A simple partnership and an agreement on joint activities is a form of combining the efforts of entrepreneurs and commercial organizations in order to make a profit. It does not give rise to an obligation to create a legal entity, which leads to both positive and negative consequences.
Legislative regulation
The Civil Code provides for a number of forms of business partnerships created for profit. Thanks to the wording of the law, they are confused with simple partnerships. In fact, there is a difference between them.
In addition to the Civil Code, the organization and activities of a simple partnership and the agreement on joint activities may be regulated by other laws, in particular, “On Investment Partnership”. In addition to them, departmental regulatory acts and clarifications apply.
The legal framework gives entrepreneurs the freedom to establish contract terms. The norms of chapter 55 of the Civil Code cannot be called excessively rigid and limiting the initiative.
The role of a simple partnership
Economic activity achieves greater efficiency in pooling resources. A simple partnership and a joint venture agreement between its participants, on the one hand, is the basis for pooling resources, and on the other hand, the parties to the agreement can stop cooperation, and the division of property and other issues related to the termination of a common business cause much less problems.
In general, the form of a simple partnership is a kind of “golden mean” between the creation of a commercial organization and doing business by registering an IP.
Subject of activity
A simple partnership and a joint venture agreement means achieving a commercial goal. The law stipulates that participants have the right to take this step for other purposes not prohibited by law. This may include charity, but this is unlikely. Partnership is always created with one single goal - profit.
Non-commercial activity differs from commercial activity in that the resulting profit is distributed between the participants in the association or the owners of the organization.
If there is a production of goods and services and their sale, and the profit is directed to meet the needs of the organization, this kind of activity is not considered commercial.
Non-profit associations have the right to engage in any income-generating activity, but only to the extent that their activity is thereby ensured.
For example, the library is additionally engaged in the sale of books, the income obtained as a result is directed to support its activities, and not to the founder.
Partnership members
The right to establish a partnership is given to individual entrepreneurs and business entities or other commercial organizations.
The company may include only commercial organizations or only individuals engaged in entrepreneurial activity, or both at the same time.
Contributions of friends
According to the law, deposits are considered equal in value terms, unless otherwise specified in the agreement. What is allowed to contribute to the total, so to speak, capital?
Money, property (cars, real estate, other valuables) are accepted as a contribution. A contribution is considered to be business reputation, communications of participants - no restrictions have been established.
For example, one participant provides a garage, the second - a car, the third - tools and their own skills for organizing a repair shop.
What is considered common property
Property contributed as a contribution becomes common property. What else can be prescribed in a simple partnership agreement? The agreement on joint activities may include the transfer of property that does not belong to the participants on the basis of ownership. For example, the right to lease, rental. It becomes common law.
At the same time, the participant has the right to use property belonging to him alone for general purposes, without making it as a contribution.
Everything that is made as a contribution is noted in the contract. If the property becomes common, then the right to it arises from the moment of registration, for example, the right to a car or real estate. The list of objects may be set out in the appendix to the agreement.
As soon as the property becomes common property, the obligation to maintain it also becomes common. If shares are equal, maintenance fees should be equal.
However, the parties are entitled at their discretion to distribute the burden of maintaining the common property.
Accounting for property, liabilities, accounting records is assigned to one of the participants, partners have the right to attract an accountant on a contractual basis. If one of the participants is an organization, it is preferable to entrust keeping records of joint activities under a simple partnership agreement and working with reports to it. However, participants have the right to act differently.
General business management
Members of a simple partnership have the right to choose one of several ways to organize common activities.
- all participants are entitled to represent a partnership;
- the right of representation is given to one of the partners.
Conducting general business is confirmed either by power of attorney or by agreement. It is good that he be certified with seals. The law does not require a power of attorney to be executed by a notary public, but it is considered the most acceptable option.
Is a partner entitled, without a power of attorney, to acquire general obligations under an agreement on the joint activity of a simple partnership?
If there are restrictions, no. A transaction is deemed illegal if the other partners prove that the other party was aware of the restrictions.
A partner has the right to request reimbursement of transaction costs if:
- he violated restrictions on the conduct of common business, but the deal served the good of the common business;
- the transaction was made on behalf of one of the comrades, but also served the common good.
If the deals have incurred losses to the other partners, they are entitled to claim damages.
The law laid the basis for the activity of a simple partnership on the principle of general agreement regarding the solution of common affairs, unless otherwise specified in the agreement. For example, each comrade solves issues in which he is more competent in comparison with others.
In addition, the law requires disclosure of all information relating to general affairs. The presence of restrictions on the conduct of general affairs does not matter. All conditions restricting the right to information are automatically recognized by the law as null and void.
Gains and losses
The law distributes gains and losses according to the proportionality of the contribution of each partner. The rule comes into effect in the absence of clauses on the distribution of income and losses.
It is impossible to completely relieve a participant from gains or losses. Such restrictions are automatically null and void.
Participants Responsibility
Entrepreneurial risk involves liability with all its property. The collection of property of the participant for general obligations is imposed in proportion to the contribution made.
For example, participants contributed 30% and 70% respectively. So, each of them is responsible according to the contribution made.If the share in the common property is not enough to cover debts from the common activity, a penalty is imposed on the personal property of the participant.
Associations in the construction industry
How is a simple partnership agreement on joint activities in construction?
The participants are the owner of the rights to the land plot and the investor (typical option).
The task is to allocate responsibilities in the organization of the project:
- who works with contractors;
- who works with authorities in terms of obtaining permits;
- Who is responsible for reporting?
- who is responsible for paying taxes, in particular VAT.
Project Objectives:
- construction of a building for the purpose of its sale;
- erection of a building for the purpose of further profit (for example, a shopping center), which is then divided according to the contract.
Preparation of contract
A sample of a simple partnership agreement on joint activities in many options is freely available. The problem of their use is how much they correspond to the specifics of the activity and the needs of comrades.
The law provides wide freedom and implies a choice in how to make deposits, share profits, solve issues of interaction with other economic entities, and much more.
If the terms of the contract are not thought out, subsequently there will be problems in the relationship between partners, who run the risk of ending litigation. Therefore, downloading the form and inserting the data of comrades into spaces is not the best option.
The benefits of creating a partnership
What are the benefits of a joint partnership agreement?
- a simplified form of combining efforts, capital and opportunities;
- savings on the administrative apparatus available in the legal entity;
- the possibility of tax optimization;
- the right remains to engage in one’s own projects that are not related to common activities.
Cons of creating a partnership
There are also disadvantages to a simple partnership and joint venture agreement:
- insufficient regulation of the establishment of a simple partnership;
- the contract is complex in itself, regardless of the desire of its participants, because it is necessary to provide for a lot of nuances, to predict the development of events;
- a simplified form of association creates difficulties in the tax sphere if comrades use different taxation systems.