CREATION AND TERMINATION OF  UNINCORPORATED PARTNERSHIP IN THE TURKISH LAW

Yrd. Doç. Dr. Mustafa CAN

Gazi Üni. İİBF Ticaret hukuku öğretim üyesi

mcan51@hotmail.com

A. INTRODUCTİON

Unincorporated partnerships are created by agreement. A codification of unincorporated partnership law is found in the Turkish Obligation Code. The Turkish Obligation Code is in effect in the Turkish Republican[1]. The other companies, such as corporation and limited company, differ significantly from unincorporated partnerships and are not discussed in this chapter. They are found in the Turkish Commercial Code.

1. Definition

A unincorporated partnership is a relationship created by the voluntary “ association of two or more persons to carry on as co-owners a business for profit”[2]. The persons so associated are called partners. A partner is the agent of the partnership and each partner with respect to partnership matters. A partner is not an employee of the parnership.

2. Characteristics of a Unincorporated Partnership

A unincorporated partnership has distinguishing caharacteristics:

a.       A unincorporated partnership is a voluntary, consensual relationship.

b.      A unincorporated partnership involves partners’ contributions of capital, services or a combination of these.

c.       The partners are associated as co-owners to transact the business of the firm for profit.

If profit is not the object, the group will not be a unincorporated partnership. The Turkish Obligation Code(TOC) does not make the unincorporated partnership a separate entity, and therefore suit cannot be brought by the firm in its name.

3. Rights of Partners

The rights of partners are determined by the unincorporated partnership agreement. If written, this agreement is interpreted by the same rules that govern the interpretation of any other written document[3]. Any matter not covered by the unincorporated partnership agreement may be covered by a provision of the applicable the TOC.

4. Purposes of a Unincorporated Partnership

A unincorporated partnership may be formed for any lawful purpose but cannot be formed to commit immoral or illegal acts or acts that are contrary to public policy[4].

5. Firm Name

A unincorporated partnership need not have a firm name, although it is customary to have one.  The partners may, as a general rule, adopt any firm name they desire, including a fictitious name. There are, however, certain limitations on the adoption of a firm name. For example, the name cannot be the same as, or deceptively similar to, the name of another enterprise for the purpose of attracting its name.

6. Who May Be Partners

Any competent person may be a partner.  Persons who are competent to contract may form a unincorporated partnership. A minor may be a partner but may avoid the contract of a  unincorporated partnership and withdraw. In general, the capacity of a mentally incompetent person to be a partner is similar to that of a minor except that an adjudication of incompetence makes subsequent agreements void rather than merely voidable.

7. Creation of Unincorpoarted Partnership

If the parties agree that the legal relationship between them shall be such that they in fact operate a business for profit as co-owners, a unincorporated partnership is created even though the parties may not have labeled their new relationship partnership. The law is concerned with the substance of what is done, rather than the name. Conversely, a  unincorporated partnership does not arise if the parties do not agree to the elements of a  unincorporated partnership even though they call it a  unincorporated partnership.

8. Unincorpoarted Partnership Agreement

Because of the complexity of the problems involved,  unincorporated partnership agreements are typically written.  To reduce or avoid disputes and litigation,  unincorporated partnership agreements should be in writing[5]. The formal document that is prepared to evidence to the contract of the parties is termed a unincorporated partnership agreement. The  unincorporated partnership agreement will govern the partnership during its existence and may also contain provisions relating to dissolution.

9. Determining the Existence of a Unincorporated Partnership

A unincorporated partnership is shown to exist when it is established that the parties have agreed to the formation of a business organization that has the characteristics of a unincorporated partnership. The burden of proving the existence of a unincorporated partnership is on the person who claims that one exists. When the nature of the relationship is not clear, the following rules aid in determining whether the parties have created a unincorporated partnership.

a. Control

The presence or absence of control of a business enterprise is significant in determining whether there is a unincorporated partnership and whether a particular person is a partner.

b. Sharing Profits and Losses

The fact that the parties share profits and loses is strong evidence of a unincorporated partnership.

c. Sharing Profits

An agreement that does not provide for sharing losses but does provide for sharing profits is evidence that the parties are partners. If the partners share profits, it is assumed that they will also share losses. Sharing profits is prima facia evidence of a unincorporated partnership[6].

d. Contribution of Property

The fact that all persons have not contributed capital to an enterprise does not establish that the enterprise is not a  unincorporated partnership. A  unincorporated partnership may be formed even though some of its members furnish only skill or labor[7].

10. Unincorporated Partnership Property

In general,  unincorporated partnership property consists of all the property contributed by the partners or acquired with its funds. There is usually no limitation on the kind and amount of property that a unincorporated partnership may acquire. The TOC does not make the unincorporated partnership a separate entity, and therefore the TOC does not recognize that the unincorporated partnerships are not entities that can not acquire and own property in the unincorporated partnership’s name.

11. Assignment of a Partner’s Interest

Although a partner cannot transfer specific items of  unincorporated partnership property in the absence of authority to so act on behalf of the partnership, a partner’s interest in the unincorporated partnership may be voluntarily assigned by the partners. The assignee does not become a partner without the consent of the other partners. Without this consent, the assignee is entitled to receive only the assignor’s share of the profits during the continuance of the unincorporated partnership and the assignor’s interest upon the dissolution of the firm. The assignee has no right to participate in the management of the  unincorporated partnership or to inspect the books of the  unincorporated partnership.

