Limited partnership is a very attractive alternative to a limited liability company in Poland. It offers maximum safety for the passive investor together with the maximum tax advantage.
Steven, a businessman from the UK wanted to run his venture in Poland, together with his new Polish brother in law Jan.
Just like as about 80% of entrepreneurs who decide to build a joint venture, Steven and Jan were thinking about spółka z ograniczoną odpowiedzialnością (limited liability company). LLCs are familiar, stable, convenient legal vehicles to carry out your business in many jurisdictions. However, they have that one crucial and considerable disadvantage–they are taxed with corporate income tax (CIT). This means that Steve’s and Jan’s company would have to pay 19% CIT first and only after that each of their own share in profits would be taxed by personal income tax. This was not what Steve and Jan were looking for, and it led them to consider a partnership.
Four different types of partnership
A question immediately arose – what type of partnership should they choose? Polish commercial law offers at least four types: 1) general partnership (spółka jawna), 2) limited liability partnership (spółka partnerska), 3) limited partnership (spółka komandytowa) and 4) master limited partnership called also a limited joint stock partnership (spółka komandytowo-akcyjna). The agony of choice…
The key to choosing the optimal legal form for a business depends first and foremost on partners’ needs, and secondly on any limitations they may have. After a longer conversation we figured out together that in case of Steve and Jan their individual situations were quite different and therefore they had different needs. The business was to operate in Poland, were Jan, an experienced salesman with knowledge of the market would look after it and in fact run it by himself, whereas Steve would check how things are only occasionally, since he is involved in the UK. Above that, Steve was the major investor, providing money and supply contracts from the UK. It is not that you shouldn’t trust your brother-in-law (family is family after all) but Steve wanted to make sure that he is secure with his assets in the UK and would not like to risk more than what he directly invests into the business with Jan. Plus, Steve was not sure whether he would enter the business as himself (as a natural person) or via one of his other UK companies. That is why he was considering an LLC in the first place. Jan on the other hand, had enough of his employment contract job and wanted to start making money with his own clients. However, he did not have much capital for the start, apart of skills and market knowledge – and therefore he was more willing to take risks (the more so that the money was Steve’s!). In other words, limited liability was not that important for Jan.
Advantages of the limited partnership
When I found out the above it was immediately clear to me that Steve and Jan should set up a limited partnership (spółka komandytowa). There are two types of partners in a limited partnership. Jan would become a general partner bearing unlimited liability for debts and obligations and Steve would take the role of a limited partner bearing liability only to a certain amount stipulated in the articles of association called the limited liability amount (suma komandytowa). In exchange for this arrangement, Steve would not have many direct powers to run the business and his name would not appear in the partnership’s firm (name), however he would retain important supervisory powers and would decide with Jan on general maters. Jan risks with all his assets (his liability is not limited) but he gets his personal name to be included in the name of the partnership as well as he effectively runs the business and makes decisions on daily basis. Steve could also put forward one of his UK companies as the limited partner, because legal persons or other entities such as UK partnerships may become a partner together with natural persons in a Polish limited partnership.
Steve would contribute some money to the new partnership, however he may also propose other items (as Jan can do) – e.g. real property or other property, shares, other rights such as patents or even services and work (with some limitations as far as limited partner is concerned). Partner’s share in the capital of the partnership generally corresponds to the amount of contribution that was actually made. However, distribution of profits may be set forth in the articles of association in proportions partners agree on (with a restriction that any partner cannot be fully excluded from the participation in profits but she can be exempted from participation in losses).
Managing the limited partnership
The first most important rule is that partners must effectively run their enterprise themselves (or at least one of them must be directly involved). This may be a disadvantage in comparison with a LLC, where you can hire the whole management board. For most small to mid-size businesses however, as well as for the start-ups this is not a problem. Steve and Jan are happy to have a direct control over their partnership. There is however one important difference between the two categories of partners. Limited partners have neither right nor obligation to conduct the day-to-day affairs of their business. Articles of association may however give them such a possibility. This is fine with Steve, as he would not be directly involved nor he could be consulted with every single decision while he’s in the UK. Jan on the contrary has no choice and is the primary partner to conduct all the affairs. Again, articles of association can put on him several limitations pursuant to rules the partners agree upon in advance.
It is slightly different case as far as partnership’s representation is concerned. You may remember that partnership’s firm (name) cannot include limited partner’s name. Law generally prohibits limited partner to represent the partnership on the outside, he or she may only do so acting in the capacity of a proxy. This is a serious restriction in exchange for a limited liability he or she enjoys. Articles of association may also impose restrictions on the right to represent by a general partner, however by default it is each (if there are more than one) general partner who is entitled to represent the partnership. It is Jan who represents the partnership on regular basis.
Liability
Last but not least, one of the most important parts (apart of the tax issues) is the liability of the partnership and the partners themselves. The partnership is liable by a general rule for its obligations up to the value of its assets. If this does not suffice, subsidiary, each partner bears unlimited, joint and several, personal liability for partnership’s obligation. This means that in general, each partner is liable with all his assets with respect to all obligations of the partnership when partnership’s assets are not enough to cover them. Most importantly however, a limited partner (in this case Steve) has his liability limited up to the amount he and Jan agreed in the articles of association and which Steve paid to the partnership (limited liability amount). Partnership’s creditors cannot be satisfied from Steve’s other assets, although they can go after Jan, who is the general partner.
A sound choice
To sum up – limited partnership is a convenient, flexible choice. You can’t run it like a company by yourself – a Steve needs at least one Jan. However, apart of that it is very attractive, as it does not pay corporate income tax. This has become very important from January 1st 2014, when the Polish lawmaker decided to tax another type of partnership that used to give even more tax optimisation possibilities – a joint stock partnership. In this way the rule that partnerships are tax neutral was broken. However, a limited partnership was saved from the new law and therefore is definitely worth considering when choosing your businesses legal form in Poland.