Limited Liability Partnerships (LLP) @ Perkongsian Liabiliti Terhad (PLT)

Outline

• Business Entities• Limited Liability Partnerships (LLP) • LLP in Malaysia • LLP for Professionals• Foreign LLP• Observation

Business Entities

Generally, there 3 types of business entities which are available all over the in Malaysia:

(i) Sole proprietorships(ii) Partnerships / Firm(iii) Companies- Sdn Bhd/Bhd

AttributesType/Attributes

Legal Status

Limited Liability

Existence Regulation Tax

SoleProprietorships

Nota legal entity

Not available

Depends on the sole proprietor

Self Regulated/Registration of Business Act 1950

Income Tax

Partnerships/Firm

Nota legal entity

Not available

Depends on the partners Partnership

Act 1961/ Contracts Act1950

Income Tax

Companies Legalentity

AvailableIndependent from the members- perpetual succession

Companies Act 1965

Corporate Tax

Restriction by professional bodiesAccountants• Main regulation which governs the accounting

profession is the Accountants Act 1967- section 18Without prejudice to any other provisions of

this Act or rules or by-laws no member shall – (c) in anyway, practice as a chartered

accountant or licensed accountant other than (i) in his own name;

(ii)in the name or names of his partner or partners being chartered accountants or licensed accountants; or      

(iii) in the name of a firm existing at the time of the coming into operation of this Act or formed thereafter provided that the partners in Malaysia are eligible to be registered as chartered accountants or licensed accountants;

• Although the above provision does not specifically provides for restriction for accountants to set up practices as a company, it is clear that the provision does not provide company as a medium for accountants to carry out their business or practices.

• Malaysian Institute of Accountants (Membership and Council) Rules 2001[P.U.(A)343/2001] (as amended by the Malaysian Institute of Accountants (AMENDMENT) RULES 2002 [P.U.(A)258/2002]):Rule 2 : “member in public practice” means a chartered accountant or licensed accountant who, as a sole proprietor or in a partnership, provides or is engaged in public practice services in return for a fee or reward for such services otherwise than as an employee.

• Despite that the rule does not expressly stated the restriction for accountant to practice as a company, the Rule clearly stated that the medium in which the practice can be carried out is through sole proprietorships or partnerships.

Lawyers

• The main regulation which governs the profession is the Legal Profession Act (LPA) 1976.

• Other than the LPA1976, the lawyers are also regulated by rulings and by-laws.

• Chapter 1 of the Rulings, clause 1.01(l) clearly provides that all references to a “firm” or a “law firm” mean a firm of Advocates and Solicitors whether a partnership or a sole proprietorship.

• The exclusion of company structure from references to a firm clearly indicates that the business of legal practices can only be carried out in the form of sole proprietorships or partnerships.

Architects Act • Architectural consultancy practice

7A.(1) Notwithstanding subsection 7(1), a sole proprietorship, partnership or body corporate may practice as an architectural consultancy practice and recover in any court any fee, charge, remuneration or other form of consideration for any architectural consultancy services rendered by it pursuant to its practice as an architectural consultancy practice carried on by virtue of this section, if it is registered with the Board as an architectural consultancy practice and has been issued with a certificate of registration.

A body corporate providing architectural consultancy services, professional engineering services and/or quantity surveying services

Section 7B.(1) Where a body corporate carries on a practice of providing architectural consultancy services, professional engineering services and/or quantity surveying services, the Board may, subject to such conditions or restrictions as it may deem fit to impose, register that part of the practice providing architectural consultancy services.

REGISTRATION OF ENGINEERS ACT 1967

Section 7A. (1) Notwithstanding subsection 7(1), a sole proprietorship, partnership or body corporate may practice as an Engineering consultancy practice and recover in any court any fee, charge, remuneration or other form of consideration for any professional engineering services rendered by it pursuant to its practice as an Engineering consultancy practice carried on by virtue of this section, if it is registered with the Board as an Engineering consultancy practice and has been issued with a certificate of registration.

A body corporate providing professional engineering services, architectural consultancy services and/or quantity surveying services.

Section 7B. (1) Where a body corporate carries on a practice of providing professional engineering services, architectural consultancy services and/or quantity surveying services, the Board may, subject to such conditions or restrictions as it may deem fit to impose, register that part of the practice providing professional engineering services.

QUANTITY SURVEYORS ACT 1967

Section 7A. (1) Notwithstanding subsection 7(1), a firm, or a body corporate may practice as consulting Quantity Surveyors and recover in any court any fee, charge remuneration or other form of consideration for any professional advice or services rendered by it pursuant to its practice as such, if it has the written approval of the Board, and has been issued with a valid permit, to so practice.

A body corporate providing quantity surveying services, professional engineering services and/or architectural consultancy services

Section 7B. (1) Where a body corporate carries on a practice of providing quantity surveying services, professional engineers services and/or architectural consultancy services, the Board may, subject to such conditions or restrictions as it may deem fit to impose, grant an approval to practice in respect of that part of the practice providing quantity surveying services.

Limited Liability Partnerships• LLP is a hybrid business entity that combines the

best features of partnerships and company. • It enjoys the attributes of a body corporate, namely,

separate legal entity, limited liability, and perpetual succession HOWEVER the internal regulation is based upon an agreement which is akin to a partnership agreement.

