When a group of individuals is considering starting a business together, it is imperative that they carefully consider the type of corporate structure that the business shall have. The corporate structure chosen can have significant legal and financial implications for the business, and can impact the way that the business is run and how profits are distributed. Some entrepreneurs may be hesitant to form a company at early stages of their business venture. In such cases it may be a good alternative to form a partnership in Malta instead.
Forming a Partnership in Malta: legal background
A partnership is an agreement between at least 2 persons. The main aim of the partnership is to establish a legal relationship between the parties involved.
Maltese Law recognises three different types of partnerships:
The partnership en nom collectif (or General Partnership);
The partnership en commandite (or Limited Liability Partnership);
The partnership as envisaged by the Civil Code (Civil Partnership).
The partnerships en nom collectif and en commandite are regulated by the Maltese Companies Act, whilst the Civil Partnership is regulated by the provisions of the Civil Code.
Partnership en nom collectif
The formation of a partnership en nom collectif requires two or more individuals who would operate under a partnership name. In such type of partnership in Malta, partners will have unlimited, joint and several liability.
Unlimited liability: unlike when forming a limited liability company, partners who have opted for an en nom collectif partnership shall have unlimited liability, whereas each partner would be personally liable for the debts of the partnership. This means that the partners shall make good for any debt incurred by the partnership with their own personal property should the partnership be unable to pay its debt.
Joint and several liability: in addition to the above, joint and several liability means that a debtor may seek payment for the entirety of a particular debt from any one of the partners and they would be obliged to pay the said debtor the entire debt. It is then up to the particular partner to personally seek re-payment from the other partners on a pro-rata basis.
In order to register this type of partnership in Malta, one would have to draft a partnership deed and submit it to the Maltese Registrar of Companies.
The partnership deed shall contain the following information:
- The name and residence of each partner;
- The Partnership name;
- The registered office of the partnership;
- The objects of the partnership (The area of business in which the partnership intends to operate in);
- The contribution of each partner, specifying the value thereof;
- The operational period of the partnership (if any).
Once the partnership is approved by the registrar, a certificate of registration will be issued.
As the next step, the partners would be encouraged to draw up a separate document outlining how the partnership will be managed between themselves and their decision-making policies, among other things, to avoid unnecessary conflicts further down the line.
It shall also be noted, that profits may only be paid out once all debts are settled and that the individual partners may not compete against the partnership in business without the express consent of the partners.
Partnership en commandite
Partnership en commandite, or a limited partnership, is a combination of the attributes of a limited liability company and a partnership en nom collectif.
Partnership en commandite operates and is formed in the same way as a partnership en nom collectif . The difference between en commandite and en nom collectif partnerships lays in the liability of the partners forming such partnership.
Limited and unlimited liability: In the case of the en commandite partnership, limited partners will have limited liability so that their personal assets would be protected in case of bankruptcy, so long as at least one partner is a general partner bearing unlimited liability.
The limits of liability: The liability of the limited partners in this type of partnership is equivalent to the liability of shareholders in a limited liability company and is limited to the amount of the unpaid contribution to the partnership, if any. Similarly to the limited liability company, the capital of the en commandite partnership can also be divided into shares.
The registration procedure is the same as in the general partnership. The contents of the partnership deed shall include the same items as aforementioned, with the only addition being the express indication of the limited partners. The Act also permits for individuals and body corporates to act as general partners in the en commandite partnership.
General partners shall have the same duties as partners in a partnership en nom collectif , such as the administration and management of the partnership. Whereas the limited partners shall not be vested with the administration and management of the partnership and shall not transact any business on behalf of the company.
Should a limited partner take on such responsibilities as are reserved for general partners, he shall be deemed a general partner with unlimited, joint and several liability to the partnership’s creditors and may be expelled from the partnership.
Civil Partnership in Malta
Under a Civil Partnership in Malta, the partners agree to place something in common, such as money, property or their skill, in order to derive a mutual benefit.
This type of partnership is the easiest type to form in Malta opposed to the en nom collectif and en commandite partnerships. However, under this type of partnership, the partners operate under their own respective names and is thus more aimed at professional, skilled individuals who wish to apply their trade alongside one another.
The difference in forming this kind of partnership in Malta, is that all that is needed is a partnership agreement formulating the relationship between the partners. This shall include each partner’s respective contribution to the partnership, the objects of the partnership and the mode of distribution of profits, along with any provisions relating to the management of the partnership as the partners deem fit.
Note: A public deed is only required when immovable property is being contributed.
Such type of partnership formation grants flexibility to the partners involved and reduces certain compliance obligations partners would have through other types of partnerships. However, the partners in the civil partnership are not protected by the limited liability and are personally liable with all their assets, both present and future, to the creditors contracted.
This type of partnership isn’t vested with a separate legal personality and therefore one must take into consideration, that unlike the previous partnerships, the partners are not joint and severally liable. Thus one partner cannot bind the other unless he has been given power to that effect. This means that should a significant debt be incurred by the partnership, it is a wise practice that all partners sign so that they shall bear the responsibility equally.
Partnership en nom collectif
Partnership en commandite
|Joint and several liability of partners||General partner has unlimited liability. The limited partners have limited liability.||Personal liability of each partner|
|The administration and representation of the partnership vests in each of the partners severally||The administration and representation of the partnership vest in the general partners unless the deed of partnership provides otherwise.||As agreed through the partnership deed|
|Capital cannot be divided into shares||Capital can be divided into shares||Capital cannot be divided into shares|
|Registered partnership||Registered partnership||Not registered partnership|
|Partners declare their share of profit in their personal tax returns and taxed according to their personal tax rates.||Treated as a company for Maltese income tax purposes.||Each partner is registered as self-employed and are taxed individually.|
Dissolution of partnerships in Malta
Partnerships, similarly to companies, can be dissolved. The three common reasons for partnerships being dissolved are:
- Dissolution on the grounds speculated in the partnership deed, for example:
- The expiry of the duration of the partnership;
- By agreement of all the partners.
- Dissolution on the grounds speculated in the law, for example:
- Based on the Court’s decision that there are sufficient serious grounds for dissolution;
- The number of partners is reduced to less than two and remains so reduced for more than 6 months;
- The absence of a general partner and/or limited partner for an uninterrupted period of 6 months.
- Dissolution for financial reasons: in case of bankruptcy.
How can we help?
Whether setting up a company or a partnership, one must be aware of the obligations a certain business structure entails. Our corporate team focuses on understanding your business goals and needs and provides advice on the most suitable structure to be established for your business.
Upon deciding on the structure, whether it will be a company or a partnership, our team will assist you with drafting of the partnership deed or formation procedure, in order for you to begin your business operations in no time.
We are always available for both face-to-face or online consultations, get in touch with our team and speak with one of our experts today.