Understanding Nigerian Partnership Structures: Types, Benefits and Legal Considerations.

Introduction

One of the significant changes introduced by the Companies and Allied Matters Act, 2020 (“The Act”) are the additions of Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) to the already existing general partnership structure. These new business structures offer distinct advantages over the traditional general partnerships, reflecting global best practices and providing businesses with more flexibility and protection. This article delves into the details of the different kinds of partnerships that can be registered with the Corporate Affairs Commission, their differences, advantages and disadvantages, and legal requirements etc.

General Partnerships

A general partnership is one of the simplest and most common form of partnership and business organization that can be registered in Nigeria. It involves two or more individuals (not exceeding 20) coming together, usually bound by a partnership agreement to run a business, share profits, losses, and responsibilities. It is registered as a business name with the Corporate Affairs Commission.

Features
. All partners share equal responsibility for managing the business and are jointly and severally liable for its debts and obligations. Hence, there are no limits to each partner’s liabilities for debts and each partner’s assets can be used to satisfy the partnership’s liabilities.
. Each partner shares the profits and losses of the business according to the terms outlined in their partnership agreement. Typically, this is in equal proportions, however, the partnership agreement can specify otherwise.
. Each partner acts as an agent for the partnership, meaning that the actions of one partner in relation to the partnership can legally bind the entire partnership. This underscores the importance of trust and clear communication among partners.
. There are fewer regulatory requirements, and it is relatively simple to set up compared to the other forms of partnership. There are also fewer tax requirements, i.e., withholding tax, personal income tax and VAT in some instance.

Advantages
1. There are less strict regulations compared to the other forms of partnerships. Thus, it is easier to set up.
2. All partners can be involved in the management of the partnership leading to better and more informed decisions.

Disadvantages

1. The death or bankruptcy of one of the partners brings the partnership to an end. Although, this can be avoided in the partnership agreement.
2. There are not many options to raising capital for the business of the partnership.
3. The unlimited liability of each partner can be a disadvantage.

Limited Partnerships (LP)
A limited partnership is a form of partnership where at least two or more (not more than 20 persons) agree to carry on business for the purpose of making profit. Similar to a general partnership, however, in a limited partnership, there is at least one general partner whose liabilities are unlimited and a limited partner whose liabilities are limited to the amount he agrees to contribute to the partnership.

Features
. There is at least one general partner and a limited partner. In the event that the partnership runs into debts, the personal assets of the general partner can be used to satisfy or repay the debts. However, for the limited partner, he is only liable to the amount he agreed to contribute to the partnership.
. A general partner in a limited partnership is generally responsible for the management of the partnership, while the limited partner ensures that the partnership complies with the provisions of the Act with regards to limited partnerships and does not partake in the management of the partnership business.
. An important feature of limited partnership is that where a limited partner partakes in the management of the partnership, his liabilities automatically becomes unlimited, i.e., extends beyond the amount he agrees to contribute to the partnership.
. Limited partnerships do not have a separate personality from the partners. Thus, they cannot own properties, sue or be sued in the name of the partnership without an addition of the names of the partners to it.
. Generally, the death or bankruptcy of a general partner brings the partnership to an end, except as specified otherwise in the partnership agreement. The Act also provides that the death or bankruptcy of a limited partner does not dissolve the partnership.

Advantages

1. It is simple to form and manage and, there are fewer tax requirements in a Limited Partnership, i.e. personal income tax, withholding tax and value added tax.
2. The possibility of attracting passive investors who are not interested in taking part in the management of the partnership business., in order to raise funds for the limited partnership.
3. Limited Partnership is also attractive to professionals and specialists who are not interested in taking part in the management of the partnership business.
4. Unlike the general partnership, the death, withdrawal or bankruptcy of a limited partner does not automatically dissolve the partnership, regardless of an express provision catering for dissolution in the partnership agreement.

Disadvantages
1. General partners are at risk of losing personal assets due to their unlimited liabilities and obligations to the partnership.
2. There may be conflict of interests between the limited partners and the general partners with regard to the management of the partnership.
3. Limited partners are solely held responsible for failure to comply with regulations.

Limited Liability Partnerships (LLP)
A Limited Liability Partnership is a form of partnership with its own separate personality, formed by at least two partners and an unlimited number of partners to carry on business for the purpose of making profit. Thus, a limited liability partnership is similar to a limited liability company, in that LLPs have a separate legal personality from the partners.

Features
. As a separate legal entity, an LLP can own property, enter into contracts, sue, and be sued in its own name. Thus, the LLP itself is responsible for its obligations and liabilities, not the individual partners.
. The liability of all the partners in an LLP is limited to the amount they agree to contribute. Therefore, personal assets are protected and will not be used to settle debts of the partnership.
. There is no limit to the number of partners in an LLP and the death or bankruptcy of any or all of the partners does not bring the partnership to an end.
. There is at least two (2) designated partners, of which one (1) of them must be resident in Nigeria, who will be responsible for ensuring that the partnership complies with the provisions of the Act with respect to LLPs, and will be held liable for contraventions.

Advantages
1. The separate legal personality of an LLP offers a layer of protection for the personal assets of the partners.
2. It is also suitable for professional services firms such as law, accounting, and consultancy firms allowing partners to pool resources and partake in the management without the risk of personal liability for each other’s actions.
3. Partners in an LLP are not personally liable for the negligence or misconduct of other partners, safeguarding personal assets.

Disadvantages
1. An LLP is more expensive to set up and requires more stringent compliance obligations compared to the other forms of partnership.
2. There are more tax requirements compared to the other forms of partnership. In addition to personal income tax, withholding tax and value added tax (where the value of the taxable supplies either singular or cumulative in a calendar year is more than Twenty-Five (25) million naira), LLPs are liable to pay Companies Income Tax.

Documents required for registration of a general partnership
1. Preferred and alternative name of the business
2. Nature of business
3. Principal address and branch address (if any) of place of business
4. Particulars (full names, addresses, dates of birth, email, phone numbers) of all Partners
5. Valid means of identification and signature of all partners
5. Passport photographs of all partners
6. Partnership Agreement
7. Where a company is a partner, the Certificate of Incorporation, Memorandum and Articles of Association of the Company.
7. Professional qualification of all Partners (For Professionals)
9. Evidence of payment of registration fee

How Much Does It Cost to Register A Partnership in Nigeria?
The total cost for registration of any form of partnership in Nigeria varies from organization to organization. However, government charges for registration of a partnership ranges between fifteen to twenty-five thousand naira.

How Long Does It Take to Register A Partnership?
It takes about 3 weeks to register a partnership in Nigeria.

Can A Foreigner Participate in The Formation of a Partnership in Nigeria?
A foreigner cannot form a general or limited partnership but can incorporate a Limited Liability Partnership (LLP), and can join in the formation of a Limited Liability Partnership with other Nigerians. However, certain professionals, e.g. lawyers are not allowed to run their partnerships with foreigners except the foreigners are duly qualified to practice the profession in Nigeria.

Also, foreign Limited Liability Partnerships incorporated outside Nigeria and having the intention to carry on business in Nigeria can apply to the Minister for Trade and Investments for an exemption to incorporate a Limited Liability Partnership in Nigeria.

Conclusion
Choosing the appropriate partnership structure for your business depends on certain factors, including, preference, number of partners, the nature of the business, liability issues, control and management etc.

 

 

 

 

 

Source- FIRMUS ADVISORY