B. DİSSOLUTİON AND TERMİNATİON

The end of a unincorporated partnership’s existence is marked by dissolution and termination[8].

1. Effect of Dissolution

Dissolution ends the right of the unincorporated partnership to exist as a going concern, but it does not end the existence of the unincorporated partnership. Dissolution is followed by a winding-up period, at the conclusion of which the unincorporated partnership’s legal existence terminates.

Dissolution reduces the authority of the partners. From the moment of dissolution, the partners lose authority to act for the firm, “except so far as may be necessary to wind up  unincorporated partnership affairs or to complete transactions begun but not then finished. The vested rights of the partners are not extinguished by dissolving the firm, and by the death of a partner, the estate of deceased partner is liable to the same extent as the deceased partner.

2. Dissolution by Act of the Parties

A unincorporated partnership may be dissolved by action of the parties[9]. However, certain acts of the parties do not cause a dissolution.

a. Agreement

A unincorporated partnership may be dissolved in accordance with the terms of the orginal agreement of the parties. The relationship may also be dissolved by subsequent agreement. The partners may agree to dissolve the firm before the lapse of time specified in the articles of unincorporated partnership or before the attainment of the object for which the firm was created.

b. Expulsion

A unincorporated partnership is dissolved by the expulsion of any partner from the business, whether or not authorized by the unincorporated partnership agreement.

c. Alienation of Interest

Neither a voluntary sale of a partner’s interest nor an involuntary sale for the benefits of creditors works a dissolution of the unincorporated partnership.

d. Withdrawal

A partner has the power to withdraw from the unincorporated partnership at any time.  However, if the withdrawal violates the unincorporated partnership agreement, the withdrawing partner becomes liable to the co-partners for damages for breach of contract.

3. Dissolution by Operation of Law

A  unincorporated partnership is dissolved by operation of law in the following instances[10].

a. Death

A unincorporated partnership is dissolved immediately upon the death of any partner[11].  Thus, when the executor of deceased partner carries on the business with the remaining partner there is legally a new firm.

b. Bankruptcy

Bankruptcy of the firm or one of the partners causes the dissolution of the firm; insolvency alone does not[12].

c. Illegality

A unincorporated partnership is dissolved by an event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in  unincorporated partnership[13].

4. Dissolution by Decree of Court

A court may decree the dissolution of a  unincorporated partnership for proper cause[14]. A court will not order the dissolution for trifling causes or temporary grievances that do not involve a permanent harm or injury to the unincorporated partnership. The filing of a complaint seeking a judicial dissolution does not in itself cause a dissolution of the unincorporated partnership; it is the decree of the court that has that effect.  A partner may obtain a decree of disolution for any of the following reasons.

a. Insanity

A partner has been judicially declared insane or of unsound mind.

b. Incapacity

One of the partners has become incapable of performing the terms of the unincorporated partnership agreement.

c. Impracticability

One of the partners persistently or wilfully acts in such a way that it is not reasonably practicable to carry on the partnership business.

d. Equitable Circumstances

A decree of dissolution will be granted under any other circumstances that equitably call for a dissolution.

5. Winding Up Unincorporated Partnerships Affairs

In the absence of an express agreement permitting the surviving partners to continue the business, they must wind up the business and account for share of any partner who has withdrawn, been expelled, or died. If the remaining partners continue the business and use the partner’s distributive share, that partners is entitled to that share, together with interest or the profit earned on it[15].

When dissolution is obtained by court decree, the court may appoint a receiver to conduct the winding up of the partnership business. This may be done in the usual manner, or the receiver may sell the business as going concern to those partners who wish to continue its operation[16].

Generally, all partners have the right to participate in the winding up of the business[17]. When the firm is dissolved by the eath of one partner, the partnership property vests in the surviving partners for the purpose of administration. They must collect and preserve the assets, pay the debts, and make an accounting to the representative of the deceased partner’s estate. A partner cannot purchase any of the partnership property without the consent of the other partners.

6. Distribution of Assets

Creditors of the firm have first claim on the assets of the unincorporated partnership. Difficulty arises when there is a contest between the creditors of the firm and the creditors of the individual partners. The general rule is that firm creditors have first claim on assets of the firm. The individual creditors share in the remaining assets, if any.

After the firm’s liabilities to nonpartners have been paid, the assets of the unincorporated partnership are distributed as follows[18]: (1) Each partner is entitled to a refund of advances made to or for the firm; (2) contributions to the capital of the firm are then returned; and (3) the remaining assets, if any, are divided equally as profits among the partners unless there is some other agreement. A partner who contributes only services to the partnership is not considered to have made a capital contribution, absent an agreement to the contrary. If the  unincorporated partnership has sustained a loss, the partners bear it equally in the absence of a contrary agreement[19].

C. CONCLUSİON

A  unincorporated partnership is a relationship created by the voluntary association of two or more persons to carry on as co-owners a business for profit[20].

A  unincorporated partnership agreement governs the partnership during its existence and may also contain provisions relating to dissolution. The existence of a unincorporated partnership may be found from the existence of shared control in the running of the business and the fact that the parties share share profits and losses.

Dissolution ends the right of the unincorporated partnership to exist as going concern. Dissolution is followed by a winding up period and the distribution of assets. All partners generally have a right to participate in the winding up of the business.