On the 7th of August 2020 the Federal Government of Nigeria enacted the Companies and Allied Matters Act, 2020 ("CAMA 2020"), thereby repealing the old CAMA 1990. As part of its several innovations, the CAMA 2020 introduced the Limited Partnership (LP)2 and the Limited Liability Partnership (LLP)3 which were hitherto not contained in the CAMA 1990. Prior to this, partnership in Nigeria was regulated by the United Kingdom Partnership Act of 18904 (received English law), the Partnership Law of 19585 and the Partnership Law of Lagos State 2009.6
A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. In a partnership business, all partners share liabilities and profits equally, while in other forms of business, partners may have limited liability.7 Generally, a partnership, like a sole proprietorship, is legally and financially inseparable from its owners. Different forms of partnership include general partnership, limited partnership, limited liability partnership, limited liability limited partnership.8 Under CAMA 2020, the recognised forms of partnership are the general partnership, the limited liability partnership, and the limited partnership.
A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, financial and legal liabilities of a jointly owned business.9 In a general partnership, there are no formal legal requirements and partners agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner's assets. Furthermore, any partner may be sued for the debts of the business.10 The partners have a right to participate in managing the business and each partner reports their share of the business' profits and losses on their personal income tax return.
In a general partnership, the business entity is not separate from the partners and the partners are liable for each other's action. Similarly, the partners' personal assets are unprotected, and the partnership may be terminated upon the death or withdrawal of one of the partners.
A Limited Liability Partnership (LLP)
A limited liability partnership is a body corporate formed and incorporated as a legal entity separate from the partners.11 It is a hybrid business form that combines two types of structures; a partnership and a limited liability company12 with perpetual succession. An LLP can sue and be sued in its name and can acquire, own, hold and develop or dispose of property, whether movable or immovable, tangible, or intangible. A corporate entity can be a limited liability partner. LLPs are usually adopted by professionals such as lawyers, accountants, consultants, and architects, etc.
The provision of the law is that every LLP shall have at least two designated partners who are individuals and at least one of them shall be resident in Nigeria.13 If at any time the number of partners of an LLP falls below two and the LLP carries on business for more than six months while the number is so reduced, the person, who is the only partner of the LLP during that time it carries on business after those six months with knowledge of the fact that it is carrying on business solely, will be personally liable for the obligations of the LLP incurred during that period.14
The liability of a limited liability partner is restricted to the sum of money he has invested, including any personal guarantees. In the event that the partnership fails, creditors are prohibited from going after the partner's personal assets or income.
Global best practices treat LLPs as tax transparent and as such, the partnership is not subjected to tax in its name as the personal income of partners are taxed in accordance with the provisions of the Personal Income Tax Act.
LLPs and private limited companies ("Ltd.") are very similar as they separate the legal personality of the business from the individuals and limit the liabilities of their members/shareholders to the amount subscribed. However, they differ on various grounds such as:
- share capital - the LLP has no share capital unlike a Ltd.
- tax on entity - the LLP is not taxed as a business entity, but the partners are taxed unlike the Ltd where the company is liable to pay tax as a legal entity.
- Constitutional documents - LLPs have a Membership Agreement which is private, as opposed to the Memorandum and Articles of Association of companies that is available to the public at the Registry of the CAC.
Limited Partnership (LP)
By definition, a limited partnership has at least one general partner15 and at least one limited partner. The general partner or partners manage the business on a day-to-day basis.16 LPs are usually used by real estate investors, hedge funds and investment partnerships, family partnerships, etc. Usually, the partners provide capital in exchange for interests in the profits and do not take part in the management of the firm or partnership, nor do they have powers to bind the partnership. However, they may inspect the books and examine the prospects of the Firm.17
CAMA 2020 provides that an LP shall consist of one or more persons called general partners, who shall be liable for the debts and obligations of the firm, and one or more persons called limited partners.18 The LP cannot consist of more than 20 persons19 and each partner shall at the time of entering into the partnership contribute or agree to contribute capital or property valued at a stated amount and shall not be liable for the debts or obligations of the Firm beyond the amount so contributed or agreed to be contributed.20 LPs are not restricted to individuals, as corporate entities can become Limited Partners21 and negotiate agreements with general partners on management of the Partnership.
