In its formal usage, the term 'partnership' refers to a form of business association that binds two or more persons in a working relationship which they can jointly direct for profit. Until recently, partnerships in Nigeria were governed mainly by the Partnership Act of 1890 and the Partnership Laws of the various states. Despite being a fairly popular business model, partnerships under this framework did not produce the desired effect. The available structures were weak and somewhat limited in application. The introduction of Limited Partnerships (LP) and Limited Liability Partnerships (LLP) by the Companies and Allied Matters Act 2020 (CAMA 2020/the Act) is set to change all this.
Notably, prior to the enactment of the CAMA 2020, partnerships did not seem particularly well suited for external business collaborations as their features were largely similar to that of sole proprietorship.1 And while partnerships could gain additional credibility by incorporating as a company limited by shares, due to the attendant formalities of asset valuation, allotment of shares, etc., this option was largely unsuitable for most small businesses. The CAMA 2020 will now allow Micro, Small and Medium Enterprises (MSMEs) to effectively use the LP and LLP corporate structures to scale up their businesses and execute specific projects without being overwhelmed with onerous regulatory obligations involved in operating a company limited by shares. These and other prospects are deserving of elucidation.
REQUIREMENTS FOR REGISTRATION, OPERATIONS AND DISSOLUTION OF LPS AND LLPS REGISTRATION
An LLP can now be registered as a body corporate (legal entity); separate from its partners, with perpetual succession, capable of holding property and with capacity to sue and be sued2. This structure imitates that of a company limited by shares. Importantly, the death, insolvency, or withdrawal of any of the partners will not lead to dissolution of the partnership.
Two or more persons carrying on business as partners in Nigeria may incorporate an LLP3 by subscribing to incorporation documents and filing them with the Corporate Affairs Commission (CAC)4. After approval (within 14days of filing), the CAC shall, register the incorporation document and issue a certificate of incorporation.5 A designated partner will manage the affairs of the partnership, and they are responsible for carrying out all acts, matters and things that are required to be done by the LLP; either by law or by the Partnership Agreement.6 They are also liable to the penalties imposed on the LLP.7 A corporate entity may be a designated partner in an LP or an LLP acting through their nominees.8 The liability of partners under an LLP is limited; such that a partner will only be liable for his own wrongful actions or omission9 but not for the wrongful actions of other partners.10 An LLP is primarily governed by the provisions of CAMA and the Partnership Agreement between the partners.
An LP on the other hand shall not consists of more than 20 (twenty) partners and shall have at least one general partner;11 liable for all the debts and obligations of the firm. Other partners may be limited partners whose liability is restricted to their contributions.12 LP is not a body corporate and does not enjoy separate personality.
In certain scenarios however, including where succession provisions are made out in the partnership agreement, the partnership may outlive the existing partners. A limited partner in an LP arrangement shall not take part in the management of the partnership business. Where they do, they will also be liable for all debts and obligations incurred.13 The operations of an LP continue to be governed by the Partnership Act of 1890, where the provisions are not inconsistent with the provisions of CAMA.
Although an LP does not function as a separate entity, it can quite easily engender business collaborations. Unlike the 'Business Name' type of entity, an LP allows a partner to assign his share in the partnership to a third party as long as the other partners do not object to such assignment. It also permits succession subject to the terms of the partnership agreement. The LP structure certainly gives better definition to business collaboration and continuity than what is possible using the Business Name entity.
OPERATIONS AND COMPLIANCE REQUIREMENTS
The Act recognizes the importance of a partnership agreement in an LP/LLP's operations. Under the Act, the partnership agreement may continue to govern the mutual rights and duties of the partners.14 Regulatory requirements for both structures include annual Statement of Account and Solvency filings with the CAC; duly signed by the designated partners within 6 months from the end of each financial year15. In addition, an LLP is required to file an annual return with the CAC in each financial year within 60 days of the closure of its financial year.16
An LP/LLP can be wound up voluntarily or by the Court. Winding up by the court may be at the instance of the partners, or at its own instance in one or more of the following situations: a) all the partners agree that the LLP be wound up by the Court; (b) for a period of more than six months, the number of partners of the LLP falls below two; (c) the LLP is unable to pay its debts; (d) the LLP has acted against the interests of Nigeria or public order; (e) the LLP has failed to file the Statement of Account and Solvency or annual return for 10 consecutive financial years; or (f) the Court is of the opinion that it is just and equitable that the LLP be wound up.
LLPS AND LPS AS VEHICLES FOR EASE OF DOING BUSINESS
The introduction of LPs and LLPs is particularly oriented towards helping small businesses by enhancing their ease of doing business. We examine below, several opportunities for entrepreneurs and commercial operators generally in Nigeria, to take advantage of these corporate structures for scaling up business, optimizing profitability and executing seamless transactions.
