LESSON 6: PARTNERSHIPS

Sociedad colectiva
Sociedad Comanditaria

1. INTRODUCTION
2. GENERAL PARTNERSHIP
2.1 Formation of a partnership
2.3 Alteration of the partnership agreement
2.4 The relationship between partners: Rights and duties of the partners
2.4.1 Duties
2.4.2 Rights:
2.5 The relationship between Partners and third parties
2.5.1 The authority of partners to bind the firm
2.5.2 Partners Liability
2.6 Dissolution
2.6.1 Grounds of dissolution
2.6.2 Liquidation
3. LIMITED PARTNERSHIP
3.1 Formation of the partnership
3.2 Alteration of the partnership agreement
3.3 The business name.
3.4 Relationship between partners
3.5 Relationship between partners and third parties
3.6 Dissolution and winding- up
4. LIMITED PARTNERSHIP BY SHARES

1. INTRODUCTION

The partnership is a fundamental form of Business/commercial organization,

which is born of a contract between two or more individuals who carry on a business in
common with a view of profit. It may include every trade occupation or profession. The
essence is that there must be some commercial venture. This excludes relationships whose
basis is merely joint ownership of property whether the owners do not share any profits
made by the use thereof.

It is an organization in its own right with a separate legal personality

The Commercial Code regulates the partnership in articles 125 to 157 as an

organization in its own right with a separate legal personality, although it does not include
definition of the partnership.

There are three different types of partnership: general partnership, limited

partnership and limited partnership by shares.

A general partnership is the one in which partners are personally jointly and
severally liable with the whole of their net worth for the debts of the partnership and take
part in the management of the business.

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 A limited partnership (S. Com.) is a partnership in which there is at least one
general partner and one or more limited partners. Limited partners are only liable for the
amount of capital they contribute or promise to contribute to the partnership. The capital
of limited partnerships may be divided into participation units or shares.

2. GENERAL PARTNERSHIP

2.1 Formation of a partnership

It is created by an agreement between partners and it is known as a memorandum

or articles of association. Such agreement must be drawn up in a formal deed. Art. 125
CCo and 209 RRM establish the formalities for the creation of a partnership as following:

a) - The proper name and residence (address) of the partners

b) - The business name
c) - The name of the partners appointed for the management of the partnership
d) - The contributions of the partners to the capital of the partnership
e) - The duration of the partnership
f) - The remuneration to be paid, if so, to partners who are involved in the running
of the business
g) - Any other kind of conditions the partners want to establish.

Art. 209 RRM includes also the registered office and the capital of the partnership.

2.2 Business name (art. 126)

The business name shall include the proper name of one or more partners, which
must be followed by the words “y compañia”.

It is forbidden to include the names of other individuals who are not partners and,
on doing so, those which name is included in the business name shall have unlimited joint
liability for the debts of the partnership.

2.3 Alteration of the partnership agreement

Just as a consensual nature of the partnership relationship allows the parties to

make the agreement in such terms as they wish, so are they equally free to alter those
terms at a later date. However, the decision to alter the terms of the memorandum shall
be taken by unanimous agreement of the partners.

2.4 The relationship between partners: Rights and duties of the partners
2.4.1 Duties:

Contribution

Contribution may be in capital or in work. The Commercial Code uses the term
industry, the meaning of which in this context is work. The partners contributing with
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capital are called capital partners, the partners contributed with work, are called industrial
partners. The latest have a specific treatment relating to profits and the prohibition of
competition.

No competition with the partnership.

The commercial code establishes in arts. 138, 136, 137 that the partners shall not
compete with the partnership business without the consent of the other partners. The
partner who infringes the prohibition shall be liable to account to the partnership for any
profits made in the course of that business. The prohibition is especially hard for the
“industrial partners”, who are supposed to work only for the partnership business. The
infringement of the prohibition permits the other partners are entitled to rescission of
partnership agreement and the expulsion of the partner.

2.4.2 Rights:

To take part in the management of the business

The main characteristic of the internal relation between partners is the possibility
for all the partners to take part in the management of the business. Art. 129, however, the
memorandum or articles of association can specify that one or more managers can be
appointed.

In the event of not having appointed any partner for the management of the
business, all of them shall hold separately power but when present, agreement between
managers shall be necessary.

Being appointed in the memorandum one or more partners for the management of
the business, the dismissal of any of them is not possible, and the partners can only
appoint a co-manager to control the transactions of the first. The can also claim for the
dissolution of the partnership. However, if the dissolution is not possible (art. 132 CCo).

