A classic labyrinth for those entering entrepreneurship is the choice of the appropriate type of company, and many struggle with this area. In this text, we will look at the basic elements of a general partnership, how it operates, and whether it is advantageous (legally) for new entrepreneurs. Let’s not forget that this is a very common type of company in Greece, mainly due to its family/closed nature and the lower costs required for maintaining accounting records.

1.What is the main characteristic of a general partnership?

Given that this is a fundamental type of company used in transactions, the law clearly defines the purpose and operation of the general partnership to avoid misunderstandings. Specifically, a general partnership is a company for which the partners are jointly and severally liable for its debts to its creditors.

This means that the company’s creditors can directly pursue the partners of the general partnership for the payment of any debt/obligation that the company incurs through its actions. Additionally, the partners of the general partnership are personally liable for the company’s debts, and they cannot limit their liability through an internal agreement—such an agreement will only apply among the partners for their internal relations and cannot be proposed to third parties.

At the same time, the general partnership has its own legal personality. This means that the company has its own assets, which are formed from the items and monetary amounts contributed by the partners and the profits it earns from its market activities. Furthermore, based on this, the company can operate and transact in its own name (and not necessarily in the name of a partner), which provides it with tax advantages that indirectly serve the needs of the partners.

2.Who can be partners in a general partnership?

As mentioned above, a characteristic of the general partnership is the personal and joint liability of its partners for the company’s debts—all partners in the general partnership are liable in the same manner, and therefore there cannot be a partner who is liable in a different way. However, for new partners to enter an existing general partnership, an amendment to the partnership agreement must be made, and the entry of the new partner must be published in the General Commercial Registry (ΓΕΜΗ).

Initially, the partners vote unanimously for the entry of a new partner into the general partnership. Alternatively, if they have agreed on a majority decision-making method, a simple majority of the number of partners is sufficient to approve the entry of the new partner into the general partnership and to amend the partnership agreement accordingly.

It should be noted that a partner entering a general partnership that is already operating will be directly and personally liable for the company’s debts that existed before their entry—long before the partner arrived, who presumably was unaware of them. Additionally, if the entry of the new partner has not been registered in the General Commercial Registry, then the entry is considered defective and does not have any legal effect. An exception is the case where the new partner acted clearly in the company’s name before the public and justifiably created the impression that they are a regular partner of the general partnership without legal issues.

3.What process can be followed to establish such a company today?

To establish a general partnership today, the founders of the company must prepare a statute in advance, that is, the partnership agreement, which outlines the essential elements of the company such as its name, registered office, purpose, and the initial managers of the company, etc. The above can be done through a private document as well as through a notarial document, especially in cases where a partner is contributing real estate to the company.

Next, the partners must ensure that the partnership agreement is registered on the General Commercial Registry (ΓΕΜΗ) website, where a new file for the company will be created. This file will register every new change regarding the company, primarily the amendments to the partnership agreement made by the partners. Upon successful registration of all the necessary details of the company in ΓΕΜΗ, it acquires legal personality and can commence its transactions with the public.

Alternatively, the (future) partners can use the “One-Stop Service,” that is, they can use the ready-made statute provided to them and submit it directly to the ΓΕΜΗ service, which will handle all procedural matters for the establishment of the company, after paying the prescribed fees and charges stipulated by law. Certified notaries follow the same procedure, and founders of the company can approach them to complete the company’s establishment process.

4.Can a general partnership later be transformed into another type of company?

At this point, it should be emphasized that the transformation of a general partnership into another type of company results in the company in its new form continuing to be liable for all legal/economic relationships it created as a general partnership before the transformation. Otherwise, a general partnership can:

