LLP vs Partnership: Choosing the Right Business

Starting your own venture is an exciting prospect, full of potential and a touch of the unknown. 

One of the initial, and rather important steps is deciding on the structure your business will take. Two common options that often come up in mind are the Limited Liability Partnership (LLP), which offers a blend of flexibility and limited liability, and the traditional partnership, where two or more individuals agree to share in a business’s profits or losses. 

For those looking to get started, understanding the company registration process is a key early step, and the requirements can differ based on the chosen structure. 

Both LLPs and partnerships have distinct features that can significantly influence how your business operates.

What Is Limited Liability Partnership 

LLP is a business structure that provides the benefits of limited liability to its partners, similar to a company, while also offering the flexibility of a partnership in terms of organisation and operation.

In Malaysia, LLPs are governed by the Limited Liability Partnerships Act 2012 (Act 743).

This structure offers a distinct advantage: partners are generally not personally liable for the debts of the LLP beyond their agreed capital contributions. 

Difference between an LLP and Sdn. Bhd.

One of the more questions is how LLP differs from Sdn Bhd, which is a private limited company. While both have similarities, they do have fundamental differences which business owners should consider:

• No issuance of shares in an LLP.
• LLPs offer flexibility in making decisions compared to the more structured processes of an Sdn Bhd.
• No formal requirement for an LLP to convene an Annual General Meeting.
• No requirement for an LLP to submit financial statements to the SSM.
• The accounts of an LLP do not have a mandatory audit requirement in most cases.

Advantages of a Limited Liability Partnership (LLP)

• Limited Liability: Partners are shielded from personal liability for the LLP’s debts and obligations, protecting their personal assets.
  
• Flexibility of Operation: LLPs have more flexibility in their internal structure and operational agreements compared to companies.
  
• Separate Legal Entity: An LLP is a separate legal entity from its partners, meaning it can enter into contracts and own property in its own name.
  
• Perpetual Succession: The LLP can continue to exist even if there are changes in its partners.
  
• Taxation: Generally, the income of an LLP is taxed at the partner level, similar to a traditional partnership.

Things to Consider with a Limited Liability Partnership (LLP)

• Compliance Requirements: While more flexible than a company, LLPs still have compliance obligations with the SSM, such as annual declarations.
  
• Public Disclosure: Certain information about the LLP and its partners is publicly accessible through the SSM.
  
• Complexity Compared to Partnership: Setting up and maintaining an LLP can involve more formalities than a simple traditional partnership agreement.

What is Partnership?

A traditional partnership involves two or more people agreeing to run a business together with the aim of making a profit. These individuals, known as partners, share in the business’s profits or losses.

Partnerships can bring together different skills and resources, allowing for greater growth and a wider range of expertise. 

Advantages of a Partnership

• More Capital: Partners can pool their financial resources together, making it easier to start or expand the business.
  
• Shared Skills and Expertise: Different partners bring varied talents and knowledge, which can benefit the business.
  
• Easier Access to Loans: With more individuals involved, securing business loans might become slightly easier.
  
• Shared Workload: Responsibilities can be divided among partners, potentially reducing the burden on one person.

Things to Consider with a Partnership

• Shared Liability: Generally, each partner can be held responsible for the business debts, even those incurred by another partner (joint and several liability). This is a significant difference from an LLP.
  
• Potential for Disagreements: Differences in opinion on business decisions can arise and need careful management. A solid partnership agreement helps here.
  
• Profit Sharing: Profits are shared according to the agreed terms in the partnership agreement, which might not always be equal.
  
• Complexity: Setting up a partnership often involves a detailed agreement outlining the roles, responsibilities, and profit/loss sharing of each partner.
  
• Continuity: The departure or death of a partner can sometimes lead to the dissolution of the partnership unless there are specific clauses in the agreement.

Read more: The 24% Question: How US Tariffs Could Affect Your Business

Key Differences Summarised

To make things clearer, here’s a quick look at the main distinctions:

Which Structure Fits Best? Matching Your Business Type

The choice between an LLP and a traditional partnership isn’t just about liability and paperwork, it also comes down to what kind of business you’re running or planning to start. Certain business models tend to find one structure more advantageous than the other.

Limited Liability Partnership (LLP)

• Professional Practices: If you’re setting up a firm with other professionals like lawyers, accountants, or architects, the LLP structure is often a popular choice. It allows you to share profits and manage the business collaboratively while typically protecting your personal assets from the liabilities arising from a partner’s actions.
  
• Moderate to High-Risk Ventures: For businesses where there’s a greater chance of things going wrong financially or legally, the limited liability offered by an LLP can provide significant peace of mind, shielding your personal wealth.
  
• Businesses Valuing Operational Flexibility: If you want to run your business with a good deal of freedom in how you organise things and make decisions with your partners, an LLP often provides that level of adaptability without the stricter rules that companies have.
  
• Businesses Eyeing Long-Term Growth: If you’re in it for the long haul and see your business expanding, the fact that an LLP can keep going even if partners change can offer a more stable foundation for the future.

Traditional Partnership

• Smaller, Lower-Risk Businesses: If you’re starting a smaller operation with less inherent financial or legal risk, a traditional partnership can be a simpler way to get going with fewer formal requirements.
  
