Upon receiving a welcoming response from the readers on my previous article titled, “The Way Forward”, published in The Nation on June 4, 2013, I write to further expand and elucidate the concept of Limited Liability Partnerships (LLPs) and how they can be inculcated in Pakistan, as a viable business model for small and medium investors, and for professional service firms such as that of accountants, lawyers, medical practitioners, etc.

A Limited Liability Partnership is a body corporate with separate legal personality from that of its members, in that, LLPs are capable of holding rights and duties in their own name distinct from that of the partners who are its members.

In this way, the LLP model serves as a hybrid between a conventional partnership and a company registered under the Companies Act. In other words: “An LLP combines the characteristics of a company and a partnership firm that provides the protection of limited liability for its partners and the flexibility of the partnership arrangement for the internal management of the business” (source: SSM, Companies Commission of Malaysia: General Guidelines for Registration of LLPs and related matters).

The LLP structure encompasses several benefits for the business community that the previous business models did not. For instance, the traditional partnership law does not apply to LLPs; and hence, LLPs have perpetual succession. This shows that LLPs do not terminate upon the death or resignation of one partner from the partnership.

Likewise, no representatives of a deceased or insolvent partner have any rights or duties in respect of the LLP.

Furthermore, while the incorporation of a company requires the Articles of Association to be submitted at the time of incorporation, the LLP Agreement regulating the mutual rights and duties of partners may be submitted even after the LLP has been incorporated and a certificate to that effect has been issued by the Registrar. Therefore, it is possible to set up an LLP with lesser requirements as compared to that of setting up of a company.

In comparison to companies, the taxation and disclosure requirements of the LLP may also vary, in that, the partners of the LLP need not disclose any charges or contracts, which they are interested in, nor do they have a statutory requirement to maintain records or hold meetings even though they can be expected to maintain a minute book for sake of internal transparency.

On the flip side, however, the added requirement of maintaining books of account and filing a Statement of Account and Solvency with the Registrar of LLPs in each financial year may be an important consideration for some investors. However, given that financial scrutiny is the only way to ensure transparency and legitimacy of an otherwise free and flexible business model is, perhaps, beneficial in the larger interest of the society as a whole.

A properly maintained book of accounts may also prove beneficial in terms of attracting investment from people not connected to the members in a personal or social capacity, as it would promote trust and confidence in the venture.

Attraction of investment being the whole point of providing the LLP model in the first place, the requirement of maintaining accounts may thus eventually prove to outweigh the disadvantage it has for all legitimate ventures at least.

On balance, the LLPs offer several benefits for genuine and legitimate small and medium scale investors and professional service firms, as they offer greater flexibility and freedom to suit the requirements of their business structures, ensuring the safety of their personal assets at the same time. It is a pity that Pakistan has still not been able to gear up to this international legal trend.

In order to bring this trend home, we will have to understand that the LLP is a new form of legal entity not previously available in our legal structure and, therefore, the requisite Act will need to be passed by the National Assembly as the first step towards modernising the law of business organisations in Pakistan.

Given that registration of ‘corporations’ is a federal subject under the Federal Legislative List of the Constitution of Pakistan 1973, this would necessitate political will of the highest order and pressure from business community on the federal government so that this issue is taken up in the Assembly and a bill to this effect presented before the houses for debate (provided that the word ‘corporations’ as used in the List is extended, which it should, to mean  a ‘body corporate’ which includes LLPs, given that a body corporate is defined inter alia, as a company as per Companies Act 1956 under the Indian Limited Liability Partnership Act 2008).

In this way, an appropriate law can be passed with uniform application across Pakistan, providing a modern engine to propel a struggling economy towards progress, growth and innovative investments.

    The writer holds LLB (Hons) LLM (Law and Development) from University of London.

    She is working as an Investment Law consultant in Lahore.