co-founders agreement is legally binding if it’s properly drafted and signed by all parties. It is treated like any other contract under contract law and can be enforced in court or through arbitration, depending on the jurisdiction and terms stated.

    What is the difference between a founder and a co-founder agreement?

    Founder Agreement and Co-founder Agreement are often used interchangeably, but there can be subtle differences based on context:

    • Founder Agreement usually refers to an agreement between a solo founder and the company, often covering IP assignment, vesting, and equity terms.

    • Co-founder Agreement refers to a contract between multiple founders of the same startup, defining how they work together, split ownership, make decisions, and handle disputes.

    In practice, for teams of two or more founders, a co-founder agreement is more relevant and comprehensive.

    Mukesh Goyal

    Mukesh Goyal is a startup enthusiast and problem-solver, currently leading the Rize Company Registration Charter at Razorpay, where he’s helping simplify the way early-stage founders start and scale their businesses. With a deep understanding of the regulatory and operational hurdles that startups face, Mukesh is at the forefront of building founder-first experiences within India’s growing startup ecosystem.

    An alumnus of FMS Delhi, Mukesh cracked CAT 2016 with a perfect 100 percentile- a milestone that opened new doors and laid the foundation for a career rooted in impact, scale, and community.

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    HR Policies: Best Practices For Start-Ups In India

    HR Policies: Best Practices For Start-Ups In India

    India’s startup ecosystem is one of the fastest-growing in the world. With innovation booming and young companies scaling rapidly, the need to build a strong foundation of people practices becomes critical. One key part of this foundation? HR policies.

    For startups, setting clear HR policies early on can help shape a productive and inclusive work culture, prevent legal issues, and drive employee satisfaction- all of which contribute to long-term success. 

    This blog explores why HR policies are important for Indian startups, which ones you must prioritise, and best practices to follow.

    Table of Contents

    HR Policy for Startups- An Overview

    In the rush of building a product and acquiring customers, many Indian startups often overlook the importance of formal HR policies. However, these policies are not just about bureaucracy or paperwork. They are tools to ensure consistency, fairness, and legal compliance.

    HR policies balance employee rights and company objectives. They prevent arbitrary decision-making, reduce disputes, and clarify expectations for both employers and employees. They also provide frameworks for discipline, rewards, grievance redressal, and professional conduct, creating a workplace where talent can thrive.

    While startups face constraints in time, budget, and HR resources, basic HR policies can go a long way in promoting stability, scalability, and a positive employer brand.

    Related Read: Templates for Startup Founders

    Why HR Policies for Startups in India are Crucial?

    Here’s why every Indian startup should prioritise HR policies from day one:

    • Builds a consistent work culture: Written HR policies foster consistency across teams and leadership, even as the company grows or experiences turnover.

    • Reduces misunderstandings: Policies help resolve or prevent conflicts between employees and employers by clearly communicating rights, responsibilities, and processes.

    • Protects against legal risks: Indian labour laws, workplace safety regulations, and anti-harassment laws require compliance; having HR policies ensures your startup stays compliant.

    • Drives employee morale and loyalty: Transparent policies around leave, performance, and compensation demonstrate that the company cares for its people, fostering trust and engagement.

    • Defines company values and culture: HR policies codify expected behaviour and ethics, reinforcing the cultural DNA you want your startup to embody.

    • Streamlines core HR functions: HR teams can better manage recruitment, onboarding, training, payroll, and performance reviews when guided by clear policy frameworks.

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    Major HR Policies for Startups

    Here are the key HR policies that Indian startups should prioritise:

    Leave Policy

    A Leave Policy outlines the various types of leave employees can avail themselves of, including:

    • Casual leave
    • Sick leave
    • Paid time off (PTO)
    • Maternity/Paternity leave
    • Public holidays

    Clearly define leave eligibility, accrual, approval processes, and encashment rules to avoid confusion.

    Menstrual Leave Policy

    Many progressive startups in India now include a Menstrual Leave Policy offering additional flexibility to female employees. Typically, this includes:

    • A set number of days of paid leave per month or year specifically for menstrual health.
    • A simple, stigma-free process to request this leave.

