ORDINARY PARTNERSHIP AS A TRADE COMPANY
IN TURKISH LAW
The basic definition for “company” is a business association formed by two or more parties who bring together their labor and / or capital to achieve a common purpose. Following the latest change in Turkish Commercial Code a single person is able to set up business by forming a company. The sole purpose of establishing business by forming a company is to make profit and to share it. Without any concern of making and sharing profit, an association is also possible by forming either a “society” or a “foundation” which are not regulated by Commercial Code. To establish a company the founder(s) enter into a contract between themselves. This contract is called, “company contract”; which can also be named as the contract of incorporation (mostly known as Articles of Association).
BASIC COMPANY TYPES IN TURKEY
Ordinary partnership is regulated by Turkish Code of Obligations (Türk Borçlar Kanunu). An “Ordinary Partnership” has no independent legal personality beyond its founders. It can be formed by an oral agreement, without any written document. A “joint venture” (which is very popular abroad and frequently used by government contractors) is treated as an “Ordinary Partnership” under Turkish law.
All Companies regulated by Commercial Code are referred to as “commercial companies”. Those are Collective Companies, Commandite Companies, Corporations and Limited Companies. All commercial companies acquired the legal personality upon registration in the register of commerce. Which means that the company has its own legal entity distinct from its shareholders. Following the registry procedure The Company is able to make contracts on its own behalf and therefore obtain rights and undertakes obligations under its own Trade Title (company name).
As individual legal persons Companies are entitled to acquire rights and undertake obligations. Commercial companies’ capacity is restricted with the designated subject matter of business activity written in the company contract which is also the primary goal of the founders to enter into this business venture. While forming a company the capacity issue should be concerned and determined carefully.
In the articles of association for Corporations and Limited Companies a specific article states the “purpose (objective) and powers”. Therefore, it must be indicated explicitly and precisely. For example; if the purpose of a company is stated as “construction” only, it can not go into other business areas such as travel or transportation. Purpose of a company must be limited strictly if shareholders will not be at work or must be all around if the shareholders are also intended to run the business as executives in order to avoid possibility of falling out of scope in future.
Powers shown in the Articles of Association (company contract) describe the ways and necessary means of the company to reach its Objective. E.g., obtaining credit from local or international banks, creating mortgage as a collateral, delegating third parties with power of attorney. Beyond any doubt, managers will use this pre-determined power within the scope of Articles od Association. For example, a company manager can not provide assurance in favor of a third-party person or company unless that power is given (written) by The Articles of Association.
Finally, the amount of Capital to be transferred to the Company by share holders must be assigned in cash or in kind (with its economic value) which reflects the shares of each partner.
Capital amount must be defined in Turkish Lira. Anything with an economic value in terms of money can be committed by a shareholder. Articles of Association also determine the amount of capital to be paid (which can not be lower than that certain amount declared by the government) by each share holder and the nominal price of each share. The capital amount paid by share holders in front is the property of the company without doubt and the company has the right to ask for the remainder of it (if there is any) from shareholders who undertake such an obligation.
The paid amount of capital share cannot be claimed back by share holders. Share holders may demand their share from annual profit following a decision made by Board of Share Holders every fiscal year. Also, in case of liquidation, the amount equal to the share of each partner should be paid if there is any surplus amount shows up in final dissolution balance-sheet.
In Turkish legal system all types of companies are namely defined by the law (Numerus Clausus) and no different type -or model- of company can be created other than an ordinary partnership. Thus, a company is either one of the Commercial Companies defined by Turkish Commercial Code or Ordinary Partnership ruled by Turkish Code of Obligations. (See article no 620 paragraph (2) of Turkish Code of Obligations)
According to Turkish Law the simplest type of business association is the ordinary partnership unless its not defined otherwise by TCC any company is subjected to the rules of Ordinary Partnership set in TCO. It is regulated by the Turkish Code of Obligations (T.C.O. Art. 620-645). It is a basic type of association which fits both profit and non-profit purposes. Legal provisions that govern ordinary partnerships can also be applied to other business associations while there is no specific code provision applicable in particular. Likewise, where a business association does not have the characteristic elements of one of the associations described in the TCC, it will be subject to the provisions governing ordinary partnerships TCO.
An ordinary partnership is defined in the TCO as an association in which two or more persons undertake by contract to bring their capital or labor together to attain a common goal. An ordinary partnership can be formed to conduct manufacturing, transportation, farming, commerce, etc. Because of its simplicity of formation, an Ordinary Partnership is most suitable form of association for temporary activities including “joint ventures”.