Managers may or not be partners if such condition is specified in the memorandum

(art. 143 CCo).

If the administration had not been given to a partner, all of them would have the
power to contribute to the management of common issues and the partners need to agree
to contracts and obligations which are of interest to partnership. If there are partners who
are responsible for managing, the other shall not interfere in their management.

There is a general duty not to make a personal profit from a fiduciary position.
Thus partners, are not supposes to use partnership property for their own personal benefit
or gain and must account to the firm for any benefit obtained without consent from any
transaction concerning the partnership and are responsible and have to indemnify the firm
for any damage caused by malice, abuse the power or gross negligence. In other sense, a
partner has the right to be indemnified by the firm for any liabilities incurred or payments
made in the course of the firm’s business.

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 A partner is not generally entitled to receive any salary for acting in the partnership
business, but it is not unusual for the agreement effectively to provide for the payment of
a salary to particular partners before the determination of the profits.

Right to information

Partners’ right to information is established in art. 133, that reads that all partners
are entitled to have access to the partnership’s books.

Right to share profits

Profits and losses of capital are not to be shared equally by the partners, what is
reasonable if we think that contributions to the capital of a firm may not be equal. And it
is more likely to be decided, art. 140 of the Commercial Code provides that unless express
provisions in the partnership agreement, the sharing of profits shall be divided in
proportion to the partner's interest in the partnership. The industrial partner shall receive
the same as the minor capital partner. Losses shall be shared in the same proportion as
the profits. However, the industrial partner won’t have to pay for them.

2.5 The relationship between Partners and third parties

2.5.1 The authority of partners to bind the firm

The power to represent the partnership may be given to one or more partners and
the partnership agreement may expressly limit the faculty to use the firm’s name and only
the partners who are especially authorized to contract on behalf of the partner can bind
the partnership with their transactions.

The partnership shall not be bound by the acts of the any partner no authorized to
represent the firm, even though these transactions are conducted in the name of the
partnership, and the partner doing so shall be responsible for his acts (art. 127 and 128
Commercial code)

2.5.2 Partners Liability

Article 127 Commercial Code provides that all the partners in a partnership shall
have unlimited joint liability for the debts of the partnership.

This means that every partner is responsible for the full amount of the firm’s
liability. Outsiders have the choice of taking action either against the fir or against the
individual partners. However, a partnership’s creditors may not pursue payment of the
debts of the partnership against a partner until after having fruitlessly given the
partnership formal notice to pay by extra-judicial means.

Where damages are recovered from one partner only, the other partners are under
duty to contribute to the amount paid in proportion to the partner’s interest in the
partnership.

2.6 Dissolution

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2.6.1 Grounds of dissolution

There are a number of possible reasons for bringing a partnership to an end. It may
have been established for a particular purpose and that purpose been achieved, or one of
the partners might wish to retire from the business, or the good relationship between the
members, which is essential to the operation of a partnership, may have broken down. In
all such cases, the existing partnership is dissolved, although, in the second case a new
partnership may be established to take over the old business.

The Commercial Code in arts. 221 and 222 provides for the dissolution of a
partnership on the following grounds:

The expiry of a fixed term or the completion of a specific enterprise which was
the purpose of the partnership. In this case the partnership shall be wound up unless the
partners agree to continue after the pre-set limit and a new partnership is created (art. 223)

a) The entire loss of the capital

b) The liquidation of the partnership declared insolvent
c) The death of one of the partners. However, should it have been specified in the
agreement that, in the event of the death of one of the partners, the partnership
should continue with their heir or only with the surviving partners
d) When any of the partners who is a manager suffers of mental incapacity or any
other permanent incapacity where the partner is no longer able to manage his
affairs.
e) When a partner, declared insolvent under the insolvency, act enters into
liquidation process.
f) If the partnership is of indefinite duration, it can be brought to an end by any of
the partners giving notice of an intention to dissolve the partnership (art. 224).

In addition to the provisions listed above, art. 218 provides for the rescission of
the contract and the partnership shall be partially dissolved when a partner breaches the
partnership agreement in such cases as not contributing to the capital of the partnership,
misappropriation of funds, infringe the duty of no competition, when there is an extended
absence from the business, or when a partner who is not a manager interferes in the
faculties of the managers.

