What is an Ordinary Partnership?

An ordinary partnership is defined as a relationship in which two or more persons undertake towards each other to combine their labor or assets for a common purpose and to use them to achieve that common purpose. It is not a prerequisite for these two or more persons to be natural persons. Legal entities may also participate in an ordinary partnership.

As a rule, an ordinary partnership agreement is not subject to any specific form requirement. Even if the purpose of the partnership or the activities it undertakes are subject to formal requirements, the establishment of the partnership occurs without such a requirement. There are certain exceptions to this rule, some of which are as follows:

• The partners may agree among themselves that the agreement be concluded in a specific form. If such a form requirement is stipulated, agreements made without complying with this form shall not bind the parties.
• If assets and rights, the transfer of which is legally subject to a specific form, are to be contributed to the partnership as a capital contribution, the clauses pertaining to this contribution shall be made in compliance with the form requirements stipulated by law. It should not be overlooked that only the provisions concerning the capital contribution whose transfer is subject to a specific form, and not the entire agreement, are subject to such form. For instance, if there is an undertaking to contribute the ownership of immovable property or a share in co-owned immovable property as a capital contribution, this clause, which contains the promise of transfer, must be made in an official form as per the legal provision. Similarly, if a receivable is to be contributed to the partnership as a capital contribution, it shall be subject to the written form requirement pursuant to the provisions on the assignment of receivables.
• If commercial companies with legal personality establish an ordinary partnership for the purpose of operating a commercial enterprise and wish to register it with the trade registry, they must conclude the relevant agreement in writing and have it certified by a notary public. In this scenario, the form requirement only applies if registration with the trade registry is desired. Otherwise, there will still be no form requirement for the establishment of the ordinary partnership.

Although no form requirement is stipulated, in the event of a legal dispute, if the existence of a partnership cannot be proven, losses of rights may occur. Concluding an ordinary partnership agreement in writing would be more prudent as it will provide ease of proof for the partners. It should be remembered that in the event of a dispute, the burden of proof shall rest upon the person asserting the existence of the partnership.

Since no form requirement is stipulated, if the parties wish to conclude a written agreement, they can determine its content as they wish. In practice, it is possible to encounter many sample agreements. It would be beneficial for the parties to include the following matters in the content of a written agreement:

• Information about the parties
• The proportion in which partners will hold ownership and capital
• Partners' capital contributions
• The term of validity of the agreement, if any
• The purpose and subject matter of the partnership
• Rights and obligations of the partners
• How the partnership will be managed and represented
• How profits will be distributed
• Provisions regarding the termination and liquidation of the partnership.

What are the Characteristics of an Ordinary Partnership?

We have already mentioned that an ordinary partnership agreement is, as a rule, not subject to a specific form. In addition to this characteristic, circumstances that cause the invalidity of a contract do not affect the partnership agreement in the same way. On the assumption that the conditions for the validity of the agreement, such as a lack of form if stipulated, the incapacity of the partners, or the partnership's purpose being contrary to law and morality, are not met, the partners' liabilities continue both among themselves and towards third parties until the ordinary partnership is asserted to be invalid. In such cases, transactions carried out until the invalidity is asserted will legally maintain their validity. This means that invalidity produces prospective effect from the moment it is asserted or taken into consideration ex officio by the judge.

Does an Ordinary Partnership Have Legal Personality?

An ordinary partnership does not possess legal personality. In this context, an ordinary partnership cannot be a party to a legal relationship on its own. The parties to a legal transaction are all the partners. Therefore, all partners must participate in a legal transaction or be represented. It should be noted that it is the partners, not the ordinary partnership, that are represented. Similarly, the assets contributed to the partnership as capital contributions do not belong to the partnership itself. All partners are jointly entitled to the rights over the relevant assets. Furthermore, due to the lack of legal personality of the partnership, all partners must jointly initiate lawsuits or enforcement proceedings.

How Many Persons Are Required to Establish a Simple Partnership?

The establishment of a simple partnership requires the participation of at least two natural or legal persons.

