In 2009, the Lagos State Government enacted the Partnership (Amendment) Law of Lagos State ("the Partnership Law"). The Partnership Law, which was only applicable within the territorial confines of Lagos State, made provisions for the creation of Limited Partnerships and Limited Liability Partnerships. However, the enactment of the Companies and Allied Matters Act, 2020 ("CAMA 2020" or "the Act") now provides for the incorporation of Limited Liability Partnerships (LLP) across the country. This is aimed at improving the ease of doing business in Nigeria by ensuring that entrepreneurs are able to form partnerships and also enjoy reduced personal liability. Being a novel introduction into the Nigerian corporate law, this article seeks to explain the concept of LLP, its features, the potential benefits as well as the tax implications.
Limited Liability Partnership under the CAMA 2020
An LLP is a body corporate formed and incorporated under the CAMA 2020 with separate legal personality from its partners and with perpetual succession. It can sue and be sued in its name and can acquire, own, hold and develop or dispose of property, whether movable or immovable, tangible or intangible. Generally, the partners have limited personal liabilities, i.e. their personal assets cannot be utilized or legally sequestrated in settlement of business debts and liabilities. Consequently, the liability of a partner will be met out of the assets of the LLP. However, according to the Act, in instances where the LLP or any of its partners act with the intent to defraud creditors of the LLP or any other person, the liability of the LLP and partners who acted in that manner shall be unlimited for all or any of debts or other liabilities of the LLP.
LLPs are expected to be registered with the Corporate Affairs Commission (CAC) in the manner prescribed under the Act with at least two designated partners, one of whom must be resident in Nigeria. The designated partner will be responsible for fulfilling the compliance obligations under the Act and will be liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.
LLPs vs. Limited Partnerships
The CAMA 2020 also provides for the registration of a Limited Partnership (LP). In comparison, whereas an LLP limits liability for all partners, an LP only limits it for some. In an LP, at least one owner must be on record as the general partner with unlimited liability, and at least one partner must be listed as a limited partner with limited liability. Section 795 (3) of the CAMA 2020 provides that a limited partnership shall consist of one or more persons called general partners, who shall be liable for all debts and obligations of the firm, and one or more persons called limited partners. The Act also limits the number of partners in an LP to a maximum of twenty (20), while an LLP does not have a cap. In addition, the limited partner cannot have significant money invested in or hold major decisionmaking power in the business. If they do, they risk losing their status as a limited partner and forfeiting their limited liability status.
What are the Benefits of a Limited Liability Partnership?
Ease of Formation – The Act provides a well-structured process for forming LLPs. This process is very simplified and as such, LLPs are relatively easy to form. It generally requires two or more persons associated for carrying on a lawful business to fill out the prescribed incorporation documents and file same with the CAC. Upon submission of the documents, the CAC shall within fourteen days (14) register the documents and issue a certificate of incorporation.
Limited Legal Liability of the Partners – One of the biggest benefits of forming an LLP is the limited legal liability. Unlike limited partnerships or general partnerships, an LLP does not expose its partners to unlimited legal liability. This way, the personal assets of the partners are ring fenced from litigation and other claims, because their liability will be limited to the amount that they contributed to the LLP for its formation. However, this limited legal liability shield will be broken if the liability or lawsuit stems from an intentional, fraudulent, unauthorised or illegal act of the partner.
Flexible Management – The partnership agreement typically defines the management role of the partners. A partner can decide to have minimal management roles while others may choose to have more active roles in the management of the partnership. Management duties can be divided equally or unequally based on the experience of each partner. Generally, the partners have the freedom to decide who takes on which roles in business operations.
Multi-generational wealth transfers – LLPs can potentially serve as tools for multigenerational wealth transfer. The rights of a partner to a share of the profits and losses of an LLP and to receive distributions in accordance with the LLP agreement are transferable either wholly or in part, subject to provisions of the partnership deed or agreement. This level of flexibility, coupled with other attributes (such as perpetual succession) makes the LLP structure a suitable vehicle for efficient multi–generational wealth transfer.
Taxation of Limited Liability Partnerships
Given that the Act is yet to be gazetted and in reality, LLPs have not commenced operations in Nigeria, our expectation would be that LLPs should be treated for tax purposes in the same manner as the general partnerships i.e. the partnership is not subjected to tax in its name, but the partners will separately file their income tax returns with the relevant State Boards of Internal Revenue, with respect to the partner's share of profit from the partnership and in accordance with the provision of the Personal Income Tax Act (as amended). This treatment is consistent with global best practices in other jurisdictions such as the United States, Kenya, United Kingdom, Singapore etc., where the LLPs are treated as "tax transparent" or "passthrough" entities. LLPs therefore eliminate the burden of double taxation that affects most limited liability companies and their shareholders since, only the owners are taxed.
The introduction of the LLP in the CAMA 2020 has been widely commended by the public. As we await the commencement of the Act, it may be instructive for entrepreneurs and investors to review their business portfolio and explore the possibility of incorporating an LLP to carry on existing or new business, to the extent that it may be permitted by other statutes or regulatory bodies (e.g. an LLP will not be able to carry on the business of banking in Nigeria). LLPs offer some tax protection for business profits due to its tax transparent status. This is based on the premise that the business profits of an LLP will not be liable to corporate taxes and distribution of such profits to the partners will also not suffer withholding taxes. The partners will only be obligated to account for their personal income taxes on the income earned from the LLP.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.