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Comparison Between Limited Liability Companies (LLC) & Limited Liability Partnerships (LLP)

This article is provided by Muriithi & Ndonye Advocates.


A limited liability company (hereinafter referred to as an LLC) is incorporated under  the  Companies  Act, while  a limited  liability  partnership  (hereinafter referred to as an LLP) is incorporated under the Limited Liability Partnership Act,

2011, Cap 30A of the Laws of Kenya.

 Limited Liability Companies (LLC) Features of an LLC;

1.  May be incorporated by a single person or more persons;

2.  Members of the company have limited liability; that is the financial liability of shareholders of a company for the  company’s debts and obligations is limited to the par value of the shareholder’s fully paid –up shares.

3.  Must  have a nominal capital save for companies limited by  guarantee whose main object is usually charitable.

4.  A  company is a separate legal  entity  from   the shareholders  and the directors. Accordingly, it has the power to own property in its own name, to sue and be sued in its own name and has perpetual succession.

5.  An  LLC  may have a  common seal. A  document is  executed by   a company;

a. By the affixing of its common seal (if any) and witnessed by a director; 

b. If it is signed by  two authorized signatories; or 

c. If it signed by  a director  of  the company in the presence of a witness who attests the signature.

A document is executed as a deed by  a company if it is executed by  an attorney or a person authorized by the company to execute deeds on its behalf.

6.  Upon   incorporation, an  LLC   must  file   returns  with   the  Registrar   of Companies every successive year. The return must indicate the registered office  of  the company, the nominal  capital  of  the company, list  of  past and present members of  the company, shareholding  of  the members of the company and particulars of directors of the company.

 Disadvantages of a Company

 1.  Formality and expense incorporation  of  an LLC  is costly  as  it  requires a number of formalities to be complied with.    Administration of an LLC is equally costly as a lot of legal formalities must be complied with.

 2.  There  is  an element  of  double taxation  –  that is,  the company pays corporate  tax  at  30%   and  tax  on  the  dividends  distributed  to  the members, at 5%.

 Limited liability Partnership (LLP)

 This  is  a  unique type of  business  association   that  combines elements   of  a company with those of a partnership.

 Features of an LLP

 (a) Must  be formed  by  at least  two persons associated  for carrying  on a lawful business with a view  to making a profit;

(b) May or may not have a written limited liability partnership agreement that determines the mutual  rights  and duties  of  the partners  and their  rights and duties in relation to the partnership;

(c) Limited  liability  for the partners  – the financial  liability  of  the partners  for the debts  and obligations  of  the partnership  is limited  to the amount invested by each partner;

(d) Perpetual succession  of  the partnership-  death of  a partner  does not affect the continuity of the partnership;

(e) Capacity for suits – an LLP can sue or be sued in its own name;

 (f) Separate Property – an LLP is capable of acquiring, owning, holding and developing  or  disposing of  movable and immovable  property in its  own name;

(g) An LLP is a separate legal personality from  its partners;

 (h) An  LLP  must acquire and maintain  a common seal  that bears  its  name and to use the seal for the execution of all documents that by  law are required to be sealed;

(i)  There is no requirement for minimum capital unlike a company;

 (j) There is no double taxation – that is, profits are taxed at the partner level and not at the LLP level. A company on the other hand incurs an element of  double taxation  as  the company is subject to corporate tax  while  the shareholders pay tax on any dividends received by them;

(k) Incorporation costs - the process of registration of an LLP is less costly than that of a LLC as fewer formalities need to be complied with;

(l)  There  is less  administrative  paperwork  and record keeping compared to an LLC;

(m)  Management  structure   –  the partners   manage  the  business directly unlike   a  Company which requires a  board  of   directors   elected   by shareholders;

(n) Audited  accounts  –  this  is no requirement for audited  accounts  unless requested by  the Registrar  of  companies office.  This  is unlike  a company where the law requires a company to have its accounts audited annually by a certified accountant;

Disadvantage of an LLP

 1.  Taxation-  profits  made partnership  and paid to the partners  is subject to Pay as you Earn (P.A.Y.E) which is on a graduating scale. This is in contrast with the corporate tax charged on LLC which is pegged at 30%.

 Conclusion

 The  Limited  Liability Partnership  Act  allows  for conversion of  private  companies to  LLP   upon  such  companies  complying   with   certain   legal   requirements amongst them the requirements that;

1.  No security interest over the company's  assets  is subsisting at the time of the application; and

2.  The company is a private company in which the partners of the proposed limited liability partnership comprise all the shareholders of the company and no one else.

 It  is important  to highlight  that the Companies, Act  2015  seeks to simplify  the incorporation and administration of companies. Accordingly certain formalities have been made optional for certain types of LLC.

 

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