General partnerships represent a distinct company form in Norwegian law with unique characteristics that clearly differentiate them from limited liability companies. These companies are primarily characterized by the direct, unlimited, and joint liability that participants have for company obligations. This article illuminates fundamental legal aspects of general partnerships, focusing on capital structure, decision-making, transferability, and the participant's ownership rights.
Capital Structure in General Partnerships
Absence of Contribution Requirement
In contrast to limited liability companies, where the share capital must be at least 30,000 Norwegian kroner, general partnerships have no statutory obligation to make capital contributions or other investments in the company. This is clearly stated in the Partnerships Act § 2-6, first paragraph. However, the law allows partners to agree on capital contributions among themselves.
Free Disposition of Company Capital
A significant difference from limited liability companies is that there are no rules regarding the restriction of company capital in general partnerships. This is related to the form of liability:
Partners are directly, unlimitedly, and jointly liable for partnership obligations (Partnerships Act § 1-2 first paragraph letter a, cf. §§ 1-1 first paragraph and 2-4 first paragraph)
In principle, the entire equity can be returned to the partners
Distributions can even be decided at the expense of external capital (the company's debt), without company creditors being able to object
Creditor protection is therefore not tied to capital restrictions in the company, but to the partners' personal and unlimited liability.
Decision-Making Processes in General Partnerships
Unanimity Principle
In general partnerships, the main rule is that decisions in the company meeting require approval from all participants. This unanimity principle is established in the Partnerships Act § 2-12 first paragraph and reflects the company's character as a personal company where participants have personal liability.
The unanimity principle gives each participant veto power against company decisions, which emphasizes the strong position each participant has in the company. This contrasts with limited liability companies, where decisions are normally made by majority vote.
Transferability of Company Shares
Main Rule of Non-Transferability
A share in a general partnership is, as a default rule, not transferable. This is stated in the Partnerships Act § 2-28 first sentence. This limitation on transferability reflects that general partnerships are personal companies where the participants' identities are considered a fundamental founding premise.
The non-transferability is directly related to the form of liability – when participants have unlimited liability for the company's obligations, it becomes crucial who the other participants are, especially regarding their financial solvency and personal qualities.
Consequences for the Share's Character as a Property Right
While shares in limited liability companies typically have value as transferable property rights, this does not apply to the same extent for shares in general partnerships. The limited transferability means that the share's value is primarily tied to the participants' right to distributions from the company and not to the possibility of selling the share at a profit.
Alternatives to Transferability
The law does not exclude the possibility of issuing share certificates for shares in general partnerships, and it can be agreed that the share shall be transferable. Such agreements must be stated in the partnership agreement and would represent an exception to the main rule.
Change of Ownership on Grounds Other Than Transfer
Inheritance and Marital Property Division
The same considerations that argue against transferability of shares also argue against change of ownership on other grounds:
A share in a general partnership cannot change owner through inheritance without authorization in the partnership agreement
The remaining participants can exclude the heir or the estate (Partnerships Act § 2-31 first paragraph)
The same applies to a spouse who has taken over a deceased participant's share in connection with undivided estate, or who has been allocated the share in a marital property division
Pledging and Creditor Attachment
Even though the share as a main rule cannot be transferred, this is not in itself an obstacle to:
Voluntary pledging of the share (although there are questions about legal basis for pledging)
Creditor attachment of the share - the company's and participants' separate creditors can seize the partnership share
Bankruptcy - both the company and participants can be declared bankrupt or be subject to other insolvency proceedings
It is worth noting that the company is considered a separate bankruptcy subject, with the consequence that company creditors, in competition with the participants' separate creditors, have priority right to company assets.
Participant's Ownership Rights
Control Over Company Assets
The ownership rights over a general partnership's assets must be resolved by the rules that apply to the management of the company. It is the company – through the company meeting – that exercises ownership rights over the company's individual assets (e.g., use, sale, pledging).
Participants in general partnerships are barred from controlling their shares in the individual assets in their own interest. This is not significantly different from the situation in limited liability companies, but the justification is more practical – individual control would create insurmountable practical problems.
Relationship to Individual Authority Under Partnerships Act § 2-20
The participants' lack of right to control the company's individual assets does not conflict with the authority that each participant has under the Partnerships Act § 2-20 to exercise ownership rights. Important points here are:
The control under § 2-20 is exercised as an agent for the company and in the company's interest
The authority is not limited to the participant's own shares in the company's assets
Control Over the Net Share
Although the participant cannot control the company's individual assets, each participant has control over their claim to payments from the company (the net share). This is an independent property item that the participant can dispose of.
Mutual Right of Deduction
A particular question that arises in connection with the participants' ownership rights is whether the individual participant can demand that the company's assets should primarily cover the company's obligations. This can become relevant in several situations:
When a participant is to be redeemed
When the company is to be dissolved
When the company is declared bankrupt
It is established law that each participant in a general partnership has such a mutual right of deduction with respect to the company's obligations. This right can also be asserted against the other participants' separate creditors.
Comparison with Limited Liability Companies
To understand the distinctive features of general partnerships, it is useful to compare with limited liability companies:
Aspect | General Partnership | Limited Liability Company |
|---|---|---|
Capital Contribution | No statutory obligation | Minimum share capital 30,000 kr |
Liability | Direct, unlimited, joint | Limited to share contribution |
Capital Restrictions | No rules on restriction | Strict rules on restricted capital |
Decisions | Unanimity as main rule | Majority decisions |
Transferability | Not transferable as main rule | Shares are freely transferable |
Personal Element | Strong personal element | Capitalistic character |
Conclusion
General partnerships are personal companies where the participants' unlimited liability for company obligations is the central characteristic. This liability influences all other aspects of the company form – from capital structure and decision-making to transferability and ownership rights.
The absence of statutory capital contribution and capital restrictions makes this company form flexible, but at the same time entails significant financial liability for the participants. The unanimity principle and the limitations on transferability emphasize the personal character and the mutual trust that normally must exist between the participants.
For businesses where the participants want close collaboration and are willing to assume personal liability, a general partnership can be an appropriate company form. However, it requires thorough assessments and a good understanding of the legal consequences this company form entails.
