Limited Liability Companies (“LLP”) did not exist in Pakistan until the relatively recent enactment of the Limited Liability Companies Act 2017 (the “LLP Act”) and the Limited Liability Companies Regulations 2018 (the “LLP Rules”).
The Partnerships Act dates back to 1932 (called The Partnership Act, 1932 (Act No. IX of 1932) and only provides for general partnerships with joint and severally liable partners.
LLPs were introduced due to the perceived strong demand from business owners for an alternative business structure to the traditional general partnership structure, also known as associations of persons (“PDO”) and the possibility of setting up private or limited companies. LLPs now offer an additional option in terms of setting up a business in Pakistan.
HOW ARE LLPs INCORPORATED?
The Securities and Exchange Commission of Pakistan (“SECP”) is the authority empowered under the LLP Act to register and manage all regulatory affairs of LLPs. Anyone wishing to form an LLP must first and foremost apply to the Registrar, SECP for the reservation of a name for the LLP. The applicant must ensure that the proposed name of the LLP meets the criteria specified in the LLP Act and the LLP Rules.
Once a name has been reserved, two or more persons associated for the operation of a lawful business for profit must prepare and sign a written agreement / deed between them which determines the mutual rights and duties of the partners and their rights and duties in relation to the limited liability company (“LLP Agreement”).
For incorporation of an LLP, the signed LLP Agreement, an Application for Incorporation, and a statement from the partners indicating that all registration requirements of the LLP Act and LLP Regulations have been met must be filed with the Registrar. SECP. . Upon receipt of the above documents, the Registrar reviews them and, if satisfied that they are complete and meets the requirements of the LLP Act and LLP Rules, issues a Certificate of Incorporation.
To facilitate global businesses, LLPs formed, incorporated and registered in foreign jurisdictions (“Foreign LLP”) may also register in Pakistan by filing an application for incorporation with the Registrar and complying with certain provisions of the LLP Act and subsidiary legislation thereunder.
THE ADVANTAGES OF INCORPORATING A SENCRL
LLPs have existed in other common law jurisdictions for decades and have the flexibility of an AOP while benefiting from the limited liability protections associated with corporations. It is designed and regulated as an alternative to a traditional general partnership (AOP) or corporation, to enable entrepreneurs and small and medium-sized enterprises to jointly organize and operate their businesses efficiently and profitably.
The primary benefit of incorporating an LLP is limited liability – an LLP being a Corporation and therefore, a separate legal entity from its Constituent Partners. This gives the LLP the ability to hold property, perform contracts and incur obligations on its behalf with liabilities and obligations resting with the LLP itself rather than jointly and severally with the individual partners whose personal assets are secure and separate from those of the LLP. Each partner’s liability is limited to his property in the LLP and generally cannot extend to his personal assets.
In addition, LLPs do not involve as rigorous compliance and disclosure requirements as corporations and do not incur high operational costs compared to ordinary LLCs.
Third, there is a significant tax advantage. Corporations in Pakistan are taxed separately from their owners/shareholders. However, LLPs, being of the nature of partnerships, are unlikely to be subject to taxation at two levels, at the entity level and at the shareholder/partner level since the profits of the LLP, just like those from an AOP, will likely pass through to the partners, who will then pay the appropriate personal income tax on their share received.
It should be noted that while the above tax treatment of LLPs would be consistent with the way LLPs are regulated and taxed globally, in Pakistan, given that the structure is still new, the tax authorities still have not taken a definitive position on this subject and confusion exists because LLPs are Moral people and under the current interpretation of Pakistani tax laws by the tax authorities, corporate bodies are considered corporations for tax purposes and not PDOs.
Finally, LLPs are also not required to meet the maximum limit of twenty for the number of partners they can have, unlike AOPs registered under the Partnership Act, 1932.
ANNUAL COMPLIANCE REQUIREMENTS FOR LLPs
Generally speaking, the annual compliance and disclosure requirements for LLPs are significantly less onerous than those for businesses.
It is mandatory for each LLP to obtain, maintain and update the details of each Ultimate Beneficial Owner (“UBO”) of the LLP and declare it to the SECP on an annual basis.
A UBO has been defined as a natural person who ultimately and effectively owns or controls a limited liability company through direct or indirect rights or who shares at least a quarter of the net profits and losses of the company.
In addition, LLPs are also required to register and maintain accurate books of accounts at their registered office relating to their status for each year of their activities.
LLPs are further required to appoint a qualified and registered chartered accountant as an auditor within sixty (60) days of incorporation with the SECP.
CONVERSION IN SENCRL
The LLP regime makes it possible to transform a company or a PDO into an LLP. In this regard, conversion means a transfer of ownership, assets, interests, rights, privileges, liabilities, obligations and liability of the company/AOP to the LLP in accordance with applicable law.
The conversion procedure requires that a declaration and a document of incorporation be filed with the Registrar. These filings must describe the details of the company’s/AOP’s incorporation, financial liquidity and its creditors’ consent to the conversion. Filings are reviewed and reviewed by the SECP Registrar who, if satisfied with compliance, issues a Certificate of Incorporation.
The transformation of a commercial enterprise into an LLP does not, however, have any impact or extinguishment on the commercial activities and obligations of the latter. Specifically, all agreements, contracts, legal proceedings, orders, judgments, employees, appointments, liabilities and obligations associated with the Company/AOP prior to its conversion to an LLP continue to be enforceable and enforceable against the LLP pursuant to such conversion.
INSOLVENCY / REORGANIZATION
It is currently unclear which insolvency regime limited liability companies will be subject. Under the LLP Act, the federal government has the choice of making rules to govern the liquidation and dissolution of LLCs, or notifying the provisions of the Companies Act of 2017 to apply to their liquidation. To date, the federal government has done neither. Similarly, the LLP Act contains a section (s. 28 (Compromise, arrangement or reconstruction of limited liability partnerships) under Part XI under which the federal government has the choice either to make rules to govern the reorganization of limited liability companies or to notify the provisions of the Companies Act to apply to such reorganizations, but no rules or notifications are available.
In conclusion, the LLP regime provides an attractive opportunity for small and medium-sized businesses to benefit from the protections of incorporation and limited liability while ensuring that their compliance and regulatory costs are kept to a minimum. These advantages can make LLPs the preferred choice of business entities for many new businesses starting operations in Pakistan.