At present, the options available under the 1984 Companies Ordinance for the formation of a legal entity are a
“public company”, “private company”, “single member company”, “association not for profit” and “guarantee limited
company”. With the passage of time,the professional services sector has shown an appreciable growth. The
only option currently available is for a few professionals is to join and form a general partnership.
However, a general partnership does not have a legal personality. It merely comprises of its partners, unlike a company, which is an artificial person, it cannot create a charge on its assets, contract in its own name or hold property.
In fact, contracts made are enforced against partners either individually or jointly with each other. Without the
partners, therefore, a partnership has no existence of its own. Hence, the bill on “The Limited Liability Partnership Act 2014” has been moved, which will provide an enabling environment for the growth and regulation of professional
services sector. It is envisaged that the proposed law to broaden the corporate sector by bringing this large and unregulated segment under the regulatory framework. This business structure shall appeal to lawyers, chartered accountants, cost accountants even small entrepreneurs or other professionals perhaps doctors and engineers for carrying out their professional practice while enjoying the benefits of limited liability. It is an ideal opportunity for
small entrepreneurs to reassess their business structure and reorganize it in a smart manner under the LLP regime.
Small entrepreneurs can reap financial benefits such as setting up the business at a lower cost, registering higher
profit margins, with reduced chances of facing legal consequences. The law aims to make these professionals
globally competitive and by having a corporate identity their contribution shall be recorded in the nation’s
However, an LLP cannot be formed for charitable purposes because it has been designed for mutual benefit and profit earning through commercial purpose, whereas a charitable organization or trust are formed with the objects of welfare. LLP is a hybrid business model combing the characteristics of a ‘corporation’, ‘company’ and ‘partnership’, blending together the benefits of these business forms.
The LLP is a partnership in which all partners have limited liability in an incorporated entity and the legal entity is separate from its partners. The concept of limited liability partnership was introduced for the first time in the United States in the 1990s. The idea of LLP was well taken and many other countries such as the UK, Singapore, India, Japan, South Africa, introduced laws for governing LLPs.
One of the key differences between a general partnership and LLP is that whilst in a general partnership individual partners are personally liable for the partnership’s debts and obligations, a LLP provides each of its individual members the protection against personal liability for certain partnership liabilities and limits the liability of each partner. As the name suggests, it has the features to protect the partners’ liability. Any debts and obligations of the LLP will be borne by the assets of the LLP and not that of its partners. In a company, the constitutional document is the Memorandum and Articles of Association, which binds all shareholders and directors. However, under an LLP the rights and duties of the partners of an LLP and is the LLP shallbe governed by the LLP agreement. Unlike a company, which is subject to stringent compliance requirements of the law, an LLP shall be provided with flexibility of organizational arrangement and comparatively fewer regulatory compliance requirements.
The Salient Features of a Limited Liability Partnership are:
- The LLP is a body corporate and legal entity separate from its partners.
- The LLP will have perpetual succession.
- The LLP shall be governed by an agreement between the partners or between the LLP.
- The LLP shall be liable to the full extent of its assets with the liability of the partners being limited to their agreed contribution in the LLP.
- No partner shall be liable to the independent or unauthorized action of the other partners or their misconduct.
- Every LLP shall have at least one partner as designated/managing partner whose duties and obligations shall be provided in the law. He shall be a resident in Pakistan.
- Lesser compliance requirements.
- Easy registration (payment of a flat fee, statement by every person who is to be partner of the LLP, partnership agreement containing the proposed name of the LLP, nature of business to be transacted, physical existence/registered office, details of allpartners /designated partner, minimum capital requirement and minimum contribution by the partner(s))
- Easy exit.
- Transfer of ownership (legal heirs to assume partnership
- Provides for conversion of existing status.
- Exemption from audit.
- Income tax to be charged in the hands of the LLP and not in the hand of the individual partners.
- Maintaining solvency.
- Foreign investment allowed in LLP subject to approval by the Interior Ministry