Continuation from Choice of Business Structures for the Business Owner
One of my clients approached me the other day to discuss the future plans of his business, jointly operated by him and his wife, which is ready for growth and expansion very soon. He felt that in view of the expansion plans, the time is right for him to incorporate a company (Sdn. Bhd.). Considering the future direction of his business and in view that his tax rates tell reach the maximum personal tax bracket of 26%, I also felt that it’s time for him to consider other business vehicles to run his business from (see my earlier post on the conditions to incorporate a Sdn. Bhd.).
Naturally, most accountants would jump on the idea and start the incorporation process without much questions asked. With an additional company in our portfolio, this means additional annual $$$ for us from the provision of our various professional services to the Sdn. Bhd. So obviously he was rather puzzled when I asked, “Could you wait a couple more months before setting up a vehicle for your business?”
He replied that a couple more months of wait won’t hurt, but the curiosity got the better of him and he immediately asked, “Why wait?”
You see, at the moment, there are only limited business entities for a person to run his business from, ie. the sole-proprietorship, partnership (more commonly referred to as “Enterprise” by most laymen) and the company (“Sdn. Bhd.”). While the former offers more flexibility for the business owner(s) to organise their business, each business owner is lliable jointly with the other partners for all debts and obligations of the business which are incurred while he is a partner and this liability can extend to his own personal assets (ie. unlimited liability).
While a Sdn. Bhd. addresses the issue of unlimited liability as it is a separate legal entity on its own and the owners are only liable to the extent of their capital contribution, the annual administrative costs of running/maintaining a Sdn. Bhd. will put most small business owners off the idea of starting a Sdn. Bhd.
The obvious need of having a more flexible model of doing business, especially for the small business owners and professional practices, have led to the introduction of a new business vehicle, which is the Limited Liability Partnership (LLP).
As its name suggests, a LLP combines the protection of limited liability for its members while offering a degree of flexibility of organising the internal structure of the business. Besides the attraction of having limited liability, the LLP has one important advantage over the conventional partnership: a LLP being a separate legal entity, enjoys perpetual legal existence while in the case of the conventional partnership, any change of the partners marks the end of the partnership arrangement and the creation of a new one. While compared to the Sdn. Bhd., one of the many appealing features of an LLP is that there is less statutory compliance requirements attached with the administration of a LLP, so effectively it means that a LLP is cheaper to operate than a Sdn. Bhd.
“Ok..” my client responded, “..so why wait?”
Next: The implementation of the Limited Liability Partnership in Malaysia