Should my business consider an Australian Limited Liability Partnership?

Often an underutilised option, it is first crucial to understand the differences between Limited Liability Partnerships and a general law partnership.

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) is a general law partnership that chooses to register as a partnership with limited liability under an Australian Partnership Act. As the name suggests, there is a fundamental difference in the distribution of liability when dealing with an LLP.

There is a general partner, which is responsible for all debts and obligations of the partnership. It is usual for the interest of the general partner to be nominal. There is also a limited partner. Limited partners are similar to shareholders in a company, in that they are only  required to contribute towards the liabilities of  the business for an amount that does not exceed the amount shown on the register. That liability is like  that of a shareholder to pay the subscription amount for shares that are issued to them.

While an LLP is formed under state law, once registered,, there are mechanisms to recognise them in other states and territories that have similar frameworks. Given the fundamental differences between a Limited Liability Partnership and a general law partnership, it is a statutory requirement that a Limited Liability Partnership always make it known to third parties that the partnership is an LLP by using the words (a limited partnership) after the business name in every business document.

Duty implications

Converting a general partnership into an LLP does not trigger extra duty (tax on transactions) if ownership proportions remain the same. Once, noting the change of treatment for income tax purposes, a Limited Liability Partnership continues to be treated as a partnership for duty purposes and not a proprietary limited company.

Tax issues

There are no tax implications in forming a limited liability partnership on the basis that the existing partnership proportions remain ‘as is’. Once registered, the relevant taxing provisions cease to be Division 5 of the 36 Act and instead become Division 5A of the 36 Act.

The upshot of change means that the Limited Liability Partnership is treated as a company for tax purposes. For ‘closely held Limited Liability Partnerships’ the treatment equates them to private companies for tax purposes, noting that Division 7A of the 36 Act would have application.

as the formation of an LLP can, in some cases, be used to ‘corporatise’ a general law partnership when a rollover under 122-B of the 97 Act is not available (often because of duty considerations).

There are a few unique tax implications for LLPs.

• The partners’ interests are akin to shares in a company, so franking credits can be paid when profits are distributed, similar to company dividends.
• Once a Limited Liability Partnership is registered, it is deemed a company for all purposes of the income tax law. This means a loss of access to the Discount Capital Gain.
• LLPs can still qualify for small business tax concessions, but they will face the same hurdles as a proprietary limited company.

Why consider an LLP structure?

Prior to Queensland’s introduction of the small business restructures, ‘roll ups’ of sole traders, trusts and partnerships were dutiable in any circumstance. A restructure using a Limited Liability Partnership essentially allowed a duty efficient restructure where a business could mimic a Subdivision 122-A or B rollover without the associated duty costs.

Limited Liability Partnerships are, however, unusual entities from a commercial perspective and very unlikely to be the vehicle of choice if a proprietary limited company entity is accessible.

Partnership agreement

It is worth flagging that the drafting of an agreement for a Limited Liability Partnership must be done in a manner that considers profit retention and accumulation, as well as the maintenance of a franking account.

Why do LLPs work from a New Zealand perspective?

Macpherson Kelley’s Tax team has seen an uptick in businesses out of New Zealand considering Limited Liability Partnerships as their Australian restructure of choice. Public Ruling BR Pub 10/01 (Ruling) from the  New Zealand Inland Revenue confirms that New Zealand partners in an Australian limited partnership are allowed a foreign tax credit (in New Zealand) for the Australian income tax paid by the partnership, in proportion to their partnership share of the income.

Macpherson Kelley’s experience advising on LLPs

Limited Liability Partnerships (LLPs) are becoming increasingly relevant in Australia as businesses seek flexible yet protective structures to operate in a changing economic landscape.

While LLPs may not be the most commonly chosen structure, they can offer distinct advantages making them worth considering in today’s dynamic commercial environment.

With experience advising local and international firms and businesses, Macpherson Kelley’s Taxation team can provide tailored advice to businesses considering a restructure. Reach out to the team today.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.