limited liability partnerships act 2005

technical limited liability partnerships act 2005 relevant to Professional Scheme Paper 2.2 (SGP) conducting business The Limited Liability Partnerships Act 2005 (‘LLP Act’) came into force in Singapore on 11 April 2005. Under the Act, it is now possible to set up a limited liability partnership (LLP) – a new business vehicle in addition to the traditional company or firm (comprising sole proprietorships and general partnerships). This article looks at the rationale behind the LLP Act and the nature, formation, management, dissolution, and tax treatment of an LLP All . sections and parts referred to in this article refer to the LLP Act, unless otherwise stated. REASONS FOR INTRODUCING LLPs Up until 11 April 2005, a person intending to start a business could only set up a firm or a company. A firm is a low cost business vehicle, but suffers from the fact that it is not a legal entity separate from its owner(s). This means that the owners of the firm have unlimited liability for all the debts and liabilities incurred by the firm. In addition, the restriction on a firm’s size inhibits its growth. In contrast, a company is a legal entity separate from its members and therefore the members are not liable for the debts and liabilities of the company. However, the high cost involved in the setting up and the maintenance of a company, and the onerous reporting requirements imposed on its operations make it an unattractive option for small businesses. The Company Legislation and Regulatory Framework Committee, set up in 1999, had recommended, inter alia, that an LLP that combined features of both a partnership and a company should be introduced so as to increase the options available to business people and investors. A study team on LLPs was appointed by the Ministry of Finance in November 2002, and the LLP Bill was finally presented to Parliament on 19 October 2004. During the drafting process, the study team essentially consulted two documents: the UK Limited Liability Partnerships Act 2000 (the ‘UK LLP Act’) and the US Delaware Revised Uniform Partnership Act (the ‘Delaware Code’). The LLP Act therefore contains features drawn from these two pieces of legislation. For instance, as in the UK and US, an LLP in Singapore is a legal entity separate from its partners, and comes into existence following its registration with the Accounting and Corporate Regulatory Authority (ACRA). The LLP also has unlimited legal capacity to contract and conduct business with perpetual succession. However, unlike a UK LLP which can only be formed by a new , registration, in Singapore an existing general partnership or a company can be converted to an LLP just as in the Delaware Code (Part IV). , In addition, the LLP Act goes further than the Delaware Code by providing for the transfer to, and assumption of, all the business, undertaking, assets and liabilities etc, of a partnership firm or a company which proposes to reconstitute its business under the LLP (see Second and Third Schedules). Although a detailed examination of the distinctions between the LLP Act and its UK and US counterparts is outside the scope of this article, it is important to note that the Singapore LLP Act is a unique piece of legislation. Care must therefore be exercised if attempting to compare LLPs from these two jurisdictions with local examples. NATURE OF AN LLP In a nutshell, an LLP is like a company on the outside but remains very much like a partnership within. With respect to third parties and external relations, an LLP is similar to a company in that it is a body corporate with a separate legal entity from that of its partners. It has perpetual succession, and any change (including death (section 11) or bankruptcy (section 12)) to the status of one or more of the partners will not affect its existence, rights or liabilities (section 4). It can also sue and be sued in its own name, acquire and hold both movable and immovable property, have a common seal, and undertake all activities – just as a company can (section 5). It can even ratify any contract or transaction entered into or made on its behalf prior to its formation, just as a company March 2006 student accountant 45 (section 5(2) – read together with section 41 of the Companies Act). Most importantly, all obligations of the LLP remain those of the LLP and a partner , of an LLP is not personally liable, by way of indemnification, contribution, or otherwise, solely by reason of being a partner (section 8). However, if a partner is personally liable to a third party as a result of a wrongful act or omission in the course of the partnership business, the LLP will be liable to the same extent as the partner (section 8(4)). The rest of the partners will not be personally liable for the acts committed by the negligent partner. In addition, an LLP is also subject to relatively more disclosure and reporting requirements as compared to a general partnership, although not as extensive as those for a company. For instance, an LLP is required to lodge an annual declaration of solvency with ACRA, and failure to do so will incur criminal sanctions (section 24). This will be discussed further in the section on management of the LLP . With respect to the relationship of the partners, an LLP is very much like a general partnership. Partners of an LLP can agree among themselves as to how they will share the capital and profits, and can decide on other issues by drawing up an LLP agreement. In the absence of such an agreement, or if a