5.6 Legal Aspects of Equity Provided by Shareholders 1715.6.3 Shares in Partnerships
A partnership is a type of business entity in which partners share with each other
the profits or losses of the business undertaking in which all have invested. In
Roman law, the partnership was known as the societas. Nowadays, a partnership is
usually a contract between individuals who agree to: carry on a business enter-
prise; contribute to it by combining property, knowledge or activities; and share its
profits. Most partnerships are family businesses, but they can also be used in joint
ventures and projects with a limited duration.
The most basic form of partnership is the general or unlimited partnership. It is
characteristic of the most basic form of partnership that all partners have unlimited
liability for its obligations. All partners usually manage its business.
Depending on the governing law, a partnership either is or is not regarded as a
separate legal entity. Whether it is regarded as one can depend on whether it is
registered.
Under German law, an unregistered partnership (a company constituted under civil law,
Gesellschaft des bürgerlichen Rechts, GbR) will not be regarded as a legal person. It cannot
sue or be sued. It is often used for construction projects and other similar joint venture pro-
jects. If a GbR is registered with the commercial register, it turns into an unlimited partner-
ship (Offene Handelsgesellschaft, OHG) (or a limited partnership, Kommanditgesellschaft,
KG, see below). An unlimited partnership (OHG) itself is not regarded as a legal entity in
Germany. However, it may acquire rights and incur liabilities, acquire title to real estate,
and sue or be sued.^157
Some investors favour partnerships over corporations for taxation purposes, as a
partnership structure can eliminate the dividend tax levied upon profits realised by
the owners of a corporation.
The rights of partners. Partners’ rights will be regulated in the partnership
agreement. Because of unlimited liability, the most basic partners’ rights are the
right to participate in the firm’s management and the right to access the firm’s
books.
The extent of management discretion to raise equity by issuing shares and to
reduce equity. Because of their unlimited liability, it is for partners to agree on the
ownership structure of the partnership. For example, a partner cannot be expelled
by majority decision.^158
The transferability of shares. For the same reason, shares in a partnership are
not freely transferable. A partnership agreement is an agreement with two or more
parties, and the transferability of a share would mean the assignment of the rights
and obligations of a party.^159
(^157) For English law, see the Partnership Act 1890.
(^158) Section 25 of the Partnership Act 1890: “No majority of the partners can expel any part-
ner unless a power to do so has been conferred by express agreement between the part-
ners.”
(^159) See nevertheless section 31(1) of the Partnership Act 1890.