Introduction
For the purposes of Bermuda law, a partnership is the relationship between two (2) or more persons carrying on a business in common with a view to profit. The purpose of this Guide is to provide an overview of the legal framework of partnerships in Bermuda, including exempted limited partnerships.
The advantage of a partnership is that it is versatile enough to handle a variety of business activities whether a small enterprise or establishing an investment fund.
The business of the partnership is carried out according to the partnership agreement and applicable Bermuda partnership law, and the partnership agreement can be oral or in writing or may even be implied by conduct.
The typical rights and responsibilities of partners include the right to be involved in decision making, to share in the profits, to examine the accounts of the business, to insist on openness and honesty from fellow partners as well as the responsibility for sharing losses made by the business. Partners must also be prepared to share with their fellow partners any profits they make from carrying on a competing business without the consent of the other partners.
Any of these rights or obligations can be varied or excluded by an agreement that governs the relationship between the partners. A written partnership agreement is invaluable as it may provide solutions should a disagreement arise between the partners. Topics that should be addressed in any such agreement include:
- the financial input of each partner and the possibility of future contributions;
- how the partners will share income, profits or losses, which will be divided equally unless there is evidence of a contrary agreement;
- whether interest might be allowed on a partner's contribution before any surplus or profit is divided between the partners; and
- profit sharing whereby a suitable ratio in which profits remaining after salary and interest on capital are to be shared.
Our partnership law closely mirrors general English partnership law. The partnership governing statutes are the Partnership Act 1902, which is similar in content to the U.K. Partnership Act 1890, the Limited Partnership Act 1883, the Exempted Partnership Act 1992 and the Overseas Partnership Act 1995.
Types of Partnerships
Bermuda law provides for the establishment and operation of five (5) types of partnerships, comprising:
1. A partnership to which the Partnership Act 1902 applies (general partnership);
2. A partnership which is registered as an exempted partnership under the Exempted Partnerships Act 1992 (exempted partnership);
3. A limited partnership which is registered under Limited Partnership Act 1883 (limited partnership);
4. A limited partnership which is registered under Limited Partnership Act 1883 and the Exempted Partnerships Act 1992 (exempted limited partnership); and
5. A partnership formed under a law other than the law of Bermuda and registered under the Overseas Partnerships Act 1995 (overseas partnership),
Bermuda law considers a partnership which is not registered as an exempted partnership, carries on business only in Bermuda and is not part of an MNE Group (as defined in the Economic Substance Act 2018, as set out below) to be a 'local partnership'.
Legal personality and status
Bermuda partnerships are generally not in themselves legal entities separate from their partners however they may function as such for all practical purposes. They can carry on business (partners can bind the partnership1 ) and sue or be sued in the partnership name.
It is possible however for a Bermuda partnership to irrevocably elect to have legal personality by filing a declaration with the Registrar of Companies. Such election allows a partnership to continue regardless of changes in partnership membership due to retirement, death, bankruptcy of one of the partners or other changes in its constitution2.
In the case of a limited partnership, the legal personality election can also serve to protect the limited partners of a partnership which trades outside Bermuda in those jurisdictions which may not recognise the limited liability of the limited partners. The Registrar of Companies will, following such election issues a Certificate stating that the partnership has a separate legal personality. However, once legal personality has been elected then it can be removed.
The election for legal personality by new partnerships must be made at the time of formation; any failure to do so means that the ability is lost and cannot be sought at a later date.
Conversely, an exempted partnership or a limited partnership may convert to an exempted company or an exempted LLC (limited liability company) and an exempted company or an exempted LLC may convert to an exempted limited
Footnotes
1 However limited partners will lose limited liability and be liable as a general partner if they take part in the management of a limited partnership, see below.
2 Partnership Act 1902, Section 4A.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.