The purpose of an ordinary partnership is to achieve a common purpose, which is usually to make profit (the economic gain of the partners). The creation of an ordinary partnership requires at least two persons who may be either real or legal persons by definition. Each partner must contribute something like money, credit, property or labor to the partnership. Unless otherwise agreed, contributions shall be equal of the same kind and amount. There are no formal requirements to start an ordinary partnership. The partnership agreement may be written or oral or it can be implied from the circumstances. Exceptionally, when for example real property is contributed by a partner, there must be a special written partnership agreement, because of the regarding mandatory provisions requires written form as condition of validity.
Most importantly, the liability of partners of an ordinary partnership to third persons is unlimited. An ordinary partnership has no legal personality recognized by law which means all partners should be named separated and individually before courts in order to complete the sides of case. Therefore, the liability of partners is direct, primary, joint and not limited with the capital allocated for the OP. In conclusion, creditors of this kind of partnership may sue each or any of the partners directly for payment of the entire amount of partnership debt without a concern of their share.
So that, Partners are co-owners of the capital they contributed to, and of assets acquired by, the ordinary partnership. Each partner has a proportional right to all assets, but no partner is entitled to assign his rights in partnership property without the consent of other partners. Neither is partnership property subject to attachment or execution for non-partnership debts of partners. The creditors of individual partners (not of OP) must force the dissolution of a partnership in order to get paid from partnership assets of bad (insolvent) debtor.
Ordinary partnerships are run by transactions conducted by partners. Each partner acts as an agent of other partners. When a partner enters transactions within the scope of the partnership business, he generally has apparent authority to bind all of the partners. The most widely use of OP while in a Joint Venture, one or two major partners are called “Pilot Partner(s)” as designated in partnership agreement.
When it comes to make joint decisions (unless otherwise decided) each partner has only one vote regardless of the amount of capital they hold in the partnership. Partners are equal to each other while conducting the business of the partnership and there is no subordination among them.
As we mentioned before, the Code of Obligations does not confer legal personality on an Ordinary Partnership. Therefore, any lawsuit must be brought to the courts by naming all partners. And a real property contributed to the partnership must be registered in the land registry in the name of all partners as co-owners. However, the law may recognize that when partners under a common name, the partnership has, to a limited degree, legal capacity which makes it and the partners the subject of legal rights and obligations. Nevertheless. the partners are not the organs of the partnership. Consequently, partners are not liable for tortuous acts of other partners. A special legal provision, however, makes the partners individually liable in tort if the partnership enters into a transaction under a common name and damage is caused to third persons by a tortuous act of a partner.
Internal Relations Among Partners
Unless otherwise agreed, all partners are entitled to administer the partnership together but usually one or several partners are entrusted with management of the business (as Pilot Partner(s)). Partners have a fiduciary relationship and mutual obligation to each other. A partner, in the discharge of his partnership duties, must exercise the degree of care, skill and diligence while he exercises in his own business. He should not compete with the partnership (ban of competition). Those partners who do not manage the partnership may nevertheless have a voice in the control of the business of the partnership. All partners are entitled to an accounting from those (Pilot) partners who have administrative powers.
In the absence of an agreement to the contrary, profits and losses are shared by partners equally, without regard to the amount of capital contribution! A partner cannot be excluded from sharing any profit and/or loss, except that partners contributing only their labor may be exempted from participating in losses.
Since an ordinary partnership has no independent legal personality, partners may (and must) act on behalf of other partners. For third persons (outer world), an ordinary partnership appears to be as individual partners rather than a single entity. The existence of a partnership is an indication that partners are entitled to represent each other in daily transactions.
A partner who enters into transactions with third persons on behalf of the partnership does so in his own name and may do so without disclosing the names of other partners. The other unnamed partners are considered as silent partners and are not legally part of the transaction unless rights and obligations deriving out of that transaction is transferred to them. Usually, however, an authorized partner acts in the name of the partnership or on behalf of other partners. While this is case, the law states that the other partners are also parties of that transaction and liable jointly and severally, as long as the transaction remains within the scope of the partnership’s purpose.
An ordinary partnership comes to an end when the term for which the partnership was created expires or if the objective of the partnership has been attained or has become unattainable. The death of a real person partner also dissolves the partnership unless the partnership agreement has a specific provision to the contrary. A partnership is also dissolved when the liquidated share of a partner is subjected to the execution, or if a partner goes bankruptcy. A partnership should be terminated upon written notice sent by any of the partners where the partnership agreement has been decided for an indefinite period of time or for the lifetime of one of the partners. If there are justifiable legal grounds, any partner has the right to demand the dissolution of the partnership.
Upon dissolution of a partnership, debts of the partnership are paid first. If assets remain, credit extended to the partnership and expenses paid on behalf of the partnership by the partners will be reimbursed. Lastly, partners will be reimbursed for their capital contributions. A partner may not demand the return of the same property contributed as capital. Losses of the partnership are divided among the partners. Following dissolution, partners remain liable to third persons.