Conversion of a Limited Company to a Limited Liability Partnership (LLP) in Kenya: A Comprehensive Guide

Introduction

As business dynamics evolve, some companies in Kenya are considering converting from a limited company to a Limited Liability Partnership (LLP) to benefit from the flexible management structures and limited liability protections that LLPs offer. This article provides a detailed overview of what an LLP is, the features that distinguish it from other business entities, and the step-by-step process to convert a limited company to an LLP in Kenya.

Understanding a Limited Liability Partnership (LLP)

An LLP is a hybrid business structure that combines the features of both partnerships and companies. It offers the flexibility of a partnership with the limited liability protection of a company. Here are the key features of an LLP:

1. Separate Legal Entity: An LLP is a body corporate with its own legal identity, distinct from its partners. This means the LLP can own property, enter into contracts, and sue or be sued in its own name.
2. Limited Liability: The personal assets of partners are protected. Partners are only liable to the extent of their contribution to the LLP, which protects them from the LLP’s debts and obligations.
3. Flexibility in Management: LLPs offer a flexible management structure. Partners can organize the internal governance of the LLP according to their mutual agreement, which is typically outlined in the LLP agreement.
4. Taxation: LLPs are taxed as partnerships, where the income generated by the LLP is distributed among the partners, who then report this income on their individual tax returns.
5. Perpetual Succession: An LLP has perpetual succession, meaning it continues to exist regardless of changes in its partnership structure, such as the admission or exit of partners.

?Legal Framework for LLPs in Kenya

The legal framework for LLPs in Kenya is governed by the Limited Liability Partnership Act. The Act outlines the formation, regulation, and dissolution of LLPs, providing a clear pathway for existing limited companies to convert to LLPs.

?Conditions for Conversion

Before converting a limited company to an LLP in Kenya, certain conditions must be met:

1. No Security Interest: The company should not have any security interests registered over its assets at the time of the conversion application.
2. Same Shareholders and Partners: The partners of the proposed LLP must be the same as the shareholders of the company

Steps to Convert a Limited Company to an LLP

The conversion process from a limited company to an LLP in Kenya involves several steps:

Preparation of Documentation: The conversion process begins with the preparation of the necessary documentation. This includes:

1. Form LLP 7: This form is a conversion statement that must be filed with the Registrar. It includes details such as the name of the company, the proposed name of the LLP, objectives of the LLP, details of the partners (including names, addresses, and contributions), the registered office address of the LLP, and the names of the intended managers of the LLP.
2. LLP Agreement/Partnership Agreement/Deed: The LLP Agreement, also known as the Partnership Agreement or Deed, outlines the management and control of the partnership, detailing the LLP's name, business nature, partnership duration, capital contributions by each partner, names and addresses of partners, profit and loss sharing ratios, procedures for admitting new partners and handling exits, decision-making processes, roles and responsibilities of each partner, and dispute resolution mechanisms.

Payment of Registration Fees

A prescribed registration fee of around KES 26,000 must be paid to process the registration of the LLP. This fee covers the administrative costs associated with the conversion.

Obtaining the Certificate of Registration

Upon satisfying all requirements and submitting the necessary documents, including the conversion statement and LLP agreement, and after the payment of the registration fee, the Registrar will issue a certificate of registration. This certificate serves as proof of the conversion and confirms the legal existence of the LLP.

Transfer of Assets and Liabilities

Once the LLP is registered, all assets, interests, rights, privileges, and obligations of the company transfer to the LLP. The company is then considered dissolved and is removed from the register of companies.

Moreover, all agreements to which the company was a party immediately before its registration as a limited liability partnership have the effect from that registration as if the partnership was a party to an agreement instead of the company.

?Conversion of Shareholding to Partnership Interest

A critical aspect of the conversion process is translating the existing shareholding into partnership interests in the LLP. This involves several steps:

1. Valuation of the Company: Conduct a valuation of the company to determine the worth of each shareholder's equity.
2. Determining Partnership Contributions: The value of each shareholder's equity is translated into their capital contributions to the LLP.
3. Allocating Partnership Interests: Each shareholder receives a partnership interest in the LLP equivalent to their shareholding in the company. For example:

• Shareholder A with 28% equity becomes Partner A with a 28% partnership interest.
• Shareholder B with 28% equity becomes Partner B with a 28% partnership interest.
• Shareholder C with 28% equity becomes Partner C with a 28% partnership interest.
• Shareholder D with 16% equity becomes Partner D with a 16% partnership interest

Compliance and Post-Conversion Requirements

After the conversion, the LLP must comply with various regulatory requirements, including maintaining registers and documents such as the registration certificate, partnership agreements, financial records, and minutes of partner meetings. These documents must be kept at the registered office for at least seven years.

Complex LLP Structures: Insights from Global Practices

Globally, LLPs have been utilized in various complex structures to optimize operational efficiency and tax benefits. Here are some insights:

1. Professional Services Firms: In countries like the United Kingdom and the United States, large professional services firms such as law firms and accounting firms often operate as LLPs. This structure allows for flexible profit-sharing arrangements and limited liability for partners, which is crucial in managing the risks associated with professional advice and services.
2. Multinational Operations: Some multinational corporations establish LLPs in jurisdictions with favorable regulatory environments to streamline their international operations. This allows them to efficiently manage cross-border transactions and take advantage of tax treaties and incentives offered in different countries.
3. Joint Ventures: LLPs are also popular in joint venture arrangements where multiple parties come together to undertake a specific project or business activity. The LLP structure provides a clear framework for profit-sharing, decision-making, and liability management among the partners.
4. Family-Owned Businesses: In jurisdictions like India, LLPs are increasingly being used by family-owned businesses to manage succession planning and maintain control over business operations while protecting family members' personal assets from business liabilities

Conclusion

?Converting a limited company to a Limited Liability Partnership (LLP) in Kenya offers several advantages, including flexible management structures and limited liability protection for partners. By following the outlined steps and ensuring compliance with legal requirements, businesses can successfully transition to an LLP structure, enhancing their operational flexibility and safeguarding their partners' interests.