• Businesses Prioritising Simplicity: For those who want to keep administrative tasks to a minimum, the generally lighter compliance burden of a traditional partnership can be appealing.
  
• Ventures Built on Shared Skills and Resources: When you and your partners each bring unique talents and assets to the table, a traditional partnership allows for easy collaboration and shared ownership.
  
• Early-Stage Businesses with Potentially Lower Profits: In the initial phases where profits might be modest, the way income is taxed in a traditional partnership (as individual income) could be more beneficial than the corporate tax structure that might apply to an LLP in some scenarios.

Remember, these are just general pointers. The best structure for your specific business will depend on a careful evaluation of your unique circumstances, your future ambitions, and your comfort level with risk and responsibility. 

LLP and Partnership Registration Process

In addition, to their difference on a business structural level. The steps to register an LLP differ from those of general partnership .

Registering a Limited Liability Partnership (LLP)

To establish an LLP under the Limited Liability Partnerships Act 2012, you’ll need to apply to the Registrar by furnishing specific information. The registration fee for a new LLP or for conversion into an LLP is RM500. 

The application typically requires the following details:

• Name of the proposed LLP
• General nature of the proposed business of the LLP
• Proposed registered office of the LLP
• Name and details of every person who is to be a partner of the LLP
• Name and details of compliance officer(s) of the LLP

Approval Letter (for Professional Practices): If the LLP is formed to carry on any professional practice listed in the First Schedule of the LLP Act 2012, the application must include an approval letter from the relevant governing body specified in that schedule.

Once this information is provided and the fee is paid, and upon successful review, the SSM will issue a Certificate of Registration, officially recognising your LLP.

Registering for a Partnership

Creating a traditional partnership is generally less formal in terms of registration with the SSM, as it is primarily governed by the Partnership Act 1961. 

However, it’s essential to have a comprehensive partnership agreement. While not always mandatory to register this agreement with any specific authority, it’s highly advisable for clarity and legal standing as disagreements over business directions and profits may arise.

Key aspects of setting up a traditional partnership include:

1. Partnership Agreement: Drafting and agreeing on the terms of the partnership agreement. This document should outline crucial aspects such as:
   
   • The names of the partners.
   • The business’s name and nature.
   • The capital contributions of each partner.
   • The ratio for sharing profits and losses.
   • The roles and responsibilities of each partner.
   • Decision-making processes.
   • Procedures for admitting new partners or the withdrawal of existing ones.
   • Dispute resolution mechanisms.
     
2. Business Name Registration: While the partnership itself might not require formal registration in the same way as an LLP or company, registering the business name with the SSM is still a good practice.
   
3. Tax Registration: All partners will need to register with the Inland Revenue Board of Malaysia (LHDN) for tax purposes, and the partnership itself will need a tax file.

Remember that specific requirements and procedures can be subject to change, so it’s always a good idea to verify the latest information with the SSM and seek professional accounting services for advice.

Making the Right Choice for Your Venture

Deciding between an LLP and a partnership depends on several factors, with the level of liability protection being a primary consideration for most.

1. Liability Exposure

It is important to assess the potential for financial risks within your business operations. Should your venture encounter significant debt or legal challenges, the limited liability advantage of an LLP protects your personal assets from business obligations. 

This contrasts with a traditional partnership, where personal assets are also exposed to business liabilities.

2. Operational Flexibility

Consider the degree of autonomy you want for your business. An LLP generally permits greater flexibility in structuring internal operations and decision-making processes compared to the more regulated framework of companies. 

Partners in an LLP can often establish operational procedures tailored to their specific needs without the extensive statutory requirements for formal meetings and resolutions.

3. Legal Formalities

While an LLP provides the benefit of limited liability, it does mean total compliance with regulatory filings submitted to the SSM annually. 

This level of formal compliance is generally greater than that associated with a traditional partnership, which often operates primarily under the terms of its partnership agreement.

4. Long-Term Vision

Consider the projected vision of your business. The separate legal identity of an LLP, combined with its capacity for perpetual succession (continuing its existence despite changes in partners), can be a more stable foundation for sustained growth and longevity. 

This can differ from a traditional partnership, which may face dissolution upon the departure or demise of a partner. Careful consideration is required here.

5. Partner Dynamics

The strength of professional relationships and the level of trust among your intended business partners should honestly be your first assessment and consideration when it comes to business structure. 

While a comprehensive agreement outlining responsibilities and profit distribution is important for both LLPs and traditional partnerships, the direct personal liability inherent in a traditional partnership highlights the need for confidence and trust in your partners’ professional conduct. Any action they take can and will directly affect your personal financial security.

Conclusion On LLP vs Partnership

Choosing the correct business structure is a crucial first step that can significantly impact your journey as an entrepreneur. Take your time, weigh the pros and cons, and seek advice to lay a solid foundation for your business success.

It’s also a good idea to have a chat with professionals, such as those providing accounting services and legal advisors in Malaysia.

At Accounting.my, we offer comprehensive accounting services to support your business from its inception and beyond. For those considering the benefits of an LLP, we facilitate a seamless register company Malaysia process, guiding you through each step to get your business officially started with the right structure.