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Bread & Kaya: Limited Liability Partnership: An alternative business structure

Limited Liability Partnership: An alternative business structure
Foong Cheng Leong
May 01, 2013

– With LLP, entrepreneurs have more options to choose the most preferred form of business vehicle
– This would benefit small businesses (including startups), professionals groups and others

Bread & Kaya by Foong Cheng Leong

THIS month’s topic brings us to the new Limited Liability Partnership Act 2012 which came into force on Dec 26, 2012.

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.

According to the Companies Commission of Malaysia (CCM), 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.

LLP also offers flexibility in terms of its formation, maintenance and termination, while simultaneously has the necessary dynamics and appeal to be able to compete domestically and internationally.

With the introduction of LLP, entrepreneurs will have more options to choose the most preferred form of business vehicle and this would benefit small businesses (startups), professionals groups (e.g. lawyers, accountants or company secretaries), joint ventures and venture capital funds.

The cost of incorporating an LLP is in the region of RM500 as compared to general partnership and corporation which are in the region of RM30 to RM60, and RM1,000 and above respectively.

[RM1 = US$0.32]

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.

Difference between LLP and a company

According to the CCM, there are many fundamental differences between an LLP and a company. Amongst others, the differences are:

– No issuance of shares;
– Flexibility in making decisions;
– No formal requirement for Annual General Meetings;
– No requirement to submit financial statements to CCM; and
– Accounts need not be audited
– Drawback

However, one drawback of an LLP regime as compared with a conventional partnership is the tax structure.

The Malaysian Bar Corporate and Commercial Committee reported that the Minister of Finance concluded that the tax treatment of LLPs ought to be similar to the tax treatment of companies. Thus, LLPs would be subject to income tax at the rate of 25%.

However, there is a provision that if the capital of a Malaysian tax resident LLP at the beginning of the year of the assessment is not more than RM2.5 million (and subject to some conditions and exceptions), then the applicable tax rate would be 20% for the LLP’s chargeable income of us to RM500,000, with chargeable income in excess of RM500,000 being subject to tax rate of 25%.

This is akin to the tax rate for small and medium enterprises or SMEs.

For more information on LLP, please visit http://www.ssm.com.my/en/LLP-AboutLLP.



First published on my column Bread and Kaya at Digital News Asia on 1 May 2013.

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Bread & Kaya: Start-ups, get your house in order

My 4th Bread & Kaya’s column was published on Digital News Asia on 3 April 2013.

Bread & Kaya: Start-ups, get your house in order

– There are a number of things you need to get done before potential investors do due diligence on your start-up
– Seek advice from others, ensure any legal advice is professional, and do due diligence on your investor as well

Bread & Kaya by Foong Cheng Leong
3 April 2013

WHEN I was in high school, I invested a few thousand ringgit on a web-hosting company operated by a ‘friend.’ Unfortunately, the web-hosting company didn’t materialize and I never saw my money again, nor the ‘friend.’ In fact, there was no such web-hosting company!

That was my first failed investment. Looking back, I realized that the investment was purely done by trust. I did not do any background check on the company or even the ‘friend.’

But years later, I was approached by a stranger (at that time) to help his start-up by providing my services to him, in return for shares in his company. I did not invest a single ringgit. I am glad to report that the start-up is doing well, with offices around South-East Asia and other parts of the world.

Today’s column sets out some tips before opening your start-up for funding.

Before you think about attracting investors, you need to get your house in order. Prudent investors would usually do an in-depth due diligence of your company to see, among others, what assets and liabilities you have.

They will check your background, hence you need to make sure it’s squeaky clean. They will obtain a company search report from the Companies Commission of Malaysia to verify the details of your directors and shareholders, shareholding structure and financial reports – so make sure you file your reports on time.

They will also go through your memorandum of association and articles of association (documents that are required before incorporating a ‘Sdn Bhd’). Take some time to read them and amend if necessary. Board and shareholders minutes will also be part of due diligence exercise.

Investors usually come with high expectations. Thus, educate your investors of the nature of your business and industry, business plans, goal, competitors and obviously, monetizing strategy. Over-promising will create legal trouble for you.

When meeting your investors, appoint someone presentable who speaks well to deal with them. This raises investor confidence.

Other than your financial records and information, here are some common matters that should be addressed before the due diligence stage.

1) Intellectual property rights

Intellectual property rights generally refer to your trademarks, copyright, industrial designs, confidential information and patents.

Start-ups generally file their trademarks first as it is affordable. If you have a physical product and the design is new, do consider filing an industrial design to protect the design.

Patents are usually not filed due to budget constraints. A patent application (with the assistance of a patent attorney) costs at least RM5,000 and above. However, if the invention is novel and you think it’s worth protecting, do file it within one year otherwise it will not be afforded protection.

You can file for protection with the Intellectual Property Corporation of Malaysia (MyIPO), or if your business or operation extends to other countries (e.g. Singapore), you should register your rights there too.

A registered intellectual property right gives you the exclusivity over your product, thus you may stop others from using them. Also, the Income Tax (Deduction for Expenditure on Registration of Patent and Trade Mark) Rules 2009 provides tax deduction for the registration of trademarks and patents in Malaysia for certain start-ups.

2) Proper contracts

All terms and conditions between the founders, with merchants, customers, vendors and employers must be properly spelled out. For existing contracts, review them to see whether they are still applicable or have to be changed or terminated.

Here are a few tips:
– In your agreements with customers, investors will look on how revenue is generated and to find any unfavorable terms, etc. Do make sure your contracts (or invoice or receipt) with service providers (e.g. graphic designer, website, software) do not state that intellectual property rights (in particular, copyright) belong to them (by default, intellectual property rights belong to the person who commissioned the work, unless stated otherwise). Such contracts should describe the subject matter in detail and that the rights to the intellectual property are properly assigned to your company.
– If you are using a website or a software application to deal with your customers, put terms of use or services and a privacy policy in place as required by the Consumer Protection (Electronic Trade Transactions) Regulations 2012. Do not rip off terms of use or services and a privacy policy of others as those agreements are drafted specifically for their businesses.

3) Non-disclosure agreement

Before opening your door to investors, do get them to sign a non-disclosure agreement (commonly known as an NDA). This agreement is crucial in making sure that they do not misuse the information they gathered from the due diligence. Such information may include your finance information, source codes and customer data.

Your investors may also want to look into the source codes of your proprietary software. Although an NDA may be signed to protect it, you may want to take an extra step to request that the software due diligence is done by an independent third party.

Also, when dealing with your vendors or employees, get them to sign a NDA. Your information is your asset.

4) Employee matters

If you have employees, make sure that there are employment contracts. If you have promised the employees something (e.g. equity), make sure you state it in writing. Ensure that you have been contributing to statutory contributions such as the Employee Provident Fund (EPF) and Social Security Organization (Socso).

This guide is a non-exhaustive basic guide and merely an idea on what you need to do before attracting investors. Do seek out advisers or mentors for help and advice. Get an experienced lawyer when dealing with terms and conditions. Speak to other fellow entrepreneurs who have done it before for advice.

Most importantly, do due diligence on your investor as well!

Docudeer – Your source of sample legal agreements and documents!
1. General Terms of Services
2. Comprehensive e-Commerce Terms & Conditions
3. Simple e-Commerce Terms & Conditions (Free!)
4. General Privacy Policy
5. Simple Non Disclosure Agreement
6. Letter of Employment

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