Commercial Partnership Essay.
The partnership en nom collectif, the partnership en commandite and the company are the three kinds of commercial partnerships which may be established under the Companies Act. Explain the main features of each. Why do you think the company is the most widely used vehicle to do business with?
Commercial partnerships in Malta are regulated by The Maltese Companies Act which came into effect on the 1st January 1995 in order “to regulate…limited liability companies and other commercial partnerships”. In fact, when one wants to set up a commercial partnership in Malta the Act provides a number of possible legal structures.
The Act stipulates that, “A commercial partnership may be of the following kinds: a partnership en nom collectif; a partnership en commandite; and a company (limited liability company)”.
The purpose for which the commercial partnership may be formed is regulated by the Act which provides that a partnership en nom collectif and a partnership en commandite may be formed for the exercise of one or more acts of trade.
Under the Commercial Partnerships Ordinance, this provision applied also to a limited liability company however under the provisions of the Act in force today, “a company may be formed for any lawful purpose and shall have the status of a public company; or a private company.” This means that a company may not necessarily be set up for the purposes of trading. Any lawful purpose is sufficient in order to set up a limited liability company.
The Partnership En Nom Collectif
Article 7 of the Companies Act defines the partnership en nom collectif as one which “…may be formed by two or more partners and operates under a partnership name and has its obligations guaranteed by the unlimited and joint and several liability of all the partners.” The formation of a partnership en nom collectif requires that every partner gives his contribution in money or in kind or in future personal services. The totality of the contributions constitutes the original capital of the partnership en nom collectif. In a partnership en nom collectif all the partners are unlimitedly liable.
The above definition highlights the fundamental elements of a partnership en nom collectif. It may be formed by two or more partners; it must operate under a partnership name; and the partners are unlimitedly, joint and severally liable for all the obligations of the partnership. The partnership-name is the name under which the business is carried on and the obligations are entered into. It is the name by which the partnership and the legal entity created by such name are known to the public and it represents the external manifestation of the juridical distinction between the legal personality of the partnership and the members composing it.
The unlimited liability of the partners for the obligations of the partnership is an essential characteristic of the partnership en nom collectif which distinguishes it from the other forms of commercial partnerships. In a partnership en nom collectif, each and every partner is liable for all the debts and obligations of the partnership with all his property present and future and not only up to the amount contributed by him to the partnership. Due to the unlimited liability of each and every partner, creditors of the partnership may enforce their claims against any of the partners and this even where such claims exceed the amount contributed or promised as contribution by the said partner.
The joint and several liability of the partners for the obligations of the partnership means that the partner against whom an action is brought for the recovery of a sum due by the partnership may not plead the benefit of discussion of any of the other partners. However, one of the provisos to Article 7 states that, “no action shall lie against the individual partners unless the property of the partnership has first been discussed.” Therefore a creditor looking for a payment has to first go to the property of the partnership itself as an entity before its individual partners. Only in the absence of sufficient partnership assets can the creditor go to the individual partners.
A partnership is legally valid when partners enter into an agreement called the “deed of partnership.” The deed of partnership has to be entered into, signed and sent to the registrar and thus duly registered by the Registrar of Companies. The next step would be the issued of “a certificate of registration” and this can be described as the act of birth of the partnership because it is at this point that the latter comes into being. Article 14 of the Companies Act shall state : (a) the name and residence of each of the partners; (b) the partnership-name; (c) the registered office in Malta of the partnership; (d) the objects of the partnership, that is to say, whether the objects are trade in general or a particular branch of trade, and in the latter case, the nature of the trade; (e) the contribution of each of the partners, specify the value of the respective contribution of every partner; (f) the period if any fixed for the duration of the partnership.
The Partnership En Commandite
In a partnership en commandite there must be at least one general partner and one limited partner. The general partner has to guarantee all the obligations of the partnership unlimitedly whereas the limited partner enjoys limited liability up till the payment of his share. Article 51 of the Act defines a partnership en commandite as one which “operates under a partnership name and has its obligations guaranteed by the unlimited and joint and several liability of one or more partners, called general partners, and by the liability, limited to the amount, if any unpaid on the contribution, of one or more partners, called limited partners.” From the definition, it is clear that this partnership shares a number of similar characteristics with the partnership en nom collectif.
What has been said with regard to the partnership name when dealing with the partnership en nom collectif applies also to the characteristics of the partnership en commandite. In addition Article 53 of the Act states that “a person who holds himself out as being a general partner shall be held liable unlimitedly and jointly and severally with the general partners for all the obligations contracted by the partnership.” Therefore, if a partner makes believe that he is a general partner, then he will be treated as such. Furthermore, Article 53(2) of the Act provides that “the inclusion in the partnership name of the name of a person who is not a partner shall be taken into account by the Court in determining whether such person is holding himself out as being a partner.” Therefore the partnership name can only include the name of the general partner, otherwise if a limited person added his name, he would be deemed to be holding himself out as being a general partner. These same provisions are applicable also to a partnership en nom collectif through Article 18 of the Companies Act.
The co-existence in the partnership of one or more general and one or more limited partners distinguishes the partnership en commandite from the partnership en nom collectif and from the limited liability company. The liability of the general partners is similar to that of the partners in en nom collectif, that is unlimited and joint and several. The liability of the limited partners is defined by law as “…limited to the amount, if any, unpaid on the contribution and in no case are limited partners bound to restore profits received in good faith’’.
The Company (Limited Liability Company)
A limited liability company is defined as being one, “formed by means of a capital divided into shares held by its members. The members’ liability is limited to the amount, if any, unpaid on the shares respectively held by each of them.”