The legal personality of the company shall continue, for the purposes of the
liquidation, until the company is closed. The dissolution of the partnership should be
registered with the Mercantile Register Office.

After the dissolution the authority of the partners authorized to bind the firm
continues so far as is necessary to liquidate the firm’s affaires and complete transactions
that have begun but are unfinished at the time of dissolution. Partners cannot, however,
enter into new contracts (art. 228).

2.6.2 Liquidation

Upon dissolution, the partnership shall start being liquidated. The value of the
partnership property is realised and the proceeds are applied in the following order: in

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paying debts to outsiders; in paying to the partners any advance made to the firm beyond
their capital contribution, and in paying the capital contribution of the individual partners.
Any residue is divided between the partners in the same proportion as they shared in
profits.

Liquidators shall be responsible, with regard to both the company and third
parties, for the harmful consequences of the errors committed thereby in fulfilling his
duties.

3. LIMITED PARTNERSHIP

The Commercial Code does not give a definition of the limited partnership, but its
characteristics may be inferred from the regulation in arts. 145 to 150. The limited
partnership is a form of partnership, where in addition to an at least one general partner,
there are also limited partners. The general partners are, in all major respects, in the same
legal position as partners in general partnership: they have management control, share the
right to use partnership property, share the profits of the firm in predefined proportions,
and have joint liability for the debts of the partnership.

The limited liability of the partners were in the XVIII and XIX centuries the
principal attraction for all those who wanted to obtain profits from a business but didn’t
not want to enter into management. On the other hand it was a good opportunity for rising
funds for merchants. At the present moment the importance of this type of partnership is
very little because of the existence of companies, which have become more and more
attractive for business because of the lack of liability of the partners and the facilities
given to partners for the transfer of shares.

3.1 Formation of the partnership

Art 145 of the Coco provides that in the memorandum the same conditions as in
the general partnership. This art. needs to be completed with art. 123 RRM which says
that in the memorandum shall include the proper names of the general partners, the name
of the company can only be compound by the name of the general partners and the
management and representation of the partnership can only be realized by the general
partners.

3.2 Alteration of the partnership agreement

The terms of the agreement of the partnership can be altered by the partners at a
later date. There are two different situations:

1. If one or more general partners have been appointed in the memorandum for
the management of the business, the dismissal of any of them is only possible by a
decision of the Court declaring the dissolution of the partnership, related to the partner in
the breach of his duty.

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 2. Decision to alter the terms of the memorandum shall be taken by unanimous
agreement not only of the general partners but also of the limited partners.

3.3 The business name

In arts. 146 and 147 it is said that a limited partnership shall be designated by its
business name, in which may be incorporated the names of one or more partners and
which must be immediately preceded or followed by the words “Sociedad en Comandita
” (limited partnership) or its abbreviation S.en C. or S. Com. In addition it is prohibited
for the limited partners to be included in the business name and in the event of
infringement of this prohibition, the limited partner shall be held jointly liable with the
active partners for any debts of the partnership, with no other rights than those
corresponding to a limited partner.

3.4 Relationship between partners

Limited partners are obliged to contribute to the capital of the partnership. The
contribution can be made in money or in any other kind of patrimonial assets: goods,
rights, industrial property rights or others.

The sharing of profit shall be made following the same criteria as for the general
partners: they will receive their part in proportion to the partner’s interest in the
partnership.

Only general partners have the right to participate in the managing of the business.
A limited partner may not carry out any act of management, even by virtue of a power of
attorney. In the event of infringement of the prohibition, the other partners may claim for
damages and for the rescission of the partnership with the limited partner.

Unless there are different provisions in the memorandum, limited partners shall
have the right to obtain, once a year, communication of the partnership’s general
accounts, partnership books and other documents (art. 152).

3.5 Relationship between partners and third parties

Limited partnerships have expressly forbidden acting with third parties in the
name of the firm. Only the general partners may be authorize to bind the firms.

Limited partners shall be liable for the debts of the partnership only in respect of
the amount of their contribution. This may not be a contribution in the form of services

3.6 Dissolution and winding- up

The rules for dissolution and winding-up are, in the Commercial code, the same
for general and limited partnerships.

4. LIMITED PARTNERSHIP BY SHARES

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 In a limited partnership by shares the capital shall be divided into shares, and
consists of the contributions of the partners. At least one of the partners shall be
indefinitely and jointly liable for the partnership’s debts and shall be the manager of the
firm (art.1.4 LSC).