1.COLLABORATION BETWEEN MSMES
MSMEs can collaborate to form partnerships. Business owners who deal in complementary products and services, can meaningfully exploit their relative market advantages by actualizing co-branding and enhanced visibility opportunities, for example; optimizing the potential for more effective use of joint resources. The new partnership structures have no share capital requirement. As such, business owners need not worry about such things as valuation of their respective businesses in order to determine the appropriate allocation of shares. The business owners can simply contribute capital to run the business and equally distribute the profits and losses.
When each of the businesses has grown and is ready to receive more funding from investors to scale up, the business owners can incorporate independently and file for the dissolution of the Partnership.
2. SET UP OF FUNDS BY PRIVATE EQUITY AND VENTURE CAPITAL FUND MANAGERS
Venture Capital (V C) firms are investment firms which mainly fund startups by taking a minority stake in the Startup. On the other hand, Private Equity (PE) firms usually invest (by taking a majority stake) in established businesses that require some form of business rescue either in terms of operations or management. PE firms can also sometimes buy out VC-backed startups.
Both VC and PE firms receive funds from investors in order to raise a pool of capital, and thereafter set up the PE or VC fund using the LP structure. The PE or VC fund managers set up the LP and designate the other investors as limited partners with whom they share the profits and the risks of investment. With the current defined structure of LPs and LLPs, fund managers can create more investment portfolios and venture into better business deals.
3. CREATION OF JOINT VENTURES
A joint venture is a business arrangement that allows for the pooling of funds to execute specific projects. The business or project of the joint venture is usually ring-fenced so that the interests of the participants in the joint venture are not comingled with their other business interests. Joint ventures are therefore usually executed using a Special Purpose Vehicle (SPV) that is run for a specific duration of time. In Nigeria, many joint ventures are registered as full-fledged companies and later discarded once the purpose of the joint venture has been fulfilled, but the regulatory compliance obligations of such SPVs continue to accumulate.
With the introduction of the LLP structure, joint ventures to finance and operate projects become easier to set up and dissolve upon the completion of the project.
4. FOREIGN COMPANIES CAN DO BUSINESS IN NIGERIA WITHOUT BEING REGISTERED AS A COMPANY
Foreign Companies looking to do business or implement specific projects of an abbreviated duration in Nigeria, can do so through the LLP vehicle. They can simply enter into a partnership with a Nigerian company; with the parties registering an SPV as an LLP, without offending the provisions of the law regarding participation of foreign companies in businesses in Nigeria.
TAX LIABILITIES OF LPS AND LLPS
One of the advantages of the new partnership structures is that the corporate entity is not taxed like a company. The profits of LPs and LLPs are not subject to 30% Company Income Tax. For assessment purposes, a partner's total income from the partnership, as well as his income from other sources, will make up the partner's total income.
The applicable reliefs and allowances under the Personal Income Tax Act17 are deducted from total income to arrive at the chargeable income. The chargeable income is the amount which will be subject to tax using the applicable tax rates.18 Where a partner does not have a chargeable income or the tax payable is less than 1% of the partner's total income, the partner's tax liability for that assessment year would be a minimum tax of 1% of the partner's total income.17
LP and LLP partnership structures can drive entrepreneurship significantly, by unclogging conventional restraints to MSME growth, such as lack of finance and capital, an elaborate regulatory regime, etc. Technical expertise can also be better networked and optimized with more business collaborations and synergies.
Although CAC is yet to deploy the technological framework for registration of LPs and LLPs, the business community is expectant that this will come as a matter of course. Such a framework must be functional and pragmatic to allow for seamless registration of these corporate vehicles, and the anticipated conversion of many 'Business Names' to LPs and LLPs.
1. The eligibility requirement for registering a partnership under the state laws was registration as a 'Business Name' with the Corporate Affairs Commission (CAC).
2. See Section 746 & 756 CAMA
3. Section 749 CAMA stipulates an LLP must have a minimum of two (2) designated partners and at least one of the designated partners must be resident in Nigeria
4 Section 753 of the CAMA
5 Section 754 of the CAMA
6 A partnership agreement may be oral, or written (i.e., a Partnership Deed). The latter sets out the terms by which the partners agree to carry on the business.
7 Section 750 CAMA
8 Section 749 & 796 CAMA
9 Section 767 (2) CAMA
10 See Section 766 & 767(1) CAMA
11. Section 806 (2) CAMA
12. Section 806 (2) and Section 795 (4) CAMA
13. Section 806 CAMA
14. Section 762 CAMA
15. Section 772 CAMA
16. Section 773 CAMA
17 Section 20 of the Personal Income Tax Act No. 104, 1993. Laws of the Federation of Nigeria, 2004.
18 See the Tax Income rates in the sixth Schedule of the Personal Income Tax Amendment Act, 2011.
19 Section 37 PITA 1993 and Section 7 PITA Amendment Act, 2011
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.