• Merge with another company either by absorbing the latter or by creating a new company that will include both the former general partnership and the other company. To accomplish this, a merger plan and detailed reports must be prepared, and there must also be a relevant decision by the partners of the general partnership with the majority stipulated in the company’s statutes.
• Split into other smaller companies, that is, multiple companies can acquire certain assets of the former general partnership to integrate them into their own company. Simultaneously, there is the possibility of establishing a new company that will receive certain assets of the former general partnership, while the partners of the former general partnership also receive some compensation or shares in the company’s assets.
• Transform into another legal form of company (e.g., into a Corporation/LLC/Sole Proprietorship/Partnership). However, for the transformation to occur, the establishment procedure stipulated for the new company must be followed, and partners who disagree with the transformation of the company have the right to withdraw from the company after receiving the value of their partnership, that is, what they contributed to the company during their time there.
• If the general partnership transforms into another company, it continues to be liable for the company’s debts incurred while it was a general partnership. Furthermore, partners who will take over the new company shares (especially if it becomes capital-intensive) must provide their consent to the company’s transformation; otherwise, it cannot be legally carried out.

5.Do the partners have rights against the general partnership/other partners?

Of course, partners acquire rights against the company as well as towards the other partners with whom they collaborate to achieve the company’s purpose. More specifically, the partners of the general partnership have the right to:

• File a corporate lawsuit, meaning a lawsuit in the name of the company against any partner who fails to fulfill their obligations to the general partnership/ systematically violates their obligations and behaves unlawfully towards their partners.
• Vote at partners’ meetings where critical decisions for the future of the company are made. Here, partners must generally vote themselves and not unjustifiably obstruct the decision-making process that serves the corporate interest.
• Be informed about the progress of the company’s affairs and inspect the company’s books whenever they wish (as long as it is feasible).
• Have a share in the company’s profits, which is calculated based on the size of their company shares (representing a fraction of the company’s profits). The company’s profits are typically calculated annually, but they can also be calculated for different time periods by agreement among the partners.
• Receive a share from the liquidation proceeds, that is, from the company’s remaining assets after its dissolution and at the stage where all corporate debts and obligations to third parties (such as the public, tax authorities, etc.) have been paid.
• Temporarily receive cash amounts from the company’s assets to cover their living expenses. These amounts are calculated over shorter time intervals (every six months/three months) and can later be offset against the amount the partners would receive from the company’s annual profits.
• Participate in the management of the company, representing it legally and extrajudicially against third parties, thus creating rights and obligations in the name and on behalf of the company. We will examine this issue in detail below.

6.What applies regarding their obligations?

In the relationship between the partners and the company, alongside rights, there are also significant obligations that the partners must adhere to in order to avoid facing legal consequences. Regarding the obligations of the partners, they must:

• Pay their contributions to the company, meaning any monetary or non-monetary contributions (including their labor) that they agreed to provide to the company. In the case of a contribution of real estate, the notarial formalities must also be observed as we know.
• Participate in the management of the company, meaning they should represent the company in transactions whenever requested by the other partners, as well as provide their consent for actions that are beneficial for the company and increase its profits.
• Share in the company’s losses, meaning they should cover the difference between the liabilities and assets of the company that arises annually. It is not excluded that the partners’ profits may be offset against the amount they must contribute to cover the losses.
• Maintain confidentiality regarding the company’s secrets, meaning its business strategies and any products of industrial property that it has created (e.g., trademarks/inventions, etc.), and not disclose them to third parties.
• Not compete with the company in its business activities—meaning they should not establish a parallel business with the same/similar purpose as that of the company while they remain partners and for some time after their departure from the company (this is also a matter of agreement between the parties).
• Act with honesty and integrity towards the company and the other partners—not to act in a way that promotes their own interests at the expense of the company’s interests (particularly by embezzling money from accounts, entering into contracts with unfavorable terms on behalf of the company).

7.When does a partner bind the general partnership with respect to third parties with whom they transact?

Firstly, the partners have the option, upon establishing the general partnership, to appoint the company’s managers simultaneously with the drafting of the statute. Thus, the latter will be responsible for managing the company’s affairs and representing it to third parties. The law states that if no managers are appointed in the statute, then all partners of the general partnership have the right to participate in the management and represent the company.

Each partner has the right to oppose a decision and, consequently, may not approve an act of representation that would create liability for the company towards third parties. However, the third party transacting with the company’s representative must be aware of the partner’s opposition or must not ignore it when they could have known about it. Otherwise, if they are not aware of the opposition, the company is legally represented by the partner, and thus the company will be bound by the actions of its partner towards the third party.

