Compared to differentiating between a Sdn Bhd vs. LLP, the differences between a traditional partnership and an LLP in Malaysia are not as immediately clear, making it harder to choose between these two business entities.
However, there are still key differences between the two structures that make them ideal for different businesses, which is why this post provides a comprehensive guide to the differences between a Conventional Partnership and LLP.
Let’s begin.
Overview of Conventional Partnership vs LLP
Enterprises and Sdn Bhds are near polar opposites in terms of financial, administrative, and tax demands, as illustrated by the table below.
| Criteria | Conventional Partnership | Limited Liability Partnership |
|---|---|---|
| Foreigners | Not allowed | Allowed (subject to sector) |
| Formation costs | RM60 for a typical partnership | RM1,500 for a typical LLP |
| Annual maintenance | RM60 for yearly business name renewal | RM200 for Annual Declaration |
| Liability protection | None. Partners are fully liable for company debt. | Limited. Owners are not liable for company debt. |
| Administration structure | Very simple | More complicated – requires appointment of Compliance Officer and submission of Annual Declaration. |
| Tax on income | Subjected to personal income tax as high as 30%. | Corporate income tax rate on LLP profits from 15-24%. |
| Number of partners | Minimum 2, maximum 20 | Minimum 2, no upper limit |
In summary:
- It’s significantly more expensive to register and maintain an LLP.
- LLPs are subject to stricter record keeping and compliance requirements.
- LLP partners are protected from company debt while an Conventional Partnership owners are fully liable.
- As annual profits grow, LLPs pay less tax than Conventional Partnerships (around the RM70,000 mark).
Let’s take a closer look at the key differences.
1. An LLP has stricter statutory compliance
All Llps are required to appoint a Compliance Officer, who is tasked with ensuring the LLP adheres to all relevant laws and regulations set by SSM. The Compliance officer may be:
- A registered partner of the LLP (provided they reside in Malaysia)
- A person qualified to act as secretary under the Companies Act 2016
One of the main duties of the Compliance Officer is ensuring the LLP lodges its Annual Declaration on time.
An Annual Declaration contains key business details and partners’ signatures, and every LLP must lodge one within 90 days from the end of the financial year, with the first Annual Declaration lodged no later than 18 months from their registration date.
Meanwhile, a Conventional Partnership partners only need to visit SSM’s online portal to renew their business registration before the registration expiry date and up to 12 months past the registration expiration.
2. An LLP provides limited liability
An LLP is recognised as a separate legal entity, while Conventional Partnerships and partners are treated as a single entity.
Partners of an LLP therefore enjoy limited liability, which means their personal assets are separate from the LLP and therefore protected from business debts. As a partner, you are only at risk of losing as much as you have invested into the business.
Meanwhile, partners of a Conventional Partnership are subject to unlimited liability where partner’s personal assets can be seized to settle business debts.
3. An LLP pays less tax at higher profit levels
We hope this section demonstrates just how much tax savings LLPs enjoy from corporate income tax rates at higher annual revenue levels.
2023 LLP tax rates
LLPs are subject to corporate income tax rates, which are as follows:
- 15% on the first RM150,000
- 17% for RM150,001 to RM600,000
- 24% for everything above that
2023 Conventional Partnership tax rates
Conventional Partnership income is treated as partners’ personal income, and is subject to the following tax rates:
- 0% for first RM5,000
- 1% for RM5,001 – 20,000
- 3% for RM20,001 – 35,000
- 6% for RM35,001 – 50,000
- 11% for RM50,001 – 70,000
- 19% for RM70,001 – 100,000
- 25% for RM100,001 – 400,000
- 26% for RM400,001 – 600,000
- 28% for RM600,001 – 2,000,000
- 30% for anything above RM2,000,000
For a more in depth guide, check out our sole proprietor’s guide to income tax.
RM70,000 in annual profits is the magic number
Beyond RM70,000 in annual profit, the tax benefits of an LLP structure begin to outweigh upkeep costs as it remains at 15% up to RM150,000, while a Conventional Partnership with the same earning is well into the 25% personal income tax bracket.
Assuming both an LLP and Conventional Partnership earned RM150,000 in YA 2023:
- the Conventional Partnership would owe RM31,400
- The LLP would only owe RM22,500
That’s some significant tax savings, and as revenue increases, the difference only becomes more extreme.
When to choose an LLP
With a slightly higher barrier to entry but more protection, an LLP is superior if you prioritise the following benefits:
- Protection of your personal assets from business debt
- More favourable tax rates on higher annual profits
In practice, this means businesses with a healthy amount of risk and high revenue, which is why an LLP is a popular choice for professional partnerships in the legal and financial sectors.
If that sounds like what you need, register your new LLP today.
When to choose a Conventional Partnership
Easy to set up and maintain but with less partner protection in return, a Conventional Partnership is suitable if you prioritise:
- Ease of set up and relaxed compliance requirements
- More favourable tax rates on lower annual profits
In practice, this means businesses with a low amount of risk and modest revenue, which is why an LLP is a popular choice for partnerships outside professional sectors.
Bear in mind that you must accept that your personal assets are at risk of being seized should the partnership ever need to pay off debts.
If that sounds like what you need, register your Conventional Partnership today.
You may also be interested in our other guides comparing business entities:
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