Monday, August 6, 2012

Good news for engineers a new partnership LLP with a twist


The Limited LiabilityPartnership(LLP) under this form is a corporation, but is internally managed as a partnership. As a corporation, the LLP has no finite life, unlike a conventional partnership, which ceases on the retirement or withdrawal of a partner. The LLP's corporate status gives it the capacity to sue in its own name and be sued. It is by virtue of this distinctive quality of a separate legal identity that also differentiates an LLP from a conventional partnership.
Three forms of partnership structures are currently in use in the business and professional world. They are the general partnership, the limited partnership(LP) and the limited liability partnership (LLP).
A general partnership may be formed by persons coming together to pool their resources to carry on business and share profits. Among professionals, the general partnership remained for a long time the only form they could come together to practise their profession.
This in most instances was dictated by their professional bodies, which saw their members' professional skills and the required high sense of individual probity; integrity, uprightness and honesty as adequate protection against malpractice claims.



The table summarises the key features of the different common business structures as contrasted with those of the LLP. 





An LLP should not be confused with a limited partnership (LP). LPs are used mainly by private equity (PE) funds and hedge funds. Typically the PE manager is the general partner with unlimited liability whereas the investors are limited partners.
Jurisdictions which wish to attract such players into their financial markets would adopt the LP business model. Malaysia Federal TerritoryLabuan has adopted both the LP and the LLP legislation. But these are for offshore players.
The distinctive feature of the LLP structure under the Limited Liability Partnership Act 2012 is the limited scope of the liabilities of the partners. A partner is not personally liable for the obligations of the LLP, whether in contract, tort or otherwise or the wrongful act or omission of any other partner. A partner is still personally liable in tort for his own wrongful act or omission. The LLP is liable to the same extent as the partner who has committed the wrongful act or omission. In the event of insolvency, a partner's liability is limited to his capital contribution.

The Malaysian's  Income Tax Act, 1967 has not as yet adopted the LLP as a taxable entity. If it does so without qualifications, then a major anomaly would arise. Tax law treats a corporation as a separate taxable entity whereas a partnership is regarded as a transparency where only the partners to the partnership are taxable persons.
The hybrid nature of the LLP structure becomes problematic when considered in the context of the tax law, for the following additional reasons:
● A company is taxed at a flat rate, currently at 25% whereas an individual partner in a partnership is taxed at graduated rates;
● A company's tax resident status is determined by where its business is managed and controlled from; each partner's tax residence rests on that partner's extent of physical presence in the country in any one year and
● Distributions by a company can normally only be by way of dividends which are governed by restrictions under the Company's Act. Withdrawals of profits and capital by a partner are less formal; subject to partners' agreement.
A suggestion has been made that a choice be given to the LLP to be taxed either as a corporation or as a partnership. This would offend against the principle of tax neutrality since the policy objective of introducing the LLP structure is to rectify the major weakness in the general partnership business model by limiting partners' liabilities.
The LLP law recognised that this cap on liability could create concerns among those who use the services of professional firms and has mandated that such firms should have the benefit of professional Indemnity insurance.
The status of the LLP as a corporation must not influence its treatment for tax purposes since its prime objectives are to:
● Give it legal personality as distinct from its partners;
● Have perpetual succession and
● Give it unlimited capacity.
Thus a conventional partnership converting to an LLP should have no change in its tax status. This is achieved by a declaration in the tax code to the effect that for tax purposes, an LLP should be treated as a partnership. This is what the tax law in the Britain and Singapore has effected. This has the merit of ignoring the dichotomous nature of the LLP for tax purposes, achieving the intended policy objective without creating anomalies.
If this is done, there is no doubt that the future of the LLP is assured since it would be the vehicle of choice for many professional firms.

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