How Is an Ordinary Partnership Formed, and What Are the Partners’ Rights and Obligations?

How Is a Simple Partnership Formed? Elements of Formation

For a simple partnership, defined in this way in Art. 620 of the Turkish Code of Obligations, to be formed, the following elements are required;

1. Element of persons
2. Sermaye unsuru
3. Element of contract
4. Element of common purpose and the object of the partnership

The Element of Persons; First of all, two or more persons must be parties to the contract. It makes no difference whether the person is a natural or a legal person. While there is a minimum number of parties to the partnership, there is no maximum. However, although there is no upper limit, a natural limit arises from the rights and obligations of the partnership and the achievement of its purpose. A natural person who is a party must, as a rule, have full legal capacity. Persons with limited capacity and persons lacking capacity may also enter into a partnership contract through a statutory representative (Article 463/b TCC). Furthermore, an ordinary partnership does not have legal personality.

The Element of Capital; Each partner must contribute capital to the partnership. These capital contributions combine to form the partnership capital, which the partners hold in joint ownership. As capital, the partners may contribute anything to which an economic value can be attributed within the limits of Articles 26-27 TCO and Articles 23-25 TCC.

The Element of Contract; The parties to an ordinary partnership form the partnership by concluding a consensual contract between themselves. The contract creates a continuing obligation. Since the contract serves the common interest of the partners, it is not a fully bilateral (synallagmatic) contract. Consequently, the provisions on rescission of the contract under Article 123 TCO cannot be applied between the parties. Only the provisions on rescission before the capital contributions have been made may apply. The contract is not subject to any formal requirement, although the parties may stipulate one. Furthermore, where the transfer of assets or immovable property to be contributed as capital is subject to a formal requirement, only those transfers are carried out in compliance with the statutory formal requirements. If defects emerge in the formation of the contract but the partnership has nevertheless commenced performance, its liability towards third parties will not cease. Such defects may include immorality, complete lack of capacity and the like. This situation, applied with the aim of protecting persons in external relations affected by it, is referred to as “defective partnerships”. Such a partnership continues to exist until one of the parties declares that the partnership does not conform to the contract.

The Element of Common Purpose and the Object of the Partnership; The purpose is an economic one, namely sharing profits. The object, however, is different. Indeed, the purpose referred to in Article 639(1) TCO, where the achievement of the purpose becoming impossible is listed as one of the grounds for dissolution of the partnership, is the object of the partnership.

Internal Relations Between Partners

Internal relations in an ordinary partnership are the relations among the partners themselves. As in all partnerships, internal relations in an ordinary partnership are subject to freedom of contract. The provisions of the partnership contract act as the operating directives of the partnership. Provided that there is no breach of mandatory provisions, problems arising in internal relations are resolved in accordance with the provisions of the contract.

Ownership Relations among the Partners

Since the partnership has no legal personality, the capital contributed belongs to all the partners and is held in joint ownership. The use of the assets and rights forming the capital contributed therefore requires the unanimity of the partners. If they wish, the partners are free to switch to co-ownership in shares by including a clause to that effect in the partnership provisions.

Since the property is held in joint ownership, the partners’ shares are not determined. For this reason, a creditor of one of the partners may only have the liquidation share due to that partner attached. Where the partnership is governed by co-ownership in shares, the creditor may also have the shares of the partner concerned attached.

Resolutions of the Partnership

Matters such as the structure and organisation of the partnership and the disposal of profits are among the resolutions of the partnership. As a rule, the partnership’s resolutions are adopted unanimously. However, if the contract provides that resolutions are to be adopted by majority, the resolution is adopted by a majority of the number of partners, not according to the proportion of shares (Article 624 TCO).

Rights and Obligations of Partners

Sermaye Borcu

Although the limits on the assets that may be contributed as capital are not clear, according to the Court of Cassation’s settled case law, a “Mining Partnership” whose object is the operation of a mine cannot be an ordinary partnership, and mining operations cannot be allocated to an ordinary partnership. Since an ordinary partnership does not have legal personality, this is not possible owing to the rule that a mining operation licence is granted to a single person.

The obligation to contribute capital is an obligation owed by each partner to the other partners. Unless otherwise provided in the contract, the partners contribute equal capital to the partnership. The capital contributed must be of a nature and amount appropriate to the purpose of the partnership.

A partner has the right to bring an action against another partner who fails to perform its obligation to contribute capital. The aim is the performance of the unperformed obligation and thereby the fulfilment of the liability towards the company (Article 128/7 Turkish Commercial Code).

Participation in Profits, Losses and the Outcome of Liquidation

Under Article 623 TCO; “Unless otherwise agreed in the contract, each partner’s share in profits and losses shall be equal, irrespective of the value and nature of its contribution (para. 1). Where the contract determines the partners’ share in either profits or losses, that determination shall also apply to the other (para. 2). An agreement that a partner shall share only in profits without sharing in losses shall be valid only for a partner who has contributed solely its labour (para. 3).” By so providing, the Code lays down rules for profits and losses where the contract contains no provisions on them. It is appropriate that the legislature has acted sensitively with regard to labour. This is because a partner who contributes its labour as capital would be affected twice by losses if the partnership incurs a loss. This would in turn deter parties who would contribute their labour as capital from forming partnerships.

The Obligation Not to Compete

Under Article 626 TCO; “Partners may not, for their own benefit or that of third parties, carry out activities that obstruct or harm the purpose of the partnership.” By this provision, a prohibition on competition is laid down. However, it is not mandatory and concerns internal relations; the partners may provide otherwise in the contract.