• LLP shall be liable for business risks/debts but defaulted partners shall be jointly liable with the LLP.

• Partners are liable for his tortious act; e.g negligence.

Main Characteristics of LLP

• A legal entity- as a body corporate (LLPs in UK, India, Singapore, Labuan) or as a non-body corporate (Jersey LLP) or as a partnership (US LLP)

• Attributes- similar to companies (SLE, LL, PS.etc)• Internal regulation- similar to partnerships (via agreement)• Third party protections- claw back mechanisms and

minimum disclosure.• Formalities and Disclosure requirement- annual declaration

of solvency- no submission of audited account/ AGM minutes

• Tax status- on the entity (Labuan) or as a partnership- income of partners (UK, Jersey and Spore) or as a partnership but at fixed rate (India) or as a company (Malaysia)

Legal Status

LLP

Body Corporate(UK, India, Singapore,Malaysia)

Non-body corporate(Isle of Jersey, UK)

Partnership(US)

Attributes

Separate Legal Entity

Right to own property

• The limitation of liability in LLP is only

PARTIAL- viable for innocent partner and not to defaulted partners. As such, partners still have to be cautious on their duties to client as they shall be jointly liable with the LLP for their default in tort and in contracts.

Internal Regulation

r

Agreement Between Partners or

Default Rules

Tax Status

Other highlights• Third party protections- claw back mechanisms

and minimum disclosure.• Registration Formalities-moderate- less than

companies but more than partnerships.• Disclosure-only submission of annual solvency/

insolvency report.• Accounts- No audit requirement but keep of

records for certain years.• Partnership laws are not applicable whilst winding

up procedures/laws on companies are applicable.

LLP IN MALAYSIAAgenda Labuan LLP Malaysia PLT

Legal status Body corporate Body corporate

Attributes Similar to companies- partial limited liability for defaulted partners

Similar to companies- partial limited liability for defaulted partners

Internal regulation

Partnership agreement or default rules of the Act

LLP Agreement or default rules of the Act

Third parties / creditors’ protection

•The word Labuan LLP as part of the name•Keep proper accounting records.•Claw-back provision.

•The word PLT as part of the name•Keep accounting and other records which give a true and fair view of the LLP state of affairs (7 years)•Claw-back provisions(section 22)

Agenda Labuan LLP MalaysiaPLT

Formalities/Disclosure requirement

•Formal registration•Annual declaration of solvency.

•Formal registration•Annual declaration of solvency/insolvency

Applicable Laws

•Labuan LP and LLP Act 2010

•LLP Act 2012

Tax regime Labuan Entity-Trading activity- 3%-non-trading- not taxable

RECOMMENDATIONS(i)Irrevocable option to be taxed either as a partnership or a company(ii)Fixed rate on the entity- attractive rate .

LLP IN MALAYSIA

LLP for Professionals

• Section 2 of LLP act 2012:“professional practice” means the practice as specified in the first column of the First Schedule which is governed by the written law as specified in the second column of the First Schedule, respectively;

• First Schedule only provides for Chatered Accountants, Advocates and Solicitors and Company Secretary.

LLP for professionals• The members of the LLP shall only be

professionals such as all architects, engineers, quantity surveyors, accountants or all lawyers.

• The partners shall regulate their activities by way of contract among themselves which shall incorporate requirement of the professionals ethics and regulation.

• The LLP cannot limit its liability below the compulsory level of insurance that has to be taken to protect clients’ interests.

• The LLP is liable for all the business debts but the professionals’ liabilities remains in tort- negligence

Power to amend Schedules

• Section 92. The Minister may, by order published in the Gazette, vary, delete, add to, substitute or otherwise amend the First Schedule, Second Schedule and Third Schedule.

Foreign LLP- Part VI of LLP Act 2012Section 44. (1) A foreign limited liability partnership shall not carry on business in Malaysia unless it is registered as a foreign limited liability partnership under this Act.

Section 46. (1) Notwithstanding anything under this Act, a foreign LLP shall appoint at all times at least one compliance officer from amongst its partners or persons qualified to act as secretaries under the Companies Act 1965 who—(a) is a citizen or permanent resident of Malaysia; and (b) ordinarily resides in Malaysia.

Section 48 (8) The foreign limited liability partnership shall be deemed to continue to exist in Malaysia until the winding-up of its affairs in Malaysia is completed

Conversion from Sdn.Bhd to PLT Section 30.

(1) A private company may convert to a limited liability partnership if and only if—(a) there is no security interest in its assets subsisting or in force at the time of application; and

(b) the partners of the limited liability partnership to which it is to be converted comprises all the shareholders of the private company and no one else.

Conversion from partnership to PLT Section 29. (1) A conventional partnership may convert to a limited

liability partnership if and only if the partners of the limited liability partnership to which the conventional partnership is to be converted, comprises all the partners of the conventional partnership and no one else.

(2) In this Part, “convert”, in relation to a conventional partnership converting to a limited liability partnership, means a transfer of the properties, interests, rights, privileges, liabilities, obligations and the undertaking of the conventional partnership to the limited liability partnership.