Moreover, the acts of representation of the company must contribute to the achievement of the corporate purpose and should not be unrelated to it or serve the individual interests of the partners. Therefore, if the third party that intends to transact with the general partnership through its representative realizes that the act of representation is unrelated to the corporate purpose, then the general partnership will not be bound towards them because the latter could easily discern that the act of representation was entirely unrelated to the purpose of the general partnership.

8.Can I transfer my partner status in a general partnership to another person?

To anticipate changes in the individuals participating as partners in a general partnership, the law has provided for the possibility of transferring the partnership status to another person. This can be done either by agreement among all partners and the new partner or through the appointment of the new partner in the general partnership via a will. If the partner of the general partnership did not regulate their inheritance succession through a will, then each heir will acquire a right to the partnership status of the deceased as a joint ownership.

In the case of an heir, the latter, after the death of the deceased, may request to remain as a partner in the general partnership, provided that they will take the position of a limited partner—the company will necessarily have to be transformed into a limited partnership with all the consequences we discussed earlier. The rule also applies that the new partner entering the company will be liable for previous debts that existed before their entry into the general partnership and cannot limit their liability in any way.

Otherwise, the new partner in the general partnership has exactly the same rights and obligations that the previous partner who transferred the partnership status had. They may also establish a pledge on the partnership status to receive the percentage corresponding to the partner from the company’s profits. However, the partnership agreement must also be amended so that any changes made are published in the General Commercial Registry (ΓΕΜΗ) to inform third parties transacting with the company.

9.When and for what reasons is the general partnership dissolved by law?

The law has provided certain reasons that, if they occur, lead to the dissolution of the general partnership for the future—thus, for as long as the company operated, the obligations it created through its transactions will remain valid. Specifically, if the agreed/defined period for which the company would operate passes, then it may be dissolved. An exception exists if the partners continue the company’s operation normally after this time period, in which case the company is considered to operate indefinitely.

The general partnership may also be dissolved by a relevant decision of the partners, which requires unanimity of the partners to be valid. For the company to be validly dissolved, it is also necessary to register the specific decision of the partners in the company’s record at the General Commercial Registry. The general partnership is also dissolved if the bankruptcy of the company itself is declared by a court ruling, indicating that it can no longer meet the overdue debts owed to its creditors. Furthermore, the bankruptcy of the general partnership does not simultaneously signify the bankruptcy of its general partners (they can file for bankruptcy separately).

Finally, an important reason leading to the dissolution of a general partnership is a relevant court decision issued upon the application of even one partner. In the partner’s application, they must include a significant reason that objectively justifies the dissolution of the company (e.g., a bad atmosphere and inability to cooperate among the partners). For this court ruling to be issued, the court must determine that there indeed exists a significant reason justifying the dissolution of the general partnership, thus validating the claims made in the partner’s application.

10.What is the main difference between a general partnership and a limited partnership?

When discussing the differences between a general partnership and a limited partnership, the key point where changes occur is the presence of at least one limited partner within the company. The limited partner is not legally responsible for the company’s debts to third parties that arise from the representation of the latter, as previously discussed. However, if the limited partner has not yet paid the contribution owed to the company, they will be liable for the company’s debts to third parties but only up to the amount of the contribution they owe to the company.

It matters whether the limited partner chooses to place their name next to the company’s name so that it appears in transactions. This is because, according to the law, if the name of the limited partner appears alongside the company’s name in transactions, the limited partner will be jointly and personally liable for the company’s debts to third parties—as if they were a general partner. Conversely, if the third party with whom the company transacted knew or could have known that this was a limited partner, then the latter would not be liable for the company’s debts.

Lastly, the limited partner cannot, in principle, participate in the management of the company or in its representation unless expressly permitted by the other partners. However, they may inspect the company’s financial records, be informed about the company’s affairs, and are obliged to participate in the company’s losses (as are the other partners) up to the amount of the contribution they have made to the company unless they agree with the other partners to cover the company’s losses for a greater amount.

Next to the client and his needs.

Athina Kontogianni-Lawyer

The above does not constitute legal advice, and no responsibility is assumed for it. For more information, please contact us.