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.
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| 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 Territory, Labuan 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.
