1. Partnerships
It is the preferred business model as it is flexible. It also permits the importation of expertise into the business.
Governed by 2 laws: Partnerships Act and the Limited Liability Partnerships Act, both of 2012.
Elements – a partnership must have at least two people. There is no sole/individual partnership.
Element – the partnership must be engaged in joint business
Element – the business must be with a view to profit.
Entities excluded from the operation of the Partnership Act:
• Body corporate
• Limited liability partnerships
• Forms of organizations where members are less than two eg. sole traders
• Bodies established by other Acts of Parliament eg. Statutory corporations.
2. Formation of partnerships
Express agreement –
Where partners decide to execute a partnership deed or sign a memorandum or some other document showing their intention to form a partnership.
Powers of courts in respect of partnerships.
3. Types of partnerships
Include ordinary/general partnership and limited partnerships. Extends to the limited liability partnership.
Previously there were Commonwealth partnerships and the East African Community Partnerships. However, both were repealed. Currently, those partnerships not registered in Kenya have a window under foreign partnerships.
4. Duties and obligations of partners
They are of three types:
Fiduciary duties
Disclosure duties
Diligence duties
5. Partnership membership
Initial persons proposing to form a partnership become members by executing a partnership agreement. A person can also be admitted into an existing partnership, subject to the unanimous agreement of all existing partners.
A person ceases to be a partner on death when adjudged bankrupt and not discharged for three months, or on the dissolution of a partnership. Other methods are by retirement or resignation of a partner. One can also be expelled by fellow partners. Incapacity such as mental infirmity can form a ground for expulsion. The court can also order the removal of a partner.
6. Capital of the partnership
Partners have an obligation to contribute to the capital for the partnership business. Where the agreement has not set the limits, the obligation is to contribute equally.
The Act requires approval for all partners where any additional contribution is required.
A partner who has extra contribution must also get the consent of all other partners.
A partnership can also receive loans or additional funds from its partners. The decision on whether to borrow from partners is an ordinary business which can be approved by a simple majority.
Any loan given to the partnership can only attract a 3% interest (hinders partners from taking advantage of the partnership or other partners to loan money at excessive rates).
7. Partnership Management and control
All partners are entitled to engage in the business of the partnership diligently at all times. Further, partners have deemed agents of the partnership, with powers to contract and give undertakings and enter into obligations binding the partnership.
Partners are at liberty to specify the manner and procedures of control in the agreement.
For instance, the agreement can provide:
– Who is the managing partner and their appointment
– Role and powers of managing partner
– Role and powers of other partners.
In absence of agreement, every partner is entitled to participate in the management and control of the company.
A number of matters require a unanimous decision of all partners. They are not limited to
– Admission of a new partner
– The decision to expel a partner except for an existing partner
– The decision to change the business of the partnership
–Â The decision to change the partnership name.
In default, the rest of the decisions are taken by the majority. There is no provision in the Act to differentiate the voting rights on the basis of capital contribution – the principle is one vote per partner.
The partner who has entered into a contract without authority is personally liable. The third party is entitled to sue the partner who contracts without authority and recover the price and damages.
Limited liability partnerships
Is a hybrid between an ordinary partnership and a limited liability company.
Defined as any partnership registered under the limited-liability Partnership Act 2012.
Unique advantages of LLP
1.Flexible management and control provisions.This is essential in matters requiring expeditious decision making without undue formalities. It is the most preferred structure for investment vehicles such as private equity funds.
2. The LLP has separate distinct legal personality with perpetual succession. It is fairly stable as a formal business structure.
3. Tax efficient
4. LLPs enable sophisticated investors to exploit unique investment opportunities through its structure.
5. LLPs have lower compliance requirements – no need to file annual returns, circulate statements, call AGMs like private companies.
Drawbacks to LLPs
1.Fear of loss of control to the general partner
2. The misconception that setting up an LLP is fairly complex
3. Public bodies treat LLPs suspiciously – they tend to view the strength of the LLP based on the strength of the individual partners as opposed to as a separate legal entity.
4. Limited capital raising abilities of the LLP – if the partners take out loans, the liability of the LLPs may exceed the capital contribution hence the business is often restricted to trading within its capital contribution limit.
Establishment and registration of LLPs
Can be established by an express agreement or an implied agreement (just like in ordinary partnerships). However, an LLP must be registered under the Act.
For registration, the partners or the persons involved with the registration must file with the Registrar a statement in the prescribed format. The statement must be accompanied by the required documentation as provided in the Act. Further, an LLP must be registered by two or more persons.
Where the registrar is satisfied, he registers the LLP and issues a Certificate of Incorporation. The certificate is conclusive proof that the LLP has been duly registered having complied with requirements of the Act.
Such LLP must use in its name, the words ‘LLP’.
Conversion of other entities into LLPs
The Act identifies two kinds – an ordinary partnership to LLP, and private limited liability
LLP Membership and termination of membership
Acquisition of membership is governed by the agreement, or by signing the agreement as an initial partner.
Unlike general partnerships, membership to the LLP does not terminate automatically e.g. in cases of insanity, bankruptcy or death. Your representatives can take over your rights and obligations until other partners apply to the court for an order of termination of membership.
One ceases to be a partner by:
1. Resignation, subject to a 90-day notice (termination by notice).
2. By order of court – court can terminate membership in many instances, e.g. when a receiving order in bankruptcy is made against a partner and is not discharged within 3 months.
3. By agreement – the agreement may terminate membership under certain conditions, e.g. time, purpose and dissolution/winding up of the partnership.
Winding up/dissolution of LLPs
Any partner/creditor can apply to a court for winding up/dissolution.
Further, the partners may agree by resolution to wind up/dissolve the LLP.
The Registrar may apply for winding up where the LLP is insolvent or where he deems it desirable for the LLP to be dissolved.
Where an LLP is insolvent and faces liquidation, the Fifth Schedule apply.
KEY: Liquidation of an LLP must only be carried out by a licensed insolvency practitioner, licensed under the Insolvency Act 2015.
CAVEAT
Please note that the information in this article is not to be construed as legal advice. If in need of professional legal advice please contact a certified practitioner.