Partnership

Concept and Legal Framework of the Partnership

A Partnership is a designation commonly used in international law for a legal form of partnership. Especially in common law, notably in the USA and the United Kingdom, the partnership plays a central role in corporate law. The term denotes a legally regulated relationship between two or more natural or legal persons who operate a business together with the goal of generating profit. Common law differentiates between various types of partnerships, each with different legal impacts regarding liability, representation, and taxation.

Distinction: Partnership Compared to Other Forms of Company

The partnership differs significantly from corporations such as the Limited Company (Ltd.) or Corporation (Inc.). While corporations have their own legal personality and limit the liability risk of shareholders to their capital contribution, the partnership is typically a partnership without its own legal personality (with exceptions, e.g., in the case of Limited Liability Partnership), where the partners are generally liable with their entire personal assets.

Legal Forms of the Partnership

There are several variants of the partnership in Anglo-Saxon legal systems. The most important include:

General Partnership (GP)

Die General Partnership is the classic form of partnership. Here, at least two partners contractually come together to jointly operate a business. The characteristics are:

• Liability: Each partner is personally, unlimitedly, and jointly and severally liable for the obligations of the general partnership.
• Representation: Each partner is entitled to enter into legally binding transactions for the partnership unless otherwise contractually regulated.
• Formation: No minimum capital is required. In most jurisdictions, the partnership comes into existence informally through agreement.
• Profits and Losses: These are usually allocated among the partners according to the agreement or, in the absence of such an agreement, divided equally.

Limited Partnership (LP)

Die Limited Partnership is a variant that includes at least one general partner with unlimited liability and at least one limited partner with limited liability.

• Liability: The general partner has unlimited liability as with the general partnership. The limited partners are only liable up to the amount of their capital contribution.
• Function: Limited partners are generally excluded from management and are restricted to the role of capital providers.
• Registration and Disclosure Obligations: In many jurisdictions, the limited partnership must be entered in the commercial register.

Limited Liability Partnership (LLP)

Die Limited Liability Partnership combines elements of a partnership with limited liability.

• Liability: Each partner has limited liability, usually up to their capital contribution or as provided in the partnership agreement.
• Legal Personality: The LLP is considered an independent legal entity in many legal systems.
• Characteristics: It is particularly used by professionals such as architects or auditors, provided that national regulations allow it.

Regulation and Legal Principles

Contractual Arrangements and Internal Organization

The legal relations among the partners are governed by a society agreement, partnership agreement, or partnership deed. If there is no written contract, the statutory provisions of the respective legal system apply, such as the Partnership Acts in the United Kingdom (Partnership Act 1890) or the Uniform Partnership Acts in the United States.

• Regulation of Management: The powers, decision-making processes, and veto rights are regulated therein.
• Withdrawal and Admission of New Partners: The framework for changes in partnership membership is a key component of the agreement.
• Termination of the Partnership: The agreement sets out the procedures for dissolution, liquidation, and winding up.

Power of Representation

As a rule, each partner in a general partnership possesses the power of representation both in and out of court. However, this power can be more specifically defined or restricted by contractual agreement. In a limited partnership, the power of representation is usually limited to the general partners.

Publication and Disclosure Obligations

While the general partnership is, in particular under British and US law, usually not subject to registration, LP and LLP are generally subject to comprehensive publication and reporting requirements regarding the partnership structure, management, and contributions of the partners. These serve transparency and creditor protection.

Tax Aspects

For tax purposes, partnerships are treated as transparent entities in many jurisdictions:

• Transparency Principle: The entity itself is not taxed; instead, profits and losses are allocated proportionally to the partners, who are taxed directly.
• Exceptions: Certain types, especially LLPs, may be treated as corporations for tax purposes if provided by national legislation.

Liability and Creditor Protection

Different liability principles apply depending on the form of partnership:

• General Partnership: Unlimited, personal liability of partners, including for the mistakes of other partners.
• Limited Partnership: Limited liability of the limited partners, unlimited liability of the general partners.
• LLP: As a rule, liability of all partners is limited to their contributions; in exceptional cases, personal liability may arise for unlawful acts.

Creditors of a partnership can generally assert their claims against the assets of the partnership and, depending on the legal form, against the individual partners.

Dissolution and Liquidation

A partnership typically ends upon expiry of its agreed term, death, insolvency or withdrawal of a partner, or by unanimous resolution of the partners. The assets of the partnership must be jointly liquidated, existing liabilities settled, and any residual amounts paid out in accordance with the profit-sharing arrangement.

Post-Liability

Departing partners may continue to be liable for obligations already entered into. The duration and scope of such liability depend on the statutory provisions of the respective jurisdiction and contractual agreements.

International Significance and Fields of Application

The partnership is considered a key legal form in many common law countries. It is particularly popular among small and medium-sized enterprises, start-ups, and professionals. In international business, partnerships are often chosen for their flexibility as the legal form for cross-border joint ventures or project companies.

