Monday August 6, 2012
How LLP partnership be taxed?
Comment by Kang Beng
Hoe
The broad structural form of Malaysian LLP derives from the UK
model which was also adopted by the law on LLP in Singapore
THE limited liability partnership (LLP) law
has come to our shores.
The law was gazetted on Feb 9.
The 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 and
- the limited liability partnership.
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.
Modern day business environment makes this somewhat of a myth.
It is not difficult to see that the moral malaise of widespread fraud and other misdemeanours driven by greed and avarice even, has permeated all manner of societal activities
So it is understandable that the professional groups practising in such reprehensible climate cannot expect to remain free from the spectre of untenable claims; claims by virtue of their unlimited scope which makes each and every partner jointly and severally liable for the negligence of a another partner, could leave many innocent among them in financial ruins.
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.
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.
The table, extracted from a presentation by The Companies
Commission of Malaysia, summarises the key features of the different common
business structures as contrasted with those of the LLP.
The 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.
● Kang Beng Hoe is
an executive director of TAXAND MALAYSIA Sdn Bhd. The views expressed do not
necessarily represent those of the firm. Readers should seek specific
professional advice before acting on the views.
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