By Pravin Bowry

Traditionally, most businesses in Kenya have been run as limited liability companies, private and public, under the Companies Act and as partnerships registered under the Business Names Act usually called firms.

The old legal and acceptable law is that a limited liability company is distinct from its shareholders.

Under the Limited Liability Partnerships Act (Act No. 42 of 2011), a new hybrid method of conducting business has now been given greater legal sanction in Kenya by the Act being brought into operation on March 16, 2012.

A Limited Liability Partnership (LLP) is defined as a partnership registered under the Act. On being registered, an LLP becomes a body corporate with perpetual succession (irrespective of changes of partners) with a legal personality separate from that of its partners. 

This means that the debts incurred by an LLP would be paid out of the assets of the LLP and not from the assets of individual partners save for specific cases where a partner would be personally liable for acts or omissions that do not bind the partnership.

An LLP differs from the common partnership under which the partners are liable personally for all debts and obligations of the partnership. In LLP, in contrast, the partners are only liable in contract and tort and otherwise only to a certain extent since they enjoy the status of a corporate body.

The shareholders in LLP are separate from the partnership very much akin to a limited company.

LLP is fairly easy to register and establish under the Act.  The registration process has certain level of flexibility without imposing detailed legal and procedural requirements, unlike that of a limited liability company under the Companies Act which requires a Memorandum and Articles of Association and other statutory forms.

The relationship of the partners in an LLP is to be governed by the limited liability partnership agreement and if there is no such agreement then the partnership will be governed by the Act.

It is also worth noting that Section 8 of the Limited Liability Partnership Act provides that the Partnerships Act shall apply to a limited liability partnership except so far as a provision of the LLP Act otherwise expressly provides.

However, a reading of the LLP Act, one is able to observe that the Act makes a few changes from those in the Partnership Act. For instance, under the Partnership Act, a partnership is automatically dissolved upon the departure of one or more of the partners, while the LLP Act provides that there shall be continuity in the partnership business.

The LLP Act repeals the old and outdated Limited Partnerships Act, Chapter 30 Laws of Kenya.

Another advantage of the new LLP Act is that partners are not liable for the act(s) of other partners, and that the Act only requires the partnership to maintain proper accounting records under section 30 and to lodge annual declaration of solvency or insolvency with the Registrar.

There is no requirement to maintain statutory records.

An interesting aspect which can be an advantage (sometimes even a disadvantage) is the fact that one partner can assign his interest in the LLP to another person not necessarily being a partner.

This provision can be used where there are only two partners and there is a deadlock in the management of the business to force out one partner since the assignee is also entitled to participate in the management of the business.

The Act also provides for electronic lodgement of documents with the Registrar. This can be quite advantageous as it saves on time and costs. In practice, the Registrar of Limited Liability Partnerships doubles up as the Registrar of Companies.

The new concept has certain disadvantages. An LLP cannot raise funds from the public, and also the fact that there is no separation of management from owners. The Act provides for a manager to run the management aspects of the LLP, while in a limited liability company there are directors who do so.

The manager of an LLP would have unlimited liability in certain instances where he/she is required to file certain documents with the Registrar.

An existing partnership can apply to convert into an LLP, and similarly, an existing private company may apply to convert into an LLP and it is anticipated many businesses are going to rethink the best way to undertake business in Kenya.

It would appear all is going to boil down to various aspects of payment of tax, taxation methods and tax evasion and manipulation.

The Income Tax Act stipulates that for a partnership, the tax payable is on the gains and profits of the partnership which includes remuneration payable to a partner and his/her share of the total income of the partnership. That being the case one can manipulate paying tax since an LLP is a form of corporate partnership and the partners are not entitled to any remuneration for acting in the business or management of the partnership.

The question which will soon surface is whether LLP’s are instruments of paying less tax, and whether a tax lacuna has been created by law.

The writer is a lawyer.

bowryp@hotmail.com