What is a general partnership?
A general partnership has two or more owners who can be both natural persons and companies. By its nature, the company form can only be used if the company is to be owned by more than one owner.
Note that a partnership is considered to be established already by the founders’ agreement to commence a business activity jointly. A partnership can even be considered to have been established tacitly. If you are considering starting a business with one or more participants, it is, therefore, crucial that you have prior knowledge of the rules in the area. Especially the liability rules. Furthermore, it is advisable to draw up a partnership contract before starting the company’s activities.
As mentioned, a partnership has at least two owners. The owners are called stakeholders. The stakeholders are personally liable for the debt, but there is no requirement that they have initial capital available when they form their partnership – in contrast to, for example, a public limited company that requires initial capital or that there is a share capital that corresponds to a minimum of DKK 400,000.00.
This amount can be paid in cash. But can also take the form of values other than cash. It can be, for example, a previously personally run company, production machines and similar values, which together are considered to have a value corresponding to or exceeding the required amount of DKK 400,000.00. However, you avoid these claims if you form a partnership instead. In return, there are some other rules on liability for debt than there are for limited companies. It is therefore a good idea to familiarize yourself with the differences and similarities – economic as well as legal – before you get started.
Management and authority to bind the company
There are, as is the case for public and private limited companies, no legal requirements that the partnership must have management in the form of an executive board, a board of directors or the like. The stakeholders can thus decide for themselves whether and, if so, which manages the partnership should have.
Unless otherwise stipulated in a partnership agreement, all significant internal decisions require all stakeholders to be in agreement, whereas each individual stakeholder can sign agreements with third parties and bind the company to such agreements.
As such, if a company is run in the form of a partnership, it is recommended that a partnership agreement be drawn up, which i.e. regulates:
- Stakeholders’ work obligation
- The financing of the partnership
- The authority to bind the company
- Which decisions require special decision processes
- Withdrawal of a stakeholder from the partnership, including in the event of death, divorce, incapacitation, etc.
- Dissolution of the partnership
- Non-competition clauses
- Non-solicitation clauses
- Breach of contract
- Choice of law and legal venue
If you want assistance in preparing a partnership contract, you are naturally welcome to contact us.
What about the liability of the partnership and the stakeholders?
Each stakeholder is personally, jointly and principally responsible for the partnership’s obligations.
The individual stakeholder is thus liable with all his personal assets for all debts in the partnership. Just as the individual creditor can choose to direct the claim directly against the individual stakeholder, without first having to investigate whether the partnership – or the other stakeholder(s) – can and will pay.
If a stakeholder pays a claim that is incumbent on the partnership, he or she must file a recourse claim against the other stakeholder(s).
Partnership capital requirements
There is no legal requirement for a certain amount of capital at a start-up.
The partnership can thus be started without funds at all. However, the lack of capital requirement is offset by the rules on personal liability, cf. above.
Accounting and tax matters
The partnership is in principle not obliged to publish accounts or other information. If all stakeholders are capital companies, however, the accounts must be calculated in accordance with the relevant rules.
A partnership is not an independent tax object, which is why the profits or losses of the partnership are taxed at the individual stakeholder. As such, the partnership is tax law transparent. If you experience a deficit in the partnership for a year, then you can use it for something positive. If you own the partnership personally, you can thus deduct your share of the deficit on your tax return. Similarly, if you own the partnership through a holding company, you can deduct the loss.
If your partnership is personally owned, you are not obliged to prepare or submit an annual report or annual accounts to the Danish Business Authority. In this way, you save the costs of an accountant and in addition avoid having to publish information about your company’s financial interests. But also, how it performs compared to the previous year. It is therefore only if the partnership is completely owned by companies that there is a requirement that it then also prepares and submits an annual report to the Danish Business Authority.