In Cyprus, partnerships play a significant role in business ventures, with their creation, operation, and dissolution being regulated by the General and Limited Partnership and Business Names Law (the “Law”). Under this Law, a partnership is defined as a collaborative relationship between individuals who engage in business activities with the goal of making a profit. The minimum number of partners (may be corporate entities or natural persons) is two and the maximum number is 100 (if the partnership is conducting banking activities, then the maximum number of partners is 10). It is worth noting that, for legal purposes, a partnership is not considered a separate entity distinct from its partners.
Partnerships are favoured by many in Cyprus due to their flexibility and relatively straightforward establishment process, which does not involve excessive formalities or complex legal requirements. However, it is crucial for partners to familiarise themselves with the legal implications associated with forming a partnership in Cyprus. This understanding ensures that partners are aware of their rights and responsibilities as outlined in the law. This article aims to provide an overview of partnerships, shedding light on the legal aspects involved in establishing and operating a partnership in Cyprus.
Types of Partnerships
In Cyprus, there are two main types of partnerships: general partnerships and limited partnerships.
A general partnership is the simplest form of partnership in Cyprus. In a general partnership, all partners are personally liable for the partnership’s debts and obligations. Each partner has the right to participate in the management of the partnership and share in its profits. Profits and losses are usually divided equally among the partners, unless otherwise agreed.
A limited partnership has at least one general partner who is personally liable for the partnership’s debts and obligations and at least one limited partner who shall, upon joining the partnership, contribute a sum (capital or property) and shall only be liable for the debts and obligations of the partnership to the extent of the amount contributed.
Limited partners cannot participate in the management of the partnership and do not have the power to bind the partnership but can share in its profits. If a limited partner decides to participate in managing the partnership’s business, they will be held responsible for all the debts and obligations incurred by the partnership during their involvement, as if they were a general partner.
A limited partnership may have capital and be of limited liability via shares. However, regardless of whether the partnership has capital or no, it is not regarded to be a legal person with a distinct legal personality.
Formation and Registration of Partnerships
Partnerships in Cyprus can be established through a partnership agreement that outlines the partners’ rights and obligations, profit sharing, management structure, and dissolution process. The agreement can be oral or in writing, but it is recommended to have it in writing to avoid any future disputes.
All partnerships, whether general or limited, must be registered with the Registrar of Partnerships, which is the same official body as the Registrar of Companies and Official Receiver (the “Registrar”). A prerequisite for registering a partnership is the selection of an appropriate name that meets the criteria of the Registrar and obtains their approval.
For a partnership to be registered, the following three conditions must be satisfied:
i) The partnership must maintain its main place of business within the Republic of Cyprus, which cannot be a mailbox.
ii) The partnership must have at least two partners.
iii) The partnership must be established with the intention of generating a profit.
Partnerships are not regarded as independent legal identities, so the partners themselves are liable for taxes rather than the partnership as a separate entity. As per the Law, every partnership is required to maintain accurate financial records that detail and clarify their business activities and financial standing.
Advantages and Disadvantages of Partnerships
• Minimal Formalities: Minimal formalities and costs are involved in the formation and termination of partnerships.
• Flexibility and Adaptability: Partnerships offer flexibility in terms of business structure and decision-making processes. Partners have the freedom to establish their own rules and regulations through a partnership agreement, allowing for customised arrangements that suit the specific needs and goals of the partners. This flexibility enables quick adaptations to changing market conditions and opportunities.
• Shared Risk: Partnerships enable the sharing of business risks among partners. In the event of financial difficulties or a failed business venture, the burden is distributed among all partners (except for limited partners who are liable only up to the amount they have contributed to the partnership), thereby reducing the individual risk for each partner. By spreading the risk across multiple individuals, partnerships provide a safety net and promote collective responsibility. This ensures that partners can navigate challenges together and protect their personal assets to the extent allowed by their role in the partnership.
• Increased Resources, Skills, Capital, and Effort: Compared to operating on your own as a sole trader, by joining with one or more individuals you can tap into the advantages of increased resources, enhanced skills, additional capital, and greater effort being devoted to your business.
• Unlimited liability: Partners in a partnership have unlimited personal liability for the debts, obligations, and actions of the partnership. This may be alleviated by becoming a limited partner. However, the choice to become a limited partner is appealing only to individuals who are willing to contribute capital while relinquishing management and control to others.
• Potential for Disputes: Partnerships are based on mutual trust and cooperation, but disagreements among partners can arise. Disputes regarding decision making, profit sharing, or the withdrawal of a partner can lead to conflicts that may be challenging to resolve. This necessitates the careful drafting of a partnership agreement to include rules to govern these issues.
• Lack of Continuity: Partnerships may face challenges in terms of continuity and succession planning. The departure or death of a partner can lead to the dissolution of the partnership, unless there are provisions in the partnership agreement to address these situations.
• Difficulty in Raising Capital: Partnerships may encounter difficulties in raising capital compared to other business structures. Partnerships typically rely on the contributions of partners and loans from financial institutions, which can limit the partnership’s ability to access larger funding sources or issue shares to raise capital.
Partnerships offer a flexible and cost-effective option for establishing a business in Cyprus. They provide opportunities to combine resources, skills, and capital from multiple partners, leading to increased efficiency and potential for growth. However, it is crucial for prospective partners to have a clear understanding of their rights and obligations under the law before entering into a partnership agreement. This includes being aware of the potential risks and liabilities associated with partnership, such as unlimited personal liability for general partners. Seeking legal advice and drafting a comprehensive partnership agreement can help mitigate these risks and ensure a smooth and mutually beneficial partnership. By considering the advantages and disadvantages of partnerships and making informed decisions, partners can set a solid foundation for their business ventures in Cyprus.
This article is for general informational purposes only and should not be construed as legal advice.