Limited Liability Partnership: Finally here

Traditionally, there have been three widely used corporate structures for incorporating a company in Pakistan which include a general form of partnership, sole proprietorship and a limited liability company.

But the need has always been present to bring about another form of corporate structure, known as the limited liability partnership (LLP). This has been available in a host of countries around the world and merges the flexibility of a general partnership with the advantages of a limited liability company.

The gap has been filled with the passage of the Limited Liability Partnership Bill 2017 by the Senate last week. The Securities and Exchange Commission (SECP) has been busy in updating some of the obsolete legalisation pertaining to company regulation such as the Companies Ordinance 1984 and the LLP Bill 2017 is also reflective of the regulator’s desire to provide a conducive atmosphere for the corporatisation of the economy.

The general form of partnership has an obvious flaw which does not make it the medium of choice for small and medium enterprises as well as services based industries.  It assumes unlimited liability for the partners involved because the firm is not deemed to be a body corporate.

In contrast, the LLP affords protection for the partners from the joint liability created by another partner which includes misconduct and fraudulent activities but also adverse business decisions taken on a unilateral basis.

Moreover, the LLP also manages to retain the flexibility of a general partnership which makes it ideal for firms operating in the services sector. It has been the business vehicle of choice for chartered accountants and lawyers around the globe.  The LLP will be treated a partnership firm for income tax purposes and the profit will be taxed in the hands of the LLP rather than the partners.

In addition, the LLP is also useful for encouraging start-ups such as investment firms and financial service providers. The main reason is that the compliance costs are drastically reduced for an LLP due to the less onerous legal and procedural requirements for companies registered under the Companies Ordinance 1984.  There is also potential for gaining better access to credit financing from financial institutions.

Given the recent mushrooming of start-ups and the global race to provide a fostering environment to entrepreneurs , the LLP will enable local professionals to also benefit from a more flexible and efficient corporate structure making them more competitive and dynamic.