My Article On LLP Option In NST: RED Today

This is the second part of my article on the choice of business structures for business owners, which I contributed to NST: RED. In this article, I introduced the concept of the Limited Liability Partnership (LLP) which is expected to be implemented early next year. My article is reproduced below:

ADVISORY: Limited Liability Partnership option

By Richard Oon

HYBRID ADVANTAGES: Long practised in other countries, the corporate hybrid entity that is Limited Liability Partnership finally arrives in Malaysia


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.

Considering the future direction of his business and in view of the fact that his tax rates had reached the maximum personal tax bracket of 26 per cent, I also felt that it‘s time for him to consider other business entities to run his business on.
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 company.
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 wouldn‘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 on, i.e. the sole-proprietorship, partnership (more commonly referred to as “Enterprise” by most laymen) and the ‘Sdn Bhd’ (“company”) or private limited company.
While the former offers more flexibility for the business owner(s) to organise their business, each business owner is liable 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 (i.e. unlimited liability).
While a company is a separate legal entity on its own making the owners liable only to the extent of their capital contribution, the annual administrative costs of maintaining a company may put most small business owners off the idea
of starting a company.
LLP arrives

The obvious need of having a more flexible model of doing business, especially for the small business owners and professional practices, has led to the introduction of a new business vehicle which is the Limited Liability Partnership (LLP).
As its name suggests, a LLP combines the privilege of limited liability while offering a degree of flexibility of internal structure of the business through the LLP agreement. 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. When compared to a company, 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 this means that a LLP is cheaper to operate than a company.
Limited Liability Partnerships have been practised in many countries such as the United Kingdom, United States, Singapore, China, Japan and even India, so naturally many wondered when the LLP laws will arrive at our Malaysian shores.
That day arrived when the Limited Liability Partnerships Act 2012 (“LLPA 2012“) was gazetted on 9 February 2012. However, the LLPA 2012 has yet to be implemented while waiting for the tax laws governing the taxability of a LLP to be in place.
The recent Budget 2013 addressed that issue and proposed amendments to the income tax laws to treat the tax status of a LLP similar to that of a company under the Companies Act, 1965. With the tax laws now in place, it is anticipated that the LLPA 2012 will be implemented beginning of next year.
Choice of three
So this means that effective 2013, business owners will have a choice of three different business vehicles to organise their business in, i.e. a sole-proprietorship or partnership (“Enterprise”), a company or a LLP.
Table 1 on page 10 summarises several key differences among the three business vehicles. Similar to a company, as a LLP is a separate legal entity, it offers various tax planning opportunities to the small business owner. The partners of the LLP will be taxed on the salary that they draw based on the individual scaled-rates from 0 to 26 per cent while the remaining profits in the LLP is taxed at 20 per cent for the first RM500,000 of chargeable income (where capital contribution of the LLP does not exceed RM2.5 million).
The partners can now also choose to contribute to the Employees’ Provident Fund (EPF) and enjoy tax deductions for both the employer and employee contributions. This benefit is not available for the sole-proprietorship or conventional partnership.
The business community awaits the implementation of the LLP with much anticipation as it provides an alternative business vehicle for the business owners that complements the available traditional choices of business vehicles.
The LLP lowers the costs of running a business and at the same time, offers greater protection against personal liability for the partners.
With the introduction of the LLP, the business framework in Malaysia will provide greater flexibility and freedom to business owners to select the business model that best suits the needs and requirements of their businesses.
The newsprint version can be seen below:


About Richard

Richard Oon Hock Chye has more than 25 years of experience in taxation and business advice, with particular expertise in Malaysian property law. He began his taxation career with Deloitte Touche Tohmatsu, a ‛Big Four’ accounting firm, before starting his own practice, ConsulNet Tax Services Sdn. Bhd., in 1996. He is currently the National Tax Director of TY Teoh International, one of the leading consulting service providers in Malaysia. It is a member of the MSI Global Alliance, a global network of more than 250 independent legal and accounting firms, in over 100 countries. Richard sits on the board of two companies listed on the Main Board of Bursa Malaysia, as an independent non-executive director. He is also a regular contributor to several magazines and publications, and has shared his tax expertise on numerous occasions with organisations and property developers. As well as being a member of the Malaysian Institute of Accountants (MIA), Richard is a fellow member of both the Association of Chartered Certified Accountants (ACCA) and the Chartered Tax Institute of Malaysia (CTIM). He is a Certified Financial Planner (CFP) and holds a tax agent licence issued by the Ministry of Finance. Richard is also the author of the book, ‘Every Property Investor’s Guide To How To Pay Less Tax Legally’.

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