    Performance Management, Appraisal, Rewards & Recognition Policy

    A well-defined Performance Management Policy ensures that employees understand how their work is evaluated and rewarded. Include:

    • Goal-setting frameworks (OKRs, KPIs)
    • Appraisal cycles and review processes
    • Criteria for promotions and salary hikes
    • Recognition mechanisms (awards, bonuses, public appreciation)

    Code of Conduct

    A Code of Conduct defines acceptable behaviour and ethical standards at the workplace. Cover aspects such as:

    • Professionalism and respect
    • Anti-discrimination
    • Anti-bribery and corruption
    • Use of company property
    • Conflict of interest
    • Disciplinary actions for violations

    Employee Joining and Exit Policies

    Clearly outline onboarding and offboarding procedures:

    • Documents and verification required upon joining
    • Probation period terms
    • Notice period during resignation or termination
    • Final settlement process
    • Exit interviews and knowledge transfer

    Salary and Other Perks

    Document your Salary and Benefits Policy, including:

    • Salary structure (CTC breakup)
    • Frequency of salary payment
    • Statutory benefits (PF, ESIC, gratuity)
    • Voluntary benefits (insurance, wellness programs, stock options)
    • Reimbursement policies (travel, meals, etc.)

    Sexual Harassment in the Workplace Policy

    It is mandatory under the POSH Act, 2013, for Indian companies with 10 or more employees to have an Anti-Sexual Harassment Policy. The policy should:

    • Define sexual harassment
    • Outline the complaints process
    • Establish the Internal Complaints Committee (ICC)
    • Ensure confidentiality and protection for complainants

    Regular Working Hours

    A Working Hours Policy defines:

    • Standard working hours
    • Flexible working options, if any
    • Remote work guidelines
    • Overtime policies (if applicable)
    • Break and meal times

    Related Read: Startup India Scheme: Eligibility Criteria and Benefits

     Frequently Asked Questions

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    Frequently Asked Questions

    What are HR policies in India?

    HR policies in India are formal guidelines that govern how a company manages its people. They cover areas like leave, working hours, compensation, workplace conduct, harassment prevention (POSH Act compliance), equal opportunity, health and safety, and termination processes- all while ensuring compliance with Indian labour laws.

    What does HR do in a startup?

    In a startup, HR plays a critical role in building the team and culture from the ground up. Key responsibilities include:

    • Hiring and onboarding talent
    • Defining and implementing HR policies
    • Managing payroll and benefits
    • Driving employee engagement
    • Facilitating performance management
    • Handling employee relations and grievances
    • Ensuring legal and compliance requirements are met

    In the early stages, HR often wears many hats and helps shape the company’s identity as an employer.

    What are HR key tasks?

     Key tasks of HR typically include:

    • Recruitment and talent acquisition
    • Onboarding and orientation
    • Payroll and compensation management
    • Policy development and implementation
    • Performance management and appraisals

    • Employee engagement and retention
    • Learning and development programs
    • Legal compliance and reporting
    • Managing workplace conflicts and grievances
    • Offboarding and exit interviews

    What is an HR tech startup?

    An HR tech startup builds technology solutions that help companies manage their workforce more efficiently. These can include:

    • Applicant tracking systems (ATS)
    • Payroll management software
    • Employee engagement platforms
    • Performance management tools
    • Learning & development platforms
    • AI-driven HR analytics
    • End-to-end HRMS (Human Resource Management Systems)

    In India, HR tech startups like Darwinbox, Keka, and Zoho People are popular examples.

    How to set up an HR function?

    To set up an HR function in a startup or small business:

    1. Define HR goals
    2. Draft basic HR policies
    3. Set up payroll and compliance processes
    4. Develop a hiring and onboarding process
    5. Implement performance management
    6. Communicate policies to employees
    7. Use HR software
    8. Hire HR talent or consultants

    What are the 4 C’s of HR policies?

    The 4 C’s often used to frame effective HR policies are:

    1. Clarity- Policies should be easy to understand and unambiguous.
    2. Consistency- Apply policies uniformly across the organisation to avoid bias.
    3. Compliance- Align policies with local labour laws and regulatory requirements.
    4. Communication- Actively share and educate employees about policies to ensure awareness and adoption.

    Nipun Jain

    Nipun Jain is a seasoned startup leader with 13+ years of experience across zero-to-one journeys, leading enterprise sales, partnerships, and strategy at high-growth startups. He currently heads Razorpay Rize, where he's building India's most loved startup enablement program and launched Rize Incorporation to simplify company registration for founders.

    Previously, he founded Natty Niños and scaled it before exiting in 2021, then led enterprise growth at Pickrr Technologies, contributing to its $200M acquisition by Shiprocket. A builder at heart, Nipun loves numbers, stories and simplifying complex processes.

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