Thursday, June 14, 2012

On 16 March 2012 the new Limited Liability Partnerships Act, 2011 (“LLP Act”) took effect as law in Kenya. The Act introduces a new form of business association known as a limited liability partnership (“LLP”). The LLP combines some of the features of a traditional partnership with the limited liability benefits more typically associated with a company.
Some of the important features of an LLP include:

  • It is established through registration under the Act;
  • It must have at least 2 partners and 1 manager. The partners may be natural persons or a body corporate. The manager is to be a natural person;
  • An LLP is a separate legal entity from its partners. In this respect, it is similar to a company, and different from a typical partnership;
  • Partners of an LLP are not liable for the firm’s debts and obligations nor are they liable for each other’s debts and obligations. This is not the case with general partnerships;
  • However, individual partners in an LLP are liable for their own wrongful acts or omissions. The LLP is also liable for a partner’s wrongful acts or omissions, to the same extent as that partner, where the partner is engaging in the LLP’s business or acting with its authority.

The LLP structure provides a potentially useful alternative business vehicle to the private company. It has the benefit, at least at present, of being less regulated than a private company. From a tax perspective, it may prove more effective than a company because currently partnership income is taxed in the hands of the individual partners and not at the firm level, whereas companies are taxed at the entity level and any dividends also taxed in the hands of shareholders. It remains to be seen whether the Government would propose taxing the LLP at firm level given its separate legal personality. In some other jurisdictions that have introduced LLPs, such as the UK, India and the USA, the LLP has generally been treated as a pass through vehicle for tax purposes, thereby increasing its attractiveness as a business vehicle. Provided that Kenyan income tax laws are not amended to impose a tax on the LLP at firm level, then the LLP will also provide a superior alternative business vehicle to a general partnership. This is because the LLP will provide the same “pass through” taxation benefit as a general partnership, but in addition, offer limited liability to the partners akin to that offered by a company to its shareholders. Another potential benefit of an LLP over a general partnership is that the number of partners is not restricted. The Companies Act restricts the number of partners in a general partnership to no more than 20, but creates a carve-out for partnerships formed in pursuance of some other Act. The LLP, being formed by way of registration under the LLP Act, falls within this carve-out.

An unusual feature of the LLP Act is that it prescribes mechanisms to convert existing partnerships and private companies into LLPs. This appears to suggest that Government is interested in encouraging the use of this type of business formation, particularly for small to medium size enterprises, which would typically use the other types of business formation.

There is still uncertainty regarding how the LLP Act will be applied in practice due to the fact that it is still a very new piece of legislation and, as yet, no subsidiary rules and regulations have been published to provide guidance in this respect. Currently, the Registrar of Companies, which is also the Registrar of LLPs has not as yet developed administrative forms to facilitate the registration process and this may cause some delay in establishing the first LLPs.

We shall continue to update our clients on further developments regarding what promises to be a revolutionary new type of business vehicle in Kenya.