It is important to note that unless otherwise agreed in writing by the partners, a limited partner shall not, during the continuance of the partnership, either directly or indirectly, draw out or receive back any part of his contribution and if he/it draws out or receives back any such part, the limited partner will still be liable for the debts and obligations of the partnership up to the amount so drawn out or received back.22
If a limited partner takes part in the management of the partnership business, he is liable for all debts and obligations of the Firm incurred while he takes part in the management, as though he were a general partner.23 Considering that LPs are regarded as a separate entity from the actual individual partners by the internal revenue service for tax purposes, LPs are not taxed but the partners are taxed as individuals on profits from the Partnership.
Even though the CAMA 2020 came into force in August 2020, the CAC did not commence the registration of specific entities on the Company Registration Portal ("CRP") immediately. However, on the 2nd of September 2021, the CAC announced that it has commenced the registration of LLPs and LPs and had deployed the registration interface for the registration on the CRP. The introduction of the LPs and LLPs have now increased the options for individuals and business owners when registering their business. Professional services firms such as law firms, accounting firms, etc., can now limit the liability of partners to the amount invested as opposed to the unlimited liability that was obtainable under the general partnership.
Similarly, the introduction of the LPs and LLPs is a giant stride for the corporate environment in Nigeria and a significant shift from the reliance on the received English Law and the Partnership Law of Lagos state which was limited to Lagos and was fraught with a lot of uncertainties as to its ability to confer the benefits of incorporation. It speaks to the fact that the government is making deliberate efforts to bring the nation at par with global best practices and this will most assuredly make Nigeria more attractive to foreign entities that prefer to operate under the LP/LLP model due to the distinctive features which could better serve their desired corporate structure.
1. Oreoluwa Adebayo, Associate Corporate Finance & Capital Markets Department, SPA Ajibade & Co., Lagos, Nigeria.
2. Section 795, CAMA 2020.
3. Section 746, CAMA 2020.
4. 1890 c39 43 and 54 Vict. (Statute of General Application, laws in force in England as of 1st January 1900)
5. Partnership Law (Western Region) 1958, [L.F.N. Cap. 59' Part A.].
6. Partnership (Amendment) Law of Lagos State, 2009.
7. See "Investopedia", available at https://www.investopedia.com/terms/p/partnership.asp, visited on 3rd September 2021.
8. See "4 Types of Business Partnerships: Which Is Best for You?" available at https://www.score.org/news/4-types-business-partnerships-which-best-you, visited on 3rd September 2021.
9. See "Investopedia", available at https://www.investopedia.com/terms/g/generalpartnership.asp, accessed on 3rd September 2021.
11. Section 746(1), CAMA 2020.
12. See "CAMA 2020 And The New Face Of Partnership Structure: An Overview of Limited Liability Partnerships (LLPs) In Nigeria", available at https://thenigerialawyer.com/cama-2020-and-the-new-face-of-partnership-structure-an-overview-of-limited-liability-partnerships-llps-in-nigeria/, visited on 3rd September 2021.
13. Section 749 (1), CAMA 2020.
14. Section 748 (2), CAMA 2020.
15. A general partner is one of two or more investors who jointly own a business that is structured as a partnership, and who assumes a day-to-day role in managing it.
16. See "Investopedia" available at https://www.investopedia.com/terms/l/limited-partner.asp, visited on 3rd September 2021.
17. Section 806(1), CAMA 2020.
18. Section 795(3), CAMA 2020.
19. Section 795(2), CAMA 2020.
20. Section 795(4), CAMA 2020.
21. Section 796, CAMA 2020.
22. Section 795(5), CAMA 2020.
23. Section 806(1)b, CAMA 2020.
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