Partnerships in Germany

There is no legal form in German law that exactly corresponds to the partnership. Comparable forms are the Gesellschaft bürgerlichen Rechts (GbR), the offene Handelsgesellschaft (OHG), and the Kommanditgesellschaft (KG). However, the Partnerschaftsgesellschaft (§§ 1 ff. Partnerschaftsgesellschaftsgesetz – PartGG) is a special legal form for the cooperation of professionals.

Literature and Web Links

• Partnership Act 1890 (UK)
• Uniform Partnership Act (USA)
• Partnerschaftsgesellschaftsgesetz (Germany)

Note: The legal structure and function of the partnership may vary considerably depending on the national law. The precise legal assessment should always be based on the relevant laws of the country concerned.

Frequently Asked Questions

What legal requirements must be observed when forming a partnership?

The formation of a partnership generally requires the existence of a civil law partnership agreement, which may be concluded orally but in practice is almost always in writing. It is essential to include the fundamental elements of the association to promote a common purpose through a joint business operation, as well as the involvement of several persons. For certain forms, such as the Partnerschaftsgesellschaft (§§ 1 ff. PartGG), a written agreement and registration in the partnership register at the competent local court are mandatory. Furthermore, professional regulations—such as for professionals (e.g., tax advisors, lawyers, doctors)—must be observed if arising from special professional statutes or chamber regulations. Tax registration and notification requirements to the tax office (VAT, income tax, business registration) must likewise be met at an early stage. Finally, liability provisions and rules on representation should be clearly set out in the contract to avoid later disputes and to increase legal certainty.

How is liability regulated within a partnership?

Within a partnership, the partners are generally personally and jointly and severally liable for the liabilities of the partnership toward third parties, unless restricted by law or contract. For the Partnerschaftsgesellschaft under the Partnerschaftsgesellschaftsgesetz (PartGG), liability may under certain conditions be limited to the acting partner or to eligible professional liability insurance, for example in a Partnerschaftsgesellschaft with limited professional liability (PartGmbB). Nevertheless, there remains a right of recourse among the partners internally, depending on the design of the partnership agreement. Liability regularly extends to damages caused during activity (professional liability), which is why adequate insurance cover may be legally required, particularly in consulting or professions subject to confidentiality.

What are the legal duties and rights of the individual partners?

By law, individual partners have, in particular, co-management, participation, and control rights. These include participation in decision-making (resolutions), management, the right to information and access to records, as well as voting rights at partnership meetings if applicable. The specific arrangement of rights and obligations, including the extent of management authority or participation in profits and losses, can be more specifically defined in the partnership agreement. Partners are also obliged to promote the purpose of the partnership and to refrain from actions that compete with the partnership (non-compete obligation).

What legal particularities apply on the termination of a partnership?

The termination of a partnership may occur upon expiry of the contractual term, by notice, death of a partner, court decision, or insolvency. In this context, the statutory provisions of the German Civil Code (BGB §§ 705 ff.) and, if applicable, the Partnerschaftsgesellschaftsgesetz must be observed. A settlement balance sheet must be prepared, assets distributed, and obligations settled. For professional partnerships, statutory reporting obligations to the competent chambers or registry authorities must be fulfilled. In addition, the deletion of the partnership from the partnership register must be requested if it was registered.

What needs to be considered from a legal perspective in cross-border partnerships?

For cross-border partnerships, particular attention must be paid to conflict-of-law rules in international private law. It must be clarified which national law applies to the formation, internal organization, and liability, and whether foreign law stipulates any company or professional requirements. Recognition and registration requirements in both involved countries, special tax issues, and reporting obligations abroad may also need consideration. Double professional qualifications and notification obligations with the relevant professional bodies may also be required. Data transfers, data protection, and professional duties of confidentiality must be designed in compliance with regulations across borders.

How are disputes between partners legally resolved?

Disputes between partners are primarily addressed according to the provisions of the partnership agreement, especially if that agreement provides for dispute resolution mechanisms such as arbitration or mediation. Otherwise, general statutory provisions apply, such as §§ 705 ff. BGB or specific rules under the PartGG or other special laws. A lawsuit between partners may aim for exclusion from the partnership, damages for breaches of duty, or claims to information. Unless otherwise agreed, the competent local and subject-matter civil court has jurisdiction.

What publication and disclosure obligations exist for partnerships?

Publication and disclosure obligations for a partnership depend on its legal form and activity. For a Partnerschaftsgesellschaft under the PartGG, registration in the partnership register is required, disclosing certain contract details such as name, registered office, business purpose, and participating partners. Unlike corporations, partnerships are generally exempt from financial statement publication requirements unless they operate as commercial businesses or are legally required to maintain accounts under the German Commercial Code (HGB). Tax disclosure obligations remain unaffected. Reporting and notification duties to professional organizations or authorities may also still apply, particularly in regulated professions.