particular issue is not dealt with in the agreement, there are default statutory provisions under the First Schedule of the LLP Act that help to set out the rights and duties of the partners. For example, in the absence of any agreement which provides otherwise, partners are entitled to share equally in the capital and profits of the LLP and the LLP must indemnify , each partner for payments made in the ordinary course of its business. Fiduciary duties are also owed by the partners to the other partners and to the LLP . This means that every partner must give a true and full account of all things affecting the LLP and no partner can carry on business of , the same nature as, and therefore competing with, the LLP In addition, every partner must . account to the LLP for any benefit derived from a transaction concerning the LLP but , undertaken without the consent of the LLP or , from any use of LLP property. 46 student accountant March 2006 technical FORMATION OF AN LLP As mentioned earlier, under the LLP Act an LLP in Singapore can be formed in two ways – by registering a new LLP entity or by converting an existing general partnership or private company. Registration with ACRA can be carried out online through the use of BizFile. The registration fee is currently S$150, compared to S$300 for a company. Various particulars are required for registration, including the name of the proposed LLP the , general nature of its business, its registered office and the name, identification (if any), nationality and usual place of residence of every person who is to be a partner (section 15). However, unlike a company, there is no need for an LLP to file a constitutive document, such as a memorandum and articles of association1. In addition, the LLP agreement among the partners remains a private document and need not be submitted to ACRA. An existing general partnership or private company can also submit an online application to convert to an LLP (sections 20 and 21). This is on the condition that all the partners of the general partnership, or the shareholders of the company, are going to be partners of the LLP The company must also have no . outstanding security interests in its assets at the time of the application for the conversion (paragraph 2, Third Schedule)2. In order not to prejudice creditors, when a general partnership converts to an LLP , the partners will continue to be personally liable (jointly and severally with the LLP) for liabilities and obligations which were incurred, or which arose from any contract agreed, prior to the conversion (paragraph 15(1), Second Schedule). However, as all the assets of the firm are transferred to the LLP and no longer belong to individual partners upon conversion, the partners are conferred a right to be indemnified by the LLP in the event that they are called upon to discharge their liability or obligation under paragraph 15(1) of the Second Schedule (paragraph 15(2)). Just as for a company formed under the Companies Act, every LLP must have either the words ‘limited liability partnership’ or the acronym ‘LLP’ as part of its name (section 18). All invoices and official correspondence must also bear its name and registration number, and state that it is registered with limited liability (section 27). The latter is meant to serve as a safeguard to inform potential contractors or creditors that they are dealing with a limited liability entity and not a general partnership with unlimited liability3. Every LLP must have at least two partners, whether individual or body corporate (sections 7 and 28). This is unlike the Delaware Code which leaves the issue of a one-person LLP open4. Even though the LLP Act does not provide for an upper limit to the number of partners, section 17 of the Companies Act generally requires partnerships with more than 20 partners to be incorporated as a company, and this also applies to an LLP5. MANAGEMENT OF AN LLP In the absence of any agreement to the contrary, every partner in an LLP has the right to take part in the management of the LLP (paragraph 4, First Schedule). However, a partner may not receive remuneration for being a partner as such unless otherwise agreed (paragraph 5, First Schedule). In addition, management decisions in an LLP are to be made by the majority of partners, with each partner having one vote (paragraph 7, First Schedule). In addition to partners, an LLP also requires the appointment of a manager, who must be over 21, ordinarily resident in Singapore (section 23), not an undischarged bankrupt (section 33), nor in any way disqualified by the court to be a manager of an LLP (sections 34–37). The manager is responsible for the various filing requirements imposed under the LLP Act, just like a company director or a secretary. The manager need not be a partner of the LLP (section 2). This is different from the UK position, which does not require the appointment of a statutory manager6, and allows greater flexibility for the LLP to employ professional managers to manage its business. However, the manager of an LLP is also subject to onerous statutory duties and liabilities similar to those of a company director. For instance, the manager is responsible for making the annual solvency declaration under section 24, ensuring that the LLP’s invoices and official correspondence bear the name, registration number and limitation statement under section 27, and informing ACRA of any change in particulars under section 28. If the manager fails in any of the above duties, they are personally liable