Defined in LLP Agreement

• Loss sharing ratio is agreed upon by partners in the LLP agreement

• It can be equal or based on capital contribution or custom terms

• Agreement must clearly mention loss distribution in writing

• Flexibility exists to set different rules than profit sharing

• All partners must mutually consent to the defined ratios

Equal Sharing by Default

• In absence of agreement losses are shared equally among partners

• Default rule applies under Schedule I of LLP Act

• Equal loss bearing includes both active and sleeping partners

• Default terms may be overridden by a written agreement

• Equal sharing can be risky for unequal capital contributors

Capital Contribution Basis

• Losses may be shared based on each partner’s capital share

• Higher contributing partner may bear proportionately more loss

• Capital-based loss sharing must match the agreed terms

• Helps maintain fairness in risk-taking responsibilities

• Suitable for LLPs with partners contributing in unequal amounts

Exclusion of Specific Partners

• Agreement may exclude certain partners from bearing losses

• Sleeping or minor partners can be shielded from loss sharing

• Exclusion must be clearly mentioned in the LLP agreement

• Legal documentation protects exempted partners from liabilities

• Transparency ensures trust and avoids future disputes

Tax and Accounting Treatment

• Losses are recorded in LLP’s profit and loss account

• Loss allocation affects individual partner’s capital accounts

• Losses can be carried forward under income tax for set-off

• Partners may adjust losses against future profits in filings

• Proper accounting entries ensure audit and compliance accuracy