An Alternative Business Vehicle: Limited Liability Partnerships

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The Limited Liability Partnership (“LLP”) is an alternative business vehicle that has been made available to entrepreneurs and investors in addition to the traditional options of carrying on a business either by way of common sole proprietorships, partnerships or companies. Entrepreneurs and investors can set up an LLP to run a business when there are two or more members, provided that it is formed in accordance to an LLP agreement. A member can either be an individual or a body corporate (also known as a “corporate member”).

Generally, an LLP has both general partners and limited partners. General partners are responsible for the management of the business on a daily basis and can be personally liable for all partnerships’ debts and liabilities. Limited partners, on the other hand, are usually purely investors who do not have the same day-to-day responsibilities as the general partners. However, in Malaysia, all partners in an LLP enjoy limited liability.

In other words, all partners of a Malaysian LLP are only liable up to the amount of capital contributions they initially invested in the business of the LLP. This is to protect partners in the LLP against personal liability for the partnerships’ debts and other obligations beyond their initial capital investment.

More importantly, an LLP has legal personality separate from that of its partners, which means that an LLP is capable of suing and being sued in its own name, and acquiring, owning, holding and developing or disposing of property.

Like any other business vehicles, the LLP business structure is generally designed for all lawful business purposes with the view to make profit. But it has an additional feature that combines the characteristics of both private company and conventional partnership. On one hand, an LLP provides the protection of limited liability for its partners (similar to the limited liability of a shareholder in a private company), and on the other hand, it provides the flexibility of the partnership arrangement for the internal management of its business, including profit-sharing through agreement between partners (a feature of conventional partnership).

As such, an LLP becomes a more attractive and viable business vehicle for most entrepreneurs and investors to grow their business that suits their needs without having to concern themselves too much about their personal assets, personal liabilities and strict business regulations.

In Malaysia, the LLP business structure is governed by the Limited Liability Partnership Act 2012 (“LLP Act 2012”). The 2012 Act provides regulations not only for the registration, administration and dissolution of an LLP, it also outlines the requirements for the application to covert a private company or a conventional partnership into an LLP. Partners in an LLP must carry out their duties and meet their legal responsibilities that are set out in the LLP agreement. Such agreements are governed by the 2012 Act and must contain terms on how the LLP will operate, such as:

  • the nature of business of the LLP
  • partners’ mutual rights, duties and responsibilities
  • how partners can join or leave the LLP
  • how profits are shared among partners

 

Comparative Chart between Private Limited Company (Sdn Bhd) and LLP

Business Entities Private Limited Company LLP
Entity Name Appearances Company name ended with the word “Sdn Bhd” Partnership name ended with the word “PLT” (Perkongsian Liabiliti Terhad)
Rules & Regulations Companies Act 1965 Limited Liability partnership Act 2012, Limited Liability Partnership Regulations 2012
Capital Contribution Share Capital Partners contribution
Owners of the Business Company (members/ shareholders own ‘shares’ in the company that give them certain rights in relation to the Company) LLP (partners have a share in the capital and profits of the LLP)
Legal Status Seperate legal entity Seperate legal entity
No. of Shareholders/Partners Minimum 2 and maximum 50 in private company Minimum 2 and no maximum limit
Party that is liable for the debts of the business Company LLP
Personal liability No personal liability of individual director or shareholder.
Liabilities borne by the directors or shareholders are to the extent of unpaid shares only.
No personal liability of partner, except for own tortious wrongful act or omission or without authority. Liabilities borne by the partners are jointly and severally with the LLP to the extent of unpaid share capital only.
Annual Compliance Must file annual return and financial statements every calendar year. Must lodge an annual declaration and solvency statement with CCM (the 1st within 18 months from the date of registration and thereafter, 90 days from the end of the financial year).
Annual Submission to SSM Annual Return with Audited/ Unaudited Financial Statement Annual Declaration
Annual Fee to SSM RM150-00 RM200-00
Statutory Audit Requirement Required to be audited No compulsory unless it is provided in the limited liability partnership agreement

(Adopted from Suruhanjaya Syarikat Malaysia, ‘Experience a New Dimension in Business- Limited Liability Partnership’, https://www.ssm.com.my/sites/default/files/booklet/LLP_bkengLS_update.PDF)

 

Advantages & Disadvantages of Limited Liability Partnerships
Here are some further details on the advantages and disadvantages of an LLP:

Advantages Disadvantages
Limited LiabilityA limited partner’s liability for the partnership’s debt is limited to the amount of money that individual partner contributed to the partnership. Partners are generally shielded from liability from the misconduct of other partners. Risks to the General PartnersGeneral partners must carry the burden of all the business’s debts and obligations. If the company is being sued or enters into bankruptcy, all debts and liabilities are the responsibility of the general partners.
PropertyAn LLP is allowed to acquire, own, hold and dispose of property. Personal LiabilityA partner in an LLP is personally liable for his or her own tortious wrongful act or omission.
Investment OpportunitiesAn LLP is an efficient investment vehicle that allows investors to benefit from the profits of the business without getting them actually involved in the business.
Increase Capital InvestmentsAn LLP can generate capital investments by adding more limited partners without a cap as to the number of partners.
No Turnover IssuesAn LLP allows its members to join and depart without affecting the existence of the limited partnership.
Simple Administration Not compulsory for statutory audit, AGM or board resolution as is required of private limited companies.
Less PaperworkRegistration is relatively cheaper, easier, faster and fewer documents are needed as compared to the registration for a private limited company.

 

This article was contributed by Tham Sook Wei and Hynn Choo of C.C.Choo, Hazila & Teong. If you have any queries concerning the contents of this article, please feel free to contact us at:

Email: ccchtkl.c@gmail.com

Tel: 03-27752175