Tips to Choosing a Great Business Partner

Key takeaways:

• Understanding limited liability partnerships (LLPs)
• The LLP agreement
• Key ingredients for a great business partner

Limited Liability Partnerships (LLPs) are relatively new to Malaysia, having only been introduced under the Limited Liability Partnership Act 2012. It combines the characteristics of a private company and a conventional partnership, and effectively straddles the area between sole proprietorships and private limited (or ‘Sendirian Berhad’ or ‘Sdn Bhd’) entities. Per its name, it limits the liability to the partners in the case the business faces bankruptcy or is sued, unlike sole proprietorships and conventional partnerships.

Less paperwork, lower tax

A main draw for those considering LLPs in Malaysia is the fact that while LLPs require less administrative paperwork and startup costs than Sdn Bhd entities, it is also entitled to the lower SME income tax rate of 17% (compared to the corporate tax rate of 24%). This lower corporate tax rate is only for SMEs with paid-up capital of below RM2.5 million and businesses with annual taxable income of below RM500,000.

On the other hand, sole proprietorships are taxed on the individual income rate, which can run to as high as 30% depending on income levels. Thus, LLPs have become attractive to sole proprietorships that are experiencing growth yet have not reached the level of income necessary to deal with the costs and amount of administrative paperwork required for a Sdn Bhd.

An LLP generally has lower annual maintenance costs because it doesn’t need company secretarial services or an annual audit. A Sdn Bhd company requires an annual audit and the services of a company secretary. According to Crowe, audit fees vary depending on the size of the company but typically for a company with RM1 million turnover, the audit fees may be about RM4,000 while company secretarial fees can reach RM2,000 per year, with additional fees for special exercises.

The LLP agreement

Any business owners planning to establish an LLP must create a proper and comprehensive partnership agreement that contains the details of the partnership including but not limited to the partners’ responsibilities as well as how the LLP’s profits are to be shared. Even if you are going into business with a trusted friend or spouse, responsibilities of both (or more) partners must be outlined clearly. Decision-making should typically include the sign-off of all partners.

A good LLP agreement will outline how you will split profits, make decisions, or how disagreements can be resolved within partners. It is also important to state clearly the role each partner will play in the business.

If possible, try to include a clause that gives partners a solid exit strategy should they decide to leave. This can include giving the remaining partners the first right of refusal to the exiting partner’s shares. You may need to amend the LLP agreement whenever partners are added or removed. After all, any change in the partners of a LLP shall not affect the existence, rights or liabilities of the LLP.

Key ingredients for a great business partner

Before rushing into setting up an LLP with your business partner, try to give them a dry run by working with them on a project basis, via strategic partnerships or joint ventures. If these work out, you still need to ensure your partner has these key qualities:

High compatibility: Entering into an LLP with someone requires a high degree of compatibility in terms of personal relationships. You and your partner need to be honest about sharing business goals, and be comfortable with each other’s working styles and personal visions. This will help you weed out any potential disconnects before they snowball down the road.

Complementary strengths: A great business partner would have strengths that complement yours. For instance, if you are strong on the operations side of things but do not do well at marketing the business to new clients, your partner should ideally be the outside face of the business. Some partners are more creative, while others are better at administrative and legal matters.

Good finances: Before you enter into a partnership, ask for your potential business partners’ credit history and credit scores. Not only do a partner/director’s personal credit scores affect a business’ overall credit score, these will also impact your chances of getting a business loan approved down the line. In an LLP, you will be sharing profits and expenses with your partners, and so a partner that lacks stability may be a risk to the business.

Remember, you cannot fire a business partner the way you can dismiss employees or contractors. Do not be afraid to see outside counsel and legal experts before embarking on an LLP.

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