Chartered Accountants General Limited Liability Partnership Act, 2016 has been introduced in the National Assembly to make provisions for the incorporation, regulation and winding up of Limited Liability Partnerships (LLP). LLP is a form of organisation that is neither a 'company' as defined under the Companies Ordinance, 1984 nor a Partnership under the Partnership Act, 1932. It contains the attribute of being a 'body corporate with limited liability', similar to a 'company'. In other attributes (including process of formation, operational arrangements, dissolution, etc), it is almost similar to a 'Partnership' formed under a Partnership Act, 1932.
This note provides general and primary information about this new form of organisation for businesses, as are contained in the aforesaid proposed Act.
Background Traditionally, there are three forms of organisations for business; 'sole-proprietorship', 'partnership' and 'company'. Over the times, it has been felt, in economic and commercial sense, that another form of organisation for business is needed that contains some attributes of both partnership and a company.
This resulted in the evolution of the concept of 'Limited Liability Partnership', commonly known as LLP. An LLP is a partnership in a body corporate form. Its primary attribute that is different from Partnership is the limited liability of Partners/ Members and being abody corporate. Its attribute not similar to a company is not having the compulsory requirement for share capital, and there being ease in its incorporation, operation and dissolution. All such matters can be agreed upon in a 'Limited Liability Partnership Agreement' which is essentially a Partnership Deed. Its attribute similar to 'company' is its continued existence and being a body corporate separate from members.
All the developed economies like UK, European Union, and USA have introduced LLP in their legislations. LLP structures are operating reasonably in such jurisdictions as these institutions fill in the gap that emerges in absence of this form of business organisation.
There is no specific kind of business which can be undertaken by an LLP. It can undertake all kinds of businesses. Nevertheless, in developed economies, LLPs are more prevalent in professional service sector where this form of organisation is interalia used as a shield to safeguard the liability arising in professional conduct. In UK and USA, professionals are authorised to incorporate as LLP and such entities are allowed to conduct professional services.
In addition to service sector, LLP structures are used to undertake joint ventures, including with companies. In many cases, LLPs are used as intervening entities effectively being a 'pass through vehicle'. Accordingly, in many countries, such LLPs are treated as non-taxable entities and partners/ members are taxed on their share from LLP.
In Pakistan, there was a need for this form of business organisation. Once the law is in force, professional bodies will have to decide whether or not they allow an LLP to conduct certain activities.
As per the Pakistan tax legislation, an LLP will be treated as a company since it is a body corporate and under our law, all body corporates are treated as 'companies'. There is however a need to re-examine that status since any share of profit from an LLP is not equivalent to 'dividend' that should not be taxed on distribution over and above the income of an LLP. It is therefore advisable that an LLP, formed under the proposed Act, be treated as a 'Partnership' for tax purposes.
Partners, Partnership and their relations Any individual, body corporate, or a company may become a member/partner in an LLP.
As per this law, body corporate also includes an LLP registered outside Pakistan and a company incorporated outside Pakistan. Thus, a Pakistan LLP can have foreign LLPs and companies registered and incorporated outside Pakistan as Partners. This is an important subject for certain commercial transactions and arrangement as in this manner, a foreign company may enter into Pakistan business with Pakistan's residential status, without having a subsidiary company incorporated in Pakistan.
Initial members of an LLP will be those whose names are mentioned in the incorporation document whereas other persons may become a partner in an LLP by, and in accordance with, Limited Liability Partnership Agreement.
Incorporation of LLP and LLP Agreement Unlike a company, no Memorandum of Association and Articles of Association is required to be filed for incorporation of an LLP.
SECP may prescribe the specific documents required to be filed to incorporate an LLP.
There shall however be no prescribed form of arrangement or agreement between the members/partners of an LLP. The members of LLP shall be entitled to determine their mutual rights and liabilities in the manner desired and the same shall be contained in the LLP Agreement.
In case if there is no such agreement, which is not essential, mutual rights and liabilities of the Partners/Members shall be determined by the provisions contained in the First Schedule to the LLP Act, 2016.
Once the requirements of incorporation are fulfilled,the Registrar shall issue a 'Certificate of Incorporation'. Such certificate shall be the evidence and basis of incorporation of that LLP. Each LLP shall have a name as per that certificate of incorporation.
Extent of Liability The liabilities of an LLP shall be met out of the property of that LLP. Personal assets of the members/partners remain free from any act of the LLP. This is the main attribute of an LLP as against the firm constituted under the Partnership Act, 1932 where the liability of Partner in relation to business of the firm is not limited to assets of the firm.
Contributions The form of contribution to an LLP, if any, shall be decided mutually by the Partners. In case of an intangible property, if required to be incorporated in the financial statements as contribution by a Partner of LLP,the said intangible shall have to be valued in the manner prescribed by SECP.
There is no requirement of having capital or contribution by the Partners/ Members. That matter shall be dependent entirely on the LLP Agreement. Thus, there is no requirement of having a minimum or prescribed capital in an LLP. There will be no 'share certificates'in an LLP.
Assignment or Transfer of Partnership Rights Interest in LLP of a person can be assigned or transferred to another person, wholly or partly, as per the LLP Agreement. Such assignment or transfer does not affect status and continuity of the LLP.
This provision has one similarity with the Partnership, being the right of assignment of whole or part of interest, and other similarity with a company being continuity of the entity irrespective of assignment or transfer of interest from one person to another.
Conversions The proposed Act provides for:
-- Conversion of a Partnership into an LLP; and
-- Conversion of a Private Limited Company into LLP.
These provisions and procedures are contained in the Second and Third Schedules to the Act.
Conversion of a firm into an LLP shall essentially require filing of documents essential for incorporation. There is effectively no other substantive requirement.
Conversion of a LLP from a private limited company requires that:
(i) there is no security interest against the assets of the private limited company; and;
(ii) onlythe shareholders of the private limited company become the members / partners of LLP.
Upon fulfilling the conditions of conversion as laid down in the Act, assets and liabilities of that private limited company shall lie with LLP and the private limited company shall be deemed to be dissolved without winding up.
Foreign LLP
A foreign LLP shall be required to be registered with SECP to operate in Pakistan. If so, the provisions of the Act shall accordingly apply.
Arrangements or reconstructions
There is a possibility under the law for arrangements within an LLP or between two or more LLPs for any compromise, arrangement or reconstruction. This is equivalent to 'merger' or 'demerger' of two or more LLPs' or split of one LLP into two or more entities. Federal Government will prescribe the procedure for the same.
Winding Up and Dissolution
There can be two forms of winding up and dissolution.
A voluntary winding up is the one undertaken as per the LLP Agreement. This will follow the procedure laid down in that LLP Agreement. A winding up resolution will have to be filed with the Registrar of LLP,and such resolution will be sufficient document for issuing a winding up order to be implemented in the manner laid down in that particular LLP Agreement.
The other case will be a winding up by the Court. The proposed Act has laid down conditions and circumstances where an LLP shall have to be compulsorily wound up by the Court. These situations interalia include:
1. If an LLP desires that the same be wound up by the Court;
2. If number of members falls below two;
3. If an LLP is unable to pay its debts; etc.
Partners' Lending
Partners of an LLP can lend to an LLP. In such circumstances,the lending will be treated as if it is a third party lending.
Application of the Provisions of Companies Ordinance, 1984
Provisions of the Companies Ordinance, 1984 shall apply to an LLP to the extent notified by SECP.
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