Generally, most briefing session and media coverage are on it Limited Liability Protection compare to General Partnership and sole proprietor yet it incorporation fee are much lower than a limited company ( Corporation in US) or a Sdn Bhd or Berhad in Malaysia. the briefing session and media coverage also cover it tax benefit but what's more?
First, let briefly discuss above:
Limited Liability Partnership (LLP) is an alternative business vehicle regulated under the Limited Liability Partnerships Act 2012 which combines the characteristics of a company and a conventional partnership.
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.
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.
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.
Fee
The fee for setting up for sole proprietor and partnership are RM30.00. (Follow name on identification card like hawker) or RM70.00 (Name other than on Identification card and partnership)
Before the launch of LLP. A person who want to operate a business with limited liability propection must form a limited company (Corporation in US) or a Sdn Bhd or Berhad. the Incorporation fee around RM2,000.00.
However, forming a LLP required RM500.00 now compare to RM2,000 for a limited company.
A limited company also need to file annual return and audited account yearly. It is a lot of money for a startup to pay audit fee to auditor and secretarial fee to maintain a Registered Address. However, sole proprietor and General partnership provided limited protection despite it lower set up fee. LLP required a Compliace Officer but it can be held by a partner himself and might save some secretarial fee. LLP also do not required to file audited account to SSM on timely basis. It can save on audit fee if all partner agreed that the account do not required to be audited. However, fellow partner would required the account to be audited. But, a startup can wait until profit of the partnership has generated enough profit before engaged an auditor to audited an backdated accounts. A limited company might not have such flexibility and might incurred some fine or compound by SSM even a startup has yet to be profitable and yet to generate enough profit to pay for audit fee or partner might want to close down the company if it is not feasible. Previous record show that 80% of startup will fail and have to close down within 5 years of operation and out of the 20% that survive. Another 80% would fail also. With such a high failure rate. It seem not advisable for a startup to incorporated a limited company as maintanace fee of limited company might aggravated their problem. Thus, LLP might be more suitable for a startup.
Tax advantage
LLPs also enjoy significant advantages over limited liability companies from a tax perspective. Similar to conventional partnerships, they are not an assessable entity for tax purposes and profits are treated as part of each partner’s personal income. Therefore, if the partner is an individual, his share
of income from the LLP will be taxed based on his personal income tax rate. A partner which is a corporate entity will be taxed at the prevailing corporate tax rate of 25%. Nevertheless, as non-tax-assessable entities, Nevertheless, as non-tax-assessable entities, LLPs do not enjoy corporate tax benefits which are normally available to limited liability companies.
Real benefit and advantage:
Now, come to benefit and advantage not cover by briefing and media. How can we fully ustilised the advantage of Limited Liability Parnership (LLP) other than the benefit above?
SSM website indicated that their target group including Venture Capital
Venture Capital
Base on FAQ on SSM's website , target group including Venture Capitals and it stated : "The LLP provides the flexibility of organizational arrangement through the partnership agreement whereas a company is subject to a more stringent compliance requirement."
further, it General Guidelines For Registration of Limited Liability Partnership And Related Matters stated :
The mutual rights and duties of the partners of an LLP and the mutual rights and duties of the LLP shall be governed by the LLP agreement .
However, in the absence of agreement as to any matter set out in the Second Schedule of the LLP Act 2012, provision of the Second Schedule relating to that matter shall apply.
This mean a partnership agreement have the flexibility on distribution of profit. Such flexibility not available in the Limited company (Corporation) Sdn Bhd and berhad. it has many of the flexibilities of the traditional partnership model and is not burdened by strict capital maintenance rules. Private equity funds have also adopted the LLP model, particularly given the flexibility
afforded for purposes of distributing profits earned on capital.
In US, 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. Labuan has adopted both the LP and the LLP legislation. But these are for offshore players. This is because LLP are restricted to professional like lawyer, accountant and engineer only in some state of US whereas all other business must have a General partner who have unlimited liability. However, usually A corporation (limited company) will be make a General Partner to provide limited liability protection. For example. A fund management company will be incorporated as a corporation like ABC fund Management Limited or ABC fund Managment Sdn Bhd. These fund management company will become General partner of the fund. Like ABC Income fund, ABC balance Fund, ABC small capital fund. Then, investor of the fund will become limited partner of the fund whereas the fund management company despite a General partner of limited partnership. But are protected by a Corporation or a limited company.
However, in Malaysia, business other than professional like lawyer, Accountant and Doctor are allowed to use limited liability partnership. thus, all partner are limited partner and there is no parner with unlimited liability. thus, we do not required to incorporated a limited company (Corporation) or Sdn Bhd as a General partner.Fund Manager can become a limited partner of the fund. the fact that SSM brochure, website, FAQ expressly stated that other than professional like lawyer, accountant and engineer. Other target group are venture capitals and startup SME.
How Warren Buffett used Limited Partnership?
If you read "Buffettology". The book have detail explaination how Warren Buffett used limited partnership to his advantage. When Warren Buffett started his first fund. He only have USD5,000.00. Other investor invested USD100,000.00. Thus, total capital of his first fund amounted to USD105,000.00. Thus, Warren Buffett only own less than 5% of his partnership. He cannot become controlling shareholder if he used a limited company,corporation, sdn Bhd, Berhad etc. However, he can become Managing Partner under LP's parnership agreement and other partner cannot involved in managment of the parnertship if they agreed in advance. This is one advantage of LLP over a limited company or a corporation.
If he form a limited company or a corporation. All profit are share base on your percentage of shareholding in your company. With just USD5,000 investment. He can't become second richest people in the world at one point as he only able to share less than 5% profit of the company. However, by using a limited partnership. It partnership agreement stated that all limited partner get minimum 6% of their capital. However, if profit more than 6% of capital. Managing partner or Warren Buffett able to get balance of the 25% of profit. A limited company or a corporation are very difficult to structure for a shareholder of less than 5% shares of the company to shares 25% of the balance 95% of profit of the company but this can be easily arranged under limited Liability partnership. Thus, from less than 5%. Capital account of Warren Buffett growth overtime as he reinvest all his profit to the partnership. Thus, he can slowly become the largest shareholder and become second richest man in the world at one point.
In US, he do not required to hold a fund management license if his parnership or his fund have less than 100 partner. However,I doubt SSM will approved it if you stated your nature of business as fund management and you do not hold a fund manager license. Of course, you can stated your nature of business as investment rather than fund managment like Warren Buffett but you still have to check the number of shareholder allowed. 100 in US and it might be lesser in Malaysia. Please consult your own lawyer. One safer bet is Venture Capitals as it still do not required a license like fund managment and it is expressly stated on SSM website, FAQ and brochure that venture capitals as it target group for LLP. Actually, other business also able to used this structure if investor or sleeping partner want to used share of profit to motivated his investee or entrepreneur by giving him a share of profit of 25% if he acheived minimum 6% return on capital. Whereas you do not have such flexibility if you used limited company or corporation. Part 2.
