Want Limited Liability? Try a Partnership
When starting a business, persons have the option of either doing so through a sole proprietorship (one person owns the business), a partnership (two or more persons own the business) or through a limited liability company under the Companies Act, (the business is owned by shareholders).
Each business vehicle has its advantages and disadvantages but the preferred business vehicle among entrepreneurs in Jamaica has been the limited liability company. This comes as no surprise as, of these three types of business structures, the limited liability company has been the only type of entity that allows investors to limit their exposure to business risk through the concept of separate legal personality. This means that limited liability companies are seen as entities distinct from their shareholders. The practical result of this is that, except in exceptional circumstances, debts acquired in the name of the company belong to company only, thereby protecting the personal assets of the shareholders. The shareholders’ liability in the case of insolvency or bankruptcy is limited to the amount, if any, that they owe on their shares.
Partnerships have ranked second in the bid for most preferred business vehicle as they allow persons to pool their resources and/or skills to achieve a common purpose and maximise on profits. However, as partnerships in Jamaica traditionally did not have separate legal personality, they were considered risky undertakings in that one partner becomes the agent of the other, making all partners personally liable for all obligations of the partnership. Practically speaking, if the partnership incurred debt, and the assets of the partnership were unable to fully settle that debt, the personal assets of each of the partners could be used to satisfy the debt insofar as is necessary, regardless of the fact that the debt was incurred due to the actions of only one partner.
However, this is about to change. The Senate recently passed the Partnership (General) Act and a new, more extensive Partnership (Limited) Act. When these Acts come into effect, they will allow for certain partnerships to enjoy some of the benefits that are currently enjoyed by limited liability companies.
Separate Legal Personality
Both Acts provide for the formation of partnerships with separate legal personality. Under the Partnership (General) Act, there are three types of partnerships. They are referred to in the Partnership (General) Act as the-
- General Partnership without separate legal personality;
- General Partnership with separate legal personality; and
- Limited Liability Partnership.
Under the Partnership (Limited) Act, there are also three types of partnership. These are the-
- Limited Partnership without separate legal personality;
- Limited Partnership with separate legal personality; and
- Limited Liability Limited Partnership.
The General Partnership with separate legal personality, the Limited Liability Partnership, the Limited Partnership with separate legal personality and the Limited Liability Limited Partnership are all entities distinct from their partners and have similar powers to a limited liability company in that they may hold land, enter into contracts, sue or defend a suit, all in the name of the partnership.
Both Acts also offer various ways in which partners may limit their personal liability.
Under the Partnership (General) Act, by electing to become a Limited Liability Partnership, the liability of all the general partners will be limited to their capital contribution to the partnership. For example, if one partner contributes a car to the partnership for the purpose of carrying out the day-to-day operations of the business, in the event of a recovery of debt by a creditor, that car may be sold to recover the debt; however, the partner’s personal vehicles would be protected.
For partnerships under the Partnership (Limited) Act, each partnership must have at least one limited partner and one general partner. A limited partner is essentially an investor and is not allowed to be involved in the day- to- day management of the business. The limited partner’s liability is limited to the amount of his capital contribution to the partnership but if he meddles in the management of the business, he forfeits the limit on his liability.
The Limited Liability Limited Partnership allows both general partners and limited partners to limit their liability to the amount of their capital contribution to the partnership. In this type of partnership, the primary distinction between partners will be the fact that general partners manage the business of the partnership while limited partners do not.
Limitation on number of partners
The Companies Act, 2004 currently provides that where a partnership has more than twenty partners, it must be incorporated as a company. The only exceptions to the general rule are accountants and lawyers. This effectively forces groups of more than twenty persons to use the limited liability company business structure. When the Partnership (General) Act comes into force, it will repeal this provision of the Companies Act, and enable partnerships to be formed with an unlimited number of partners, thereby allowing more options to persons seeking to do business together.
Death of the Limited Liability Company?
With these added features and benefits to partnerships in Jamaica, persons who were forced to utilise the limited liability company business structure will now have the option of starting or continuing as a partnership with many of the same benefits as a limited liability company.
Will this result in the death of the limited liability company? Absolutely not. Limited liability companies are still quite useful and offer unique benefits, one such benefit being the fact that, currently, only a limited liability company can issue a prospectus and raise capital on the Jamaica Stock Exchange. The practical result of the introduction of these Acts is that investors and entrepreneurs (including those seeking to enter into joint venture agreements) now have more options when deciding on the business vehicle that best suits their needs which will ultimately lead to more opportunities for investment and trade in Jamaica.
Chantal Simpson is an Associate at Myers, Fletcher and Gordon in the Commercial Department. She may be contacted at firstname.lastname@example.org. This article is for general information purposes only and does not constitute legal advice.