From the said definition the most important characteristic and benefit of a limited liability company is highlighted, that is, the limited liability of all the members composing the company. The limitation of liability of the members of a company forms the exceptional legal characteristic of this kind of partnership. The limitation of liability is a valued privilege in itself and as long as it is operated legally and within the terms of the Companies Act, the personal assets of directors or shareholders are not at risk. However, due to this privilege, there are a number of provisions, aimed at preventing possible abuses.
Article 68 of the Act provides that, “A company shall not be validly constituted under this Act unless a memorandum of association is entered into and subscribed by at least two persons, and a certificate of registration is issued in respect thereof”. The memorandum will include all the information about the company deemed necessary to lessen opportunities for abuse. “When the memorandum or the articles are drawn up in a public deed or in a private writing enrolled in the records of a notary public, an authentic copy thereof shall be delivered in lieu of the original.” On receiving the above-named documents, the duty of the Registrar is to examine them and, on being satisfied that all the requirements prescribed by law have been compiled with he will issue the certificate of registration. These measures and provisions will strengthen the credit and reputation of the company.
“The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it.” Article 4 of the Companies Act provides that “A company shall not be registered by a name which (a) is the same as a name of another commercial partnership or so nearly similar as in the opinion of the Registrar it could create confusion:” Therefore no two limited companies can exist with exactly the same name.
It is essential for the company to have a share capital and that the amount of such capital is stated and divided into shares of a fixed amount which according to Article 69(f) of the Act, must be stated in the memorandum. The said article states that, “the amount of share capital with which the company proposes to be registered (hereinafter referred to as “the authorised capital”), the division thereof into shares of a fixed amount.” The law also makes it impossible for a company to issue shares with variable share capital. This is only possible in the case of a SICAV which is an investment company with a variable share capital. “…Where a private company is an investment company with variable share capital, the name of the company shall be followed by the words “investment company with variable share capital” or by “SICAV”, followed by the words “private limited company”, ”limited” or its abbreviation (ltd).”
A company can either be a private or public company. The company must have a name under which it can operate and enter into legal relationships with third parties. Article 70 of the Act states that “…. A public company may be designated by any name but such name must end with the words “public limited company” or their abbreviation “p.l.c.” A private company may be designated by any name, but such name shall end with the words “private limited company” or the words “limited” or its abbreviation “Ltd”. The memorandum of association has to state whether it is a public or a private company. The public company may be listed or non-listed on the stock-exchange. It stands to reason that this would not be possible for a private company because its shares cannot be made available to the public at large.
The members of a company manifest their wishes at general meetings by voting for or against proposed resolutions and as a rule the will of the majority of the members prevails and is binding on all.
An important issue to address is deciding which form of business partnership to use. In practice, the limited liability company is the most popular commercial partnership. “First and foremost, the principal benefit of trading via a limited company has always been the limited liability bestowed upon the company’s officers and shareholders.” Before the concept of limited liability many people who had a substantial amount of resources would be reluctant to form a partnership due to the fear of losing everything as a result of the company’s losses. With the introduction of limited liability that person knows that he is only liable up to the amount he has invested and therefore only that amount is at risk and not all of his property. Therefore, this low risk of limited liability encourages greater investment.
Once a Company builds a good reputation, it even increases the value of its goodwill with the result of being more in demand for investment continuity. Another fact which promotes the use of a limited liability company is that the creditors who deal with companies know that they are dealing with a company whose shareholders’ liability is limited, namely from the fact that it has (Ltd) at the end of its name. The creditors thus know what they are going in for and know what the repercussions are if they enter into transactions with limited liabilities and therefore if they have doubts, they should not enter any contracts in the first place.
Just like all the rest of the commercial partnerships, the Limited Liability Company is a separate person. A shareholder in the company is just a person who has just acquired shares but is a separate person from the company. The company and the share holder are not one and the same thing and therefore the latter cannot be responsible for the obligations entered into by the company. In the Commercial Partnership Ordinance under Section 4(2) it was spelt out that “a commercial partnership has a legal personality distinct from that of its members.” Nowadays, even a single member company has a separate juridical personality.
Another advantage of forming a company is that once a company is formed it continues despite the death, resignation or bankruptcy of management and members. Since the limited liability company is considered a lasting legal entity “a company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.”
Another reason why it is of an advantage to form a limited liability company is that it is easy to secure new shareholders and investors. A public company which is in need of money or wishes to invest in another business enterprise can be listed in the stock exchange and acquire the needed finance by means of trading by other shareholders or investors, hence the ownership of a company can be divided among several owners in the form of shares of stock. The issue, transfer or sales of shares is regulated by the Companies Act.
With a limited liability company, the process of borrowing money from a bank is much easier. On registration with the MFSA the company is a legal person in accordance with the Companies Act and consequently the bank will open an account and “can secure its loan against certain assets of the business or against the business as a whole.” When setting up a company business partners do not pay tax on their individual income but on a corporate level on company profits which may constitute benefits and allowance. In addition companies are approved better beneficiary pension schemes which consequently are offered to the employees of the company.
Since the introduction of the limited liability company a total number of 52,000 companies where registered with the Malta Financial Services Authority, while only around 1,300 partnerships were registered. These statistics prove that it is the best decision one can make to carry out a business in the form of a limited liability company. In conclusion, a legal limited liability company helps you gain from a number of advantage mentioned above while you can limit your personal liability and protect your personal assets.
* Chapter 386 of the Laws of Malta, Companies Act (1995)
* Commercial Partnerships Ordinance
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