This article was first published in the October 2013 Malaysia edition of Accounting and Business magazine.
Since the Companies Commission of Malaysia (CCM) began accepting registrations for limited liability partnerships (LLPs) in February, some 500 businesses have adopted this new form of business vehicle.
According to CCM, 14 of these LLPs are the result of conversions made from general partnerships, while one is from a private company. Of the new LLPs, the majority are from the food and drink, education, management consultancy, information technology and property sectors.
The main reasons, says CCM, that businesses are opting to register as LLPs include the ease of establishment, the limited liability status available to partners and the flexibility of managing the business as a partnership, as opposed to managing a company under the Companies Act 1965 which is stringent in nature, or a general partnership which does not provide limited liability status.
Governed by the Limited Liability Partnerships Act 2012, the LLP was enforced on 26 December last year. It is a new form of business vehicle complementing the traditional options of registering a business as a sole proprietorship, partnership or company.
The LLP may be formed by a minimum of two people (wholly or partly individuals or bodies corporate) for any lawful business with a view of profit and in accordance with the terms of the LLP agreement. Formation is also allowed for professional practice, namely chartered accountants (regulated under the Accountants Act 1967), advocates and solicitors (regulated under the Legal Profession Act 1976, Advocates Ordinance of Sabah and Advocates Ordinance of Sarawak), and secretaries (regulated under the Companies Act 1965).
To create awareness among the business community and professionals, CCM has been conducting several seminars and roadshows over the last few months. In June one such seminar was jointly organised by CCM and ACCA Malaysia.
Held at CCM offices in Kuala Lumpur, the workshop was carried out by its corporate development and policy division senior executive Jegatheesan Govintharaj and section head Norhaiza Jemon.
The seminar, attended by 65 participants, covered the features of the LLP in Malaysia and registration guidelines, as well as the duties of the partners and compliance officer, and compliance requirements.
A key feature of the LLP is that it offers limited liability to its partners whereby any debts and obligations will be borne by the assets of the LLP. A partner, however, will be jointly and severally liable for his own wrongful act or omission in the course of the business of the LLP.
There are also many fundamental differences between an LLP and a company. These include no issuance of shares, flexibility in making decisions, no formal requirement for annual general meetings, no requirement to submit financial statements to the CCM, and the fact that accounts need not be audited.
One of the features relating to the formation of the LLP is the appointment of a compliance officer – who must be either one of the partners or persons qualified to act as a secretary under the Companies Act 1965. The statutory duties of the compliance officer include registering any changes in registered particulars of the LLP, keeping and maintaining registers and records, and ensuring publication of names.
During the lively Q&A session, many participants took the opportunity to seek clarifications. Among the main concerns raised were the duties and liabilities of the compliance officer, the duties and liabilities of partners, registration matters, matters on LLP agreement, capital contribution, administration requirements under the act and tax-related matters.
On the issue of liability, for instance, one participant questioned the rationale for partnerships to convert to LLPs, given that a partner can still be liable in the event of negligence. Responding to the question, Norhaiza said that although the concept of the LLP is to give limited liability protection to partners, there should be a control mechanism that checks wrongful acts by a partner. ‘A partner cannot make mistakes and get away with it,’ she said. ‘To maintain a standard of care in carrying out their duties, especially in the case of professionals, the provision [in the act) says that you are liable if you have been negligent.’
She stressed that it was up to businesses to decide if they want to register. ‘We’re not saying that the conventional partnership is now no longer relevant or the best business vehicle,’ she said. ‘Sometimes it is best for the business to be in the form of a conventional partnership. It is up to the businesses to decide which one is the best way forward.’
One of the more pertinent questions raised was the issue of banking facilities made available to LLPs. While the CCM said that the Association of Banks in Malaysia (ABM) recognises the status of LLPs, this has yet to be filtered down to all banks and their respective branches.
‘A lot awareness programmes need to be carried out with banks but as far as Association of Banks in Malaysia is concerned, they recognise LLP and they have brought some anchor banks on board and have told them that banking facilities should be extended to LLPs. The challenge is that some branches are not even aware that LLPs exist, so we have received complaints from LLPs saying that they cannot open bank accounts,’ Norhaiza said, adding that businesses that encounter such difficulties should file a complaint with the ABM.
Speaking to Accounting and Business after the seminar, Lock Peng Kuan, partner and coleader for audit and assurance at Baker Tilly Monteiro Heng, confirmed that the firm has had several discussions internally on the possibility of converting to an LLP. Lock, who is also the chairman of the ACCA Malaysia public practice committee, said that there are several issues that need to be considered in the event that an audit firm decides to convert to an LLP, one of which concerns capital expansion.
A question of funds
Lock pointed out that one of the predicaments faced by audit firms is the ability to raise funds. ‘It is not possible to issue shares in the LLP to offer to any potential investor, as non-accountants are not allowed to be partners of an LLP formed for professional practice. By not allowing a body corporate to be a partner, it doesn’t solve the issue for capital expansion,’ he added. He noted that conversion might also lead to an increase in operating costs as compared to a conventional partnership, due to the requirements of paperwork and the costs of engaging a compliance officer.
On the plus side, Lock pointed out that the LLP allows for natural succession, whereas in the traditional partnership any change of partners would constitute a new partnership relationship. But perhaps the most compelling argument for conversion is, he believes, the legal status of the LLP and the cap on liabilities of individual partners. ‘Being in a profession in which personal liability is always a concern, this could be the most important determining factor in deciding on a conversion.
Sreerema Banoo, journalist