The creation, operation and termination of partnerships is regulated under the General and Limited Partnership and Business Names Law, Cap 116 (the “Law”), which is based on the English Partnership Act 1890 and the Limited Partnership Act 1907.
A partnership is defined under the Law, as a relationship between persons which carry out business together for a view of profit. A partnership is not recognized as an entity with a separate personality from its partners for legal and tax purposes. The actions of the partnership are considered the actions of its partners, who act in their personal capacity. However, a partnership is able to operate under a registered business name, enter into contracts using this name and may sue or be sued in its own name.
Types of partnership
In a general partnership, every partner is liable jointly and severally with all the other partners for an unlimited amount of the debts and obligations of the partnership which were incurred during their time as partner. Each partner is regarded as an agent of the firm and the acts of any partner performed in the usual scope of business of the partnership will bind the partnership and the other partners. A person who is admitted as a partner into an existing firm does not thereby become liable to its creditors for anything done before he became a partner. A partner who retires does not thereby cease to be liable for partnership debts or obligations before his retirement.
In a limited partnership, one of the partners (called the general partner) is liable for all the debts and obligations of the partnership whilst all the other partners (called the limited partners) are responsible up to the amount they contributed to the partnership. Essentially only the general partner has unlimited liability towards the partnership while the remaining partners have limited liability. The general partners may participate in the management and operation and be authorized to bind the partnership while a limited partner is prohibited to take part in the management and bind the partnership. If such limited partner takes part in the management of the partnership he shall be liable for all the debts and obligations of the partnership incurred while he took part, as ig he was a general partner.
Partnership limited by shares
This type of partnership is relatively new as it was introduced in 2015. The partnership has share capital and the shares are allotted to the partners depending on the amount contributed. A partnership limited by shares is, in essence, a hybrid between a limited liability company and a partnership, whereby the partnerships’ capital is provided by the partners. The partnership will, therefore, be consisted of one or more managing partners, who may manage the company and are jointly and/or severally liable for the partnership and its debts and obligations. The limited partners, will bear liability for the partnership only in relation to the amount they have invested in it, and will not be able to manage the partnership itself.
Registration of partnership at the Registrar
Before a partnership is registered a name must be approved by the Registrar.
The following three conditions must be met in order for a partnership to be registered:
- The partnership must carry out a business (trade, occupation, profession). Certain business require a prior license by a relevant authority;
- The partnership must have at least two partners, who may be either natural or corporate entities or both; and
- The partnership must be established with a view to generate profit.
Registration takes place by delivery to the Registrar within one month from the date of the establishment of the partnership of a statement signed by all partners and containing the following:
- The name of the partnership;
- The general nature of the business of the partnership;
- The principal place and address of business;
- The names and details of the partners and whether these are general or limited partners;
- The date of the partnership’s commencement and its term, if applicable;
- A statement that the partnership is limited, if applicable;
- The sum contributed by each limited partner and whether paid in cash on otherwise, if applicable; and
- The names of the general partners who are authorized to administer the affairs of the partnership, for management and representation purposes.
A partnership agreement can also be prepared to regulate the relations between the partners such as the interest of the partners in the partnership property, entitlement to capital and profits, contributions towards losses, participation in the management of the partnership, duration of the partnership etc. This agreement is not submitted to the Registrar as it is a private agreement regulating the relationship between the parties.
Financial accounts and annual report
All partnerships are obliged to keep books of accounts and for this purpose partners must personally keep proper accounts, in a manner necessary to present or explain their transactions and the financial statements in trade, activities or profession including statement which contain day to day entries with sufficient details. When the taxable income of the partner is above €70,000 then audited accounts must be prepared as well. An annual return must be submitted at the Registrar together with its financial statements, within 6 months from the year-end.
The general partners must also procure that the entire set of financial statement are drawn up in accordance with International Financial Reporting Standards. The financial statements must provide a true and fair view of the partnerships dealings and preferably free of any audit qualifications. The financial statements are presented before the general meeting of the partnership, the latest within 18 months from its formation and thereafter once a year.
Partnerships are not considered as legal entities with separate legal personalities and as such the partners are subject to taxation and not the partnership per se. Partners are individually responsible to account to the tax authorities for the respective profits from the partnership, which are usually taxed as income.
Termination/dissolution of a partnership
Unless agreed by the partners, a partnership is dissolved in the following cases:
- If the partnership was agreed for a fixed term, by the expiration of that term;
- If the partnership was agreed to be a single venture or undertaking, by the termination of that venture or undertaking;
- If the partnership was for an undefined time, by any general partner giving notice to the others of his intention to dissolve the partnership;
- By the death or bankruptcy of any general partner;
- By the occurrence of any event which makes it unlawful for the business of the firm to be carried on; and
- By a court order.
- Clear segregation of duties and responsibilities between the parties;
- There is a considerably low tax expense;
- The partnership has no obligation to proceed with statutory audit unless the turnover exceeds €70,000;
- The use of such structure is advantageous when flow through entities are required for tax optimization purposes;
- Minimal formalities and cost in formation, operation and termination;
- Losses accumulated at the level of the partnership may be used by the partner himself; and
- Partnerships are not required to disclose constitutional documents.
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