No sanction is provided for breach of the prohibition on competition. However, under Article 628/2 TCO, “Each partner shall be obliged to compensate the other partners for damage caused by its own fault, without being entitled to set it off against the benefits it has procured for the partnership in other transactions.” , compensation may be claimed, and termination for just cause may also be sought.

Right of Inspection (Turkish Code of Obligations Art. 631)

Right to Claim Expenses, Interest and Remuneration

Under Article 627 TCO; “The other partners shall be liable to a partner for expenses incurred or obligations assumed by that partner in respect of partnership affairs; the other partners shall be obliged to compensate that partner for damage suffered directly as a result of management activities and for damage resulting from the risks inherent in managing the partnership (para. 1). A partner who advances money to the partnership may claim interest from the date of the advance (para. 2). A partner who, without being obliged to do so, has devoted labour to partnership affairs may claim remuneration as required by equity (para. 3).” By this provision, the rights to claim expenses incurred, advances and remuneration for work performed are regulated. On the basis of these provisions, partners may invoke these rights in internal relations, unless the contract provides otherwise.

• Gider (f.1): Expenses incurred and debts assumed for partnership business
• Faiz (f.2): Interest on money advanced to the partnership, running from the day it was advanced
• Remuneration (para. 3): Fair compensation for labour expended on partnership business without being obliged to do so

Management of a Simple Partnership

Appointment and Dismissal of the Manager

The manager may be one of the partners or, unless the contract provides otherwise, may be appointed from outside. If no one has been designated, each of the partners acts as a manager. Each may be authorised to act alone, or it may be agreed otherwise (Article 625 TCO).

Management authority is withdrawn in the same manner in which it was granted. If it was granted by the partnership contract, a resolution amending the partnership contract is adopted and the relevant clause of the contract is amended. Unless the contract provides otherwise, the amendment resolution is adopted unanimously. The manager whose authority is being withdrawn may be one of the partners, and their consent will therefore also be required for this resolution.

Where management of the company has been entrusted to one of the partners by a contractual provision, just cause is required for the authority to be revoked. Where there is just cause, each of the partners may have the authority revoked, even if the contract provides otherwise (Article 629 TCO).

Powers of the Manager

The manager’s powers apply to the ordinary business of the partnership. For extraordinary transactions, the partners must decide unanimously. However, in cases where delay would be detrimental, the manager of the partnership may also carry out extraordinary transactions of the partnership.

The Code does not draw a clear distinction between ordinary and extraordinary transactions. Although certain distinctions exist, such as the one provided for collective companies in the Turkish Commercial Code and those under the provisions on the mandate contract in the TCO, applying them identically to an ordinary partnership is not possible given the functioning and purpose of an ordinary partnership.

Extraordinary transactions may be delimited by reference to resolutions adopted unanimously by the partners, or the partners may specify in the partnership contract which transactions are ordinary and which are extraordinary.

Rights of the Managers

Right of Management and Right to Object; The manager’s fundamental right is to manage the partnership. The right to object, on the other hand, belongs only to a partner who is also a manager. A partnership may have more than one manager. Where one of these managers is a partner and the other is not, the managing partner may prevent a transaction by objecting to it before it is carried out by the non-partner manager. An objection made by the managing partner is not directly subject to any sanction as to whether it is justified or unjustified. However, in the case of an unjustified objection, the manager whose transaction has been objected to may refer the matter to the other partners. If the other manager carries out the transaction despite the managing partner’s objection, the transaction will be valid in external relations. In this respect, recourse may be had to the provisions on agency without authority (negotiorum gestio).

Right to Remuneration; If the contract or the resolution appointing the manager provides for the payment of remuneration, the manager is entitled to claim remuneration.

Obligations of the Managers

Duty of Care;  A managing partner who fails to exercise due care and causes damage must compensate the damage. For non-partner managers, this depends on whether the manager receives remuneration. If the manager is unremunerated, the standard applied is the care the manager would exercise in their own affairs. If the manager is remunerated, liability is determined in accordance with the provisions on the agent’s liability under the mandate contract.

Duty to Render Accounts; Under Article 630/3 TCO, “Managing partners shall be obliged to render accounts at least once a year and to pay the partners their share of the profits. An agreement extending the accounting period shall be null and void. The same rule shall apply where the person managing the partnership is not one of the partners.” By this provision, the matter is regulated. As can be seen from the article, the accounting period may not be extended, but there is no provision to the contrary regarding its shortening. Accordingly, more than one accounting period may be set within a year.

Duty to Permit Inspection; This cannot be excluded by the contract. The manager is obliged to permit inspection in response to the partners’ right of inspection.

External Relations and Representation of the Partnership

An ordinary partnership does not have legal personality. Unless otherwise agreed with regard to representation, the manager performs this function. The matters for which a non-partner manager is authorised to represent the partnership must be conferred on that manager unanimously by means of a power of representation.

In an ordinary partnership, representation may be direct or indirect. If the third party with whom the transaction is concluded knows or ought to know that the representative is acting on behalf of the ordinary partnership, the obligations and rights arising from the transaction will take effect directly for the partnership. However, if the third party does not know this, the transaction concluded with the manager becomes binding on the manager personally, not on the ordinary partnership. The manager subsequently transfers the receivables to all the partners by assignment and the debts by assumption of debt.

Liability of Partners for Partnership Debts