Who Bears Liability in an Ordinary Partnership?

As previously stated, the partnership does not possess legal personality. Therefore, liability for debts arising from partnership transactions rests with the partners, not the partnership itself. Each partner is jointly and severally, primarily, and fully liable with all their assets for the debt. The situation is the same for the other partners if one of the partners is a creditor. Furthermore, if a partner not authorized to represent the partnership incurs a debt by acting both on their own behalf and on behalf of the partnership, they shall be solely liable for the debt unless the other partners approve the transaction.

How is an Ordinary Partnership Taxed?

Due to its lack of legal personality, the partnership cannot be a taxpayer. Each partner becomes a taxpayer individually, and tax procedures are carried out separately for each partner. Furthermore, if a partner, not authorized to represent and without a power of attorney, participates in a tax settlement, this settlement binds only that partner. The other partners do not incur any obligation.

What Rights and Obligations Does an Ordinary Partnership Confer Upon Partners?

We have previously mentioned capital contributions as one of the elements of a partnership. This capital contribution, undertaken for the establishment of the partnership, places the undertaking partner under an obligation towards the other partners. However, this obligation is significant only in the internal relationship, and the liability is towards the other partners. Therefore, a partner who has not yet fulfilled their capital contribution continues to be unlimitedly and jointly and severally liable towards third parties. Unless there is a contrary provision in the agreement, each partner is presumed to have joined the partnership with an equal capital contribution. What is considered equal is the value of the capital contributions. The capital contributions do not have to be of the same type. Money, receivables, goods, labor, and anything else with economic value such as client base or goodwill can be contributed to the partnership as a capital contribution. As a rule, all partners are co-owners of the capital contributions. Another right and obligation is the duty to share profits or losses arising from the partnership's business. In this context, not only financial gains and losses but all tangible or intangible gains and losses should be equally distributed among the partners, unless otherwise stipulated in the agreement. Furthermore, each partner is naturally required to act in accordance with the rules of good faith, be loyal to the partnership, and refrain from acting to the detriment of the partnership.

How are Partnership Decisions Made and Managed?

While a contrary arrangement may be determined by the partners in the agreement, as a rule, decisions concerning the partnership are made by unanimous consent. Partners may vote directly on the matter or achieve unity by assenting to the decision taken. The management of the partnership, concerning ordinary affairs, may be entrusted to designated managers. However, for extraordinary affairs, the unanimous consent of all partners is required, whether there is a manager or not.

How Does an Ordinary Partnership Terminate?

The partnership terminates automatically by operation of law in the following cases:

• The realization of the common purpose or the impossibility of its realization
• The death of one of the partners
• The bankruptcy, interdiction, or attachment of a partner's share
• The expiration of the term, if stipulated in the agreement

However, despite these automatic termination circumstances, partners may always decide to continue the partnership as long as the liquidation process is not completed. In addition to these reasons, partners may always decide by unanimous consent to dissolve the partnership. Furthermore, if a right of dissolution has been granted to one of the partners, or if the agreement is not for a fixed term, any partner may unilaterally declare dissolution. Finally, if it has become unreasonable to expect a person to continue the partnership, i.e., if there is a just cause for the partner or partners, the dissolution of the partnership may always be requested from the court.

How Does the Liquidation Process of an Ordinary Partnership Work?

The liquidation of the partnership should not be confused with the liquidation of a partner's share. The withdrawal or expulsion of a partner from the partnership does not, by itself, terminate the partnership. The shares of the withdrawing or expelled partner automatically pass to the other partners in proportion to their shares by operation of law. However, if the partnership terminates as a result of one of the termination causes, it necessarily enters into a liquidation process. During this process, the partnership's assets are converted into cash, and its debts are paid. Subsequently, capital contributions are returned to the partners. Finally, if a sum remains, it is distributed among the partners within the framework of the obligation to bear profits and losses.

You can send us any questions you may have regarding ordinary partnerships via the form located at the bottom of the page.

Av. Mehmet Yücesoy

İzmir Attorney & Legal Consultancy