Limited partnerships are not a popular form of corporation in the Czech Republic. Nevertheless, it represents a full-fledged partner for a joint stock company or a limited liability company. In the case of a limited partnership, it is a kind of combination of elements of a public company and a limited liability company.
A limited partnership is a special type of partnership that combines elements of partnerships and limited liability companies. It is regulated by section 118 et seq. of the Business Corporations Act.
This hybrid model allows for the involvement of investors with limited liability (limited partners) and entrepreneurs who are willing to take greater risk in exchange for full control over the management of the company (general partners).
A limited partnership can be set up to run a business or to manage its own assets. The name of the limited partnership is then abbreviated as kom. spol. or k. s.
Setting up a limited partnership may seem simple at first glance. However, if you want to avoid disputes and confusion, then you should have a partnership agreement drafted by a professional who knows what areas need to be addressed in writing.
You may now be asking how a limited partnership differs from a public limited company or a limited liability company. The main difference between a limited partnership and other types of company is the way in which the partners are liable. In a limited partnership, you would find two types of partners.
The first type is the general partner. This partner is liable for the liabilities of the partnership with all of his or her assets without limitation. At the same time, he or she has the full right to manage the company or function as the statutory body of the company. If a person’s assets have been declared bankrupt in the last three years, then that person cannot become a general partner.
In contrast, a limited partner is liable only up to the amount of his contribution registered in the commercial register. The limited partner is not entitled to intervene in the day-to-day management of the company. His position corresponds to that of a partner in an LLC.
In short, in a limited partnership at least one partner (general partner) is unlimitedly liable, whereas in a public limited company the shareholders are not liable for the company’s obligations
A major advantage of a limited partnership is the low cost of formation, as the limited partner must contribute at least CZK 5,000 to the company’ s share capital, whereas the general partner does not have to make any contribution.
It is clear from the division outlined above that a limited partnership must always be formed by at least two partners, one of whom will be the general partner and the other the limited partner.
The formation of a limited partnership cannot be done without a memorandum of association. This agreement should include:
The application for registration in the Commercial Register must be submitted by all the partners and their signatures must be officially certified. Of course, the application for registration can also be submitted electronically via a data box. As of July 2023, companies can also be registered remotely via notarial registration, which may be a faster and easier way. A limited partnership is only formed on the date it is entered in the commercial register.
Tip: Another way to start a business is to set up a limited company.
Limited partners are entitled to a share of the profits, but they also have limited decision-making powers. They can participate in key decisions, such as amending the articles of association, but are not usually appointed to the statutory bodies.
General partners manage the company and are fully responsible for its liabilities. They have unlimited rights to act on behalf of the company and decide on its strategy and day-to-day running.
Both natural and legal persons, domestic and foreign, can becomepartners.
The distribution of profits is usually governed by the share of the contribution, but may be regulated by the articles of association. Limited partners usually share in the profits in proportion to their contributions, while general partners may have a higher share of the profits due to the fact that they bear more risk.
During the life of a partnership, situations may arise where changes to the structure need to be made. For example, a new member joins the partnership by agreement with the other partners. The change must be recorded in the commercial register.
If a partner wishes to withdraw, it depends on his or her capacity – a limited partner may withdraw from the partnership according to the terms of the agreement. For a general partner, the situation is more complicated because his departure could jeopardise the running of the company.
The possibility of transferring a business share is determined by the partnership agreement. In the case of a limited partner, the transfer is usually easier than in the case of a general partner.
What about an increase or decrease in capital? The limited partners’ contribution can be changed if the partnership agreement allows it.
According to the FinStat website, there were 630 limited partnerships in the Czech Republic in 2022, and their number is decreasing.
Doing business as a limited partnership brings several advantages. Here are the most significant ones:
However, even a limited partnership has certain disadvantages. These include, for example, the unlimited liability of the general partner, which implies a high personal risk. Furthermore, the limited decision-making rights of the limited partners or the need for a carefully drafted partnership agreement in which the rights and obligations of the partners must be determined in advance. Of course, we will be happy to help you draft it.
The dissolution of a limited partnership can occur in several ways. In the first case, the partners voluntarily decide to close their business. If the partnership was only set up for a fixed period of time, then it will also be dissolved at the end of that period.
Next, the company can achieve its purpose, which happens when it is formed for a specific project. Once the project is completed, there is no further reason for the company to exist. Even in the case of a limited partnership there is a risk of insolvency, hence this form of company can be dissolved due to insolvency.
Last but not least, the company can be dissolved by court order. The latter will decide to do so, for example, if the company fails to fulfil its legal obligations. The dissolution of a limited partnership is usually followed by a liquidation process where the assets are distributed among the creditors and partners.
Tip: Do you know how the LLC and its partners are liable for debts? This aspect tends to be one of the most important aspects that determine which type of company entrepreneurs choose.
Due to the different legal responsibilities of the partners, we recommend consulting a lawyer when setting up a limited partnership. The founders should first and foremost clarify their objectives and expectations of the company. Then they need to draw up a properly worded articles of association with a lawyer to avoid future disputes. General partners need to be clear up front about the risks of unlimited liability. It will certainly pay to protect their personal assets.
A limited partnership is a hybrid form of business combining elements of partnerships and limited liability companies, where there are two types of partners – general partners, who are liable with all of their assets and have full control over the management of the company, and limited partners, who are liable only to the extent of their contribution and have no right to interfere in the day-to-day running of the company. The establishment of a company requires at least two partners, a memorandum of association and registration in the commercial register. The advantages are the low cost of incorporation, the absence of the obligation to create a reserve fund and the possibility of easier transfer of shares. The disadvantages are the unlimited liability of the general partners and the limited decision-making powers of the limited partners. The dissolution of a partnership can occur voluntarily, by lapse of time, by achieving its purpose, by insolvency or by court order, usually followed by a liquidation process.
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