for all the penalties imposed on the LLP unless they obtain leave from the court (section 23(3)). In addition, a manager can also be disqualified for up to five years by the court on the grounds of unfitness (section 34), national security or interest (section 35), on conviction of certain offences (section 36), or upon a disqualification order being made under the Companies Act (section 37). DISSOLUTION OF AN LLP The dissolution of an LLP is very similar to that of a company, in that the LLP Act provides for both voluntary and court-imposed winding up (Fifth Schedule). In a voluntary wind up, the manager of the LLP must file a declaration of solvency with ACRA (paragraph 40, Fifth Schedule), similar to that made by the directors of a company seeking voluntary wind up (section 293, Companies Act). However, whereas a company may be voluntarily wound up if the members pass a special resolution (section 290, Companies Act), it would appear in the wording of the LLP Act that a majority of the partners can resolve to dissolve an LLP (paragraph 36, Fifth Schedule read with paragraph 7, First Schedule)7. For a court-imposed winding up, the grounds are similar to those found in the Companies Act. In addition, the LLP Act also allows the court to wind up an LLP if the court is of the opinion that it is not reasonably practicable to carry on the business of the LLP in accordance with the LLP agreement (paragraph 3(d), Fifth Schedule). This will allow an innocent partner to apply to court to dissolve the LLP should another partner breach any term of an LLP agreement. Other issues, such as the effect of commencement of winding up, the appointment and powers of the liquidators, and proof and ranking of claims etc, are treated in a very similar way to those of companies. Receivership of an LLP is also possible, and the provisions governing receivership of companies have been duplicated in the LLP Act. However, unlike companies, judicial management and schemes of arrangements are not applicable to LLPs8. TAX TREATMENT OF AN LLP Just like the LLPs in the UK and US, under the Act, an LLP is taxed as a partnership instead of a company. Even though an LLP is a body corporate, an LLP is tax transparent, meaning that it itself is not subject to taxation. Instead, the partners of the LLP are taxed on their share of the LLP’s income or gains, according to their individual income tax rates9. CONCLUSION It is still too early to judge the success of the LLP as a business vehicle. In a seminar held by ACRA for the Singapore Business Federation, it was revealed that around 138 LLPs were registered between the launch of the LLP Act on 11 April 2005 and 3 June 2005, of which 30 converted either from a firm or a company10. Undeniably, the LLP gives more choice when assessing the best way to conduct a business. Although an LLP gives owners the flexibility of operating as a partnership within the limited liability framework, at the same time it is exposed to the weaknesses of the two traditional business regimes. On one hand, unlike shareholders of a company who do not owe fiduciary duties to each other, the partners of an LLP still have duties of disclosure and good faith to one another. On the other hand, the onerous requirements imposed upon a manager of an LLP and the reporting requirements, make it , a less attractive alternative (as compared to a general partnership) to business people who value less formality and a greater degree of privacy. Ultimately, the business community has to carefully consider the pros and cons of the various business organisations in order to determine the best vehicle that suits both their short and long-term needs. REFERENCES 1 This is unlike the UK requirement where parties need to file an incorporation document in the format approved by the Registrar (see section 2 of the UK LLP Act). 2 See FAQ section of the ACRA website at www.acra.gov.sg/index.html 3 Paragraph 7.3.2 of the Report of the Study Team on Limited Liability Partnership, March 2002 (hereafter, the LLP Report). Can be viewed and downloaded at http://statutes.agc.gov.sg/agc/Publications/ LawRefmRep/Limited_Liability_ Partnership_Final_Mar_2002.pdf 4 Paragraph 7.5 of the LLP Report. 5 This may not be the intention of the LLP Act, as seen from the LLP Report, paragraph 7.4. However, section 17 of the Companies Act as it stands has the effect of restricting the maximum number of partners in an LLP especially in a , business LLP . 6 Arguably, the role of the manager under the Singapore LLP Act is similar to that of the designated member under the UK LLP Act (section 8, UK LLP Act). However, under the UK LLP Act, the designated member must be one of the partners. 7 This may not be the intention of the study team, which submitted (in their earlier draft report) that the voluntary winding up of an LLP should be allowed if all the partners agree to do so (see paragraph 12.3.3 of the LLP Report). 8 The study team felt that an LLP is essentially a partnership with limited liability through the interposition of a legal entity between the partners and the persons dealing with the partnership business, see paragraph 12.3.5 of the LLP Report. 9 See paragraph 8 of the LLP Report, and also the circulars issued by the Inland Revenue Authority of Singapore on 15 July 2004 (revised on 16 July 2004) and on 10 June 2005. 10 See Q&A for SBF Seminar on LLP Act held on 3 June 2005 on the ACRA website at www.acra.gov.sg/index.html Professor Lan Luh Luh is examiner for Paper 2.2 (SGP) March 2006 student accountant 47 technical