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A discourse on Law on Partnership in Malaysia

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Partnership in Malaysia is one of the three major business vehicles in Malaysia to carry out commercial activities. A partnership in Malaysia is a form of business entity where two or more individuals come together to carry out a business or profit-making activity. There are two types of Partnerships in Malaysia, viz. the conventional type of partnership which is governed by the Partnership Act of 1961 and Limited Liability Partnership which is governed by the Limited Liability Partnership Act of 2012.

This piece of writing is a discourse on the law on partnership in Malaysia and the advantages and disadvantages of adopting the business vehicle of partnership in Malaysia.   

What is partnership in Malaysia?

A partnership in Malaysia is an entity where two or more individuals come together with the purpose of carrying out a business activity. In Malaysia, there are two kinds of partnerships, viz.

  1. A Conventional partnership is formed between two or more individuals.
  2. A Limited liability partnership is formed between two or more individuals or corporations.  

Law on LLP and conventional Partnership in Malaysia     

Governing law

Conventional partnerships are governed by the Registration of Business Act, 1956 and The Partnership Act, 1961. An LLP, on the other hand, is governed by the Limited Liability Partnership Act 2012[1], which offers the benefits of both a company and a conventional partnership.

Number of Partners

A conventional partnership can have a minimum number of two and a maximum number of twenty partners. Such partners can only be individuals. In the case of an LLP, the minimum number of partners is two, and there is no limit on the maximum number of partners. In an LLP, partners can be both individuals and corporations.

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Startup cost

For a conventional membership, the company registration starts at RM100, and in the case of an LLP, the registration cost starts at RM500.

Annual Operating Costs

The registration cost in a conventional partnership is very low. On the other hand, for an LLP registration, the cost is slightly higher compared to a conventional partnership but significantly lower than a private company where elaborate procedures of compliances are present, such as auditing, filing of returns, other complex compliances etc.

Legal status

A conventional partnership is not a separate legal entity. The partners collectively form a partnership where all the partners are jointly and severally liable for the acts of each other. Such is not the case in an LLP, as LLP has a separate legal identity independent from its partners.

Partner’s liability

The partners in a conventional partnership have unlimited liability, and they are both jointly and severally liable. The liability can extend to the personal assets of the partners. In the case of an LLP, partners do not have a personal liability except for their own wrongful acts in furtherance of the business of LLP. Here liability of the members extends to the contribution made by the partners.

Life of Partnership

The life of a conventional partnership in Malaysia by default ends on the death or bankruptcy of a partner, which leads to the dissolution of the partnership except otherwise provided in the partnership agreement. A partner in an LLP ceases to be a partner upon his death or dissolution of the partnership. However, such cessation of the partner to be the partner of the firm does not affect the continuity of the business.  

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Advantages of Partnership in Malaysia

Easy to start-up with a low operating cost: Businesses that do not have much capital to begin with usually start with the business vehicle of partnership. Further, the annual operating cost of a conventional partnership is very low compared to a limited liability partnership.

No elaborate audit and filing requirements: the audit requirements and annual return filings do not exist in the case of partnerships compared to the convoluted and elaborate annual audits and filings with the companies.

High levels of flexibility: The law on partnership in Malaysia provides a high level of flexibility to the partners in shaping and formulating terms of the agreement and the relationship among the members with respect to the partnership. However, the terms in the partnership agreement should not be ultra vires the law laid down for partnerships.

Separate legal status of LLP: LLP being a separate legal entity does not make the partners personally liable, and their personal assets cannot be called in to settle the creditor’s claims. However, a partner can be made liable for the tort committed in furtherance of the business of the LLP but will not make the other partners liable for that wrongful act or omission. The liability of the LLP extends to the same extent as that of a partner who commits a wrongful act or omission in furtherance of the business of LLP. The liabilities of the LLP can be borne from the LLP’s property.      

Disadvantages in Malaysia

  • In conventional partnerships, the partnership is not considered a separate legal entity and partners and the businesses are not separate from each other. This makes the partners jointly and severally liable for the debts and liabilities incurred on account of the partnership firm by the other partners with or without their knowledge.
  • The liabilities of the partners in a conventional partnership in Malaysia are unlimited, and their personal assets can be used to settle the claims of the creditors.
  • Irrespective of the fact that all the partners did not equally contribute to the capital and profits of the partnership, all the partners are equally entitled to share the capital and profits from the partnership according to the law on Partnership in Malaysia unless otherwise agreed in a written partnership agreement.
  • No majority of the partners have the power to expel a partner unless the power to expel has been conferred on the partners in the partnership agreement.
  • On death or bankruptcy of a partner in a conventional partnership, the partnership comes to an end by default. However, such is not the case in an LLP where the legal heirs of the deceased partner continue to enjoy the proceeds of the partnership unless the partnership agreement provides the surviving members to purchase the share of the departing partner.
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From the above discussion, it can be concluded that a better option while starting a partnership in Malaysia is to adopt the business vehicle of an LLP instead of a conventional membership because of the hybrid features of both a private company and the flexibility of a partnership. It must be remembered that for a partnership business to succeed, the partners should carefully draft the partnership agreement under the guidance of a professional to avoid any unforeseen legal complications. 

Read our Article: Procedure of Company Incorporation in Malaysia

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