Limited Liability Partnership: An alternative business structure

By Foong Cheng Leong May 1, 2013

With LLP, entrepreneurs have more options to choose the most preferred form of business vehicle
This would benefit small businesses (including startups), professionals groups and others

Bread & Kaya by Foong Cheng Leong

THIS month's topic brings us to the new Limited Liability Partnership Act 2012 which came into force on Dec 26, 2012.

Prior to the introduction of this Act, entrepreneurs who wished to do business had to either register themselves as a sole proprietor/ partner or a body corporate. The new Limited Liability Partnership Act 2012 introduces an alternative business vehicle namely, a Limited Liability Partnership (LLP), offering a hybrid of characteristics between a conventional partnership and a company.

According to the Companies Commission of Malaysia (CCM), LLP features the protection of limited liability to its partners similar to the limited liability enjoyed by shareholders of a company coupled, with the flexibility of internal business regulation through partnership arrangement similar to a conventional partnership.

Any debts and obligations of the LLP will be borne by the assets of the LLP and not that of its partners’. An LLP has the legal status of a body corporate which is capable of suing and being sued in its own name, holding assets and doing such other acts and things in its name as bodies corporate may lawfully do and suffer.

LLP also offers flexibility in terms of its formation, maintenance and termination, while simultaneously has the necessary dynamics and appeal to be able to compete domestically and internationally.

With the introduction of LLP, entrepreneurs will have more options to choose the most preferred form of business vehicle and this would benefit small businesses (startups), professionals groups (e.g. lawyers, accountants or company secretaries), joint ventures and venture capital funds.

The cost of incorporating an LLP is in the region of RM500 as compared to general partnership and corporation which are in the region of RM30 to RM60, and RM1,000 and above respectively.

[RM1 = US$0.32]

Difference between LLP and general partnership

IN a general partnership, partners are jointly and severely liable for all business debts and obligations.

For example, if the partnership had incurred a debt and the debtor sues the partnership for the debt, all the partners will be named as party to the suit, notwithstanding that some partners are not involved in the debt.

The same goes if one partner is negligent; the rest of the partners may be liable for such a negligent act.

The LLP offers limited liability to its partners whereby any debts and obligations of the LLP will be borne by the assets of the LLP. Thus, the named party in a suit involving a LLP would be the LLP itself.

Difference between LLP and a company

According to the CCM, there are many fundamental differences between an LLP and a company. Amongst others, the differences are:

No issuance of shares;

Flexibility in making decisions;

No formal requirement for Annual General Meetings;

No requirement to submit financial statements to CCM; and

Accounts need not be audited

Drawback

However, one drawback of an LLP regime as compared with a conventional partnership is the tax structure.

The Malaysian Bar Corporate and Commercial Committee reported that the Minister of Finance concluded that the tax treatment of LLPs ought to be similar to the tax treatment of companies. Thus, LLPs would be subject to income tax at the rate of 25%.

However, there is a provision that if the capital of a Malaysian tax resident LLP at the beginning of the year of the assessment is not more than RM2.5 million (and subject to some conditions and exceptions), then the applicable tax rate would be 20% for the LLP's chargeable income of us to RM500,000, with chargeable income in excess of RM500,000 being subject to tax rate of 25%.

This is akin to the tax rate for small and medium enterprises or SMEs.

For more information on LLP, please visit http://www.ssm.com.my/en/LLP-AboutLLP.

Foong Cheng Leong is a blogger pretending to be a lawyer, and a lawyer pretending to be a blogger. He blogs at xes.cx and foongchengleong.com, and tweets at @xescx and @FCLCo.

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