Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

Partnerships are business arrangements between two or more entities or individuals whereby the partners share the profits and losses according to provisions included in the partnership agreement.  

Colombian company law provides for various types of partnerships that are subject to specific regulations under the Code of Commerce.

Partnership agreements on the other hand, are not regulated by the Colombian Civil or Commercial Statutes. The agreements, however, are subject to administrative and tax rules and specifically defined for such purposes.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

The Colombian Commercial Law regulates various types of partnerships, including the common partnerships such as the general and limited partnerships. It also differentiates other specific features, such as, for instance, those in the secret partnership.

Specific characteristics are attributable to each of the following types of partnerships under Commercial Law:

  • General partnership: as provided in section 294 of the Colombian Commercial Code, the general partnership is a legal entity where the members bear unlimited liability, regardless of their contributions.
  • Limited partnership: as per section 323 of the Commercial Code, the limited partnership is a legal entity that includes two types of members: (1) general partners with unlimited liability and (2) limited partners, who are liable in accordance with the type of partnership: (1) the limited partners in a simple limited partnership are liable for the obligations of the company in proportion to their share in capital; (2) the limited partners in the limited partnership company are liable up to the amount of their contribution.
  • Secret partnership: according to section 507 of the Commercial Code, the secret partnership is an agreement, without legal personality, whereby at least two or more people share the profits and losses on a business, but the existence of one of the partners is not avowed to the public.

 

The Colombian Administrative Law has been developing specific regulations regarding non-corporate business agreements whereby the parties decide to execute specific projects and to participate in the profits in accordance with their contribution to the joint venture:

  • joint ventures: other types of business organisations in Colombia, such as consortiums and temporary unions that are subject to private agreements and where the parties agree to share the interests in a business without creating a separate legal entity. These types of business organisation are commonly used to execute public infrastructure projects.
  • Law 1508 of 2012 (section 1) regulates public-private partnerships (PPP), which are agreements entered into between a public entity and a private company, for the supply of public goods and related services in infrastructure projects.
Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

There are different reasons why business owners choose a particular type of partnership. The following are the differences between the types of partnerships available in Colombia.

 

General partnerships

The main difference between the general partnership and the other types of partnerships is the unlimited liability of all the members. Likewise, in a general partnership, as stated in section 310 of the Commercial Code, all management duties are shared by the partners regardless of the percentage of their contributions. The management of the company can be delegated to third parties.  A minimum of two partners are required at all times.

General partnerships in Colombia are treated as a body of persons.

 

Limited partnerships

Limited partnerships include two types of business organisations in Colombia: simple limited partnership and limited shareholder partnership.

In both cases, the businesses have legal personality and two types of partners: general partners with unlimited liability and managing powers and limited partners, who are either liable in proportion to their shares or up to the amount of their contribution.

The following are the differences in limited partnerships.

  • Regarding capital contribution, the simple limited partnerships’ equity capital is divided into partnership quotas whereas in the limited shareholder partnerships it is divided in shares.
  • Under section 338 of the Colombian Commercial Code, the transfer of interests and quotas by the general partners and the limited partners, in the simple limited partnership, require a public deed and the subsequent registration before the Chamber of Commerce, while in limited shareholder partnerships, the transfer of shares by the limited shareholders requires only the endorsement of the shares and the inscription of the transfer in the Shareholders Ledger.
  • As per section 343 of the Commercial Code, limited shareholder partnership require a general partner and a minimum of five limited partners. Conversely, a minimum of one general partner and one limited partner is required for the simple limited partnership.

 

Secret partnership

The most striking feature about this type of partnership is the fact that the existence of one of the partners is unknown to third parties.

As per section 509 of the Commercial Code, the secret partnership does not create a new entity with a legal personality different from that of the parties.

The following are the rules on the two kinds of partners involved in this type of partnership: (1) a managing oartner, who is in charge of executing all the business’ activities, will be reputed sole owner of the businesses as regards third parties, and represents the partnership for all purposes and (2) a secret partner, who is entitled to participate in the profits or losses of the business and who will be liable before third parties only in the event that/its identity is revealed.

 

Joint ventures

This type of agreement derives in the existence of either a consortium or a temporary union, under which the parties agree to contribute either capital or services or both, and to share the profits, losses and interests in a business without creating a separate legal entity.

Likewise, the difference between the consortiums and temporary unions lies in the fact that partners within the consortium are jointly and severally liable for all the obligations and penalties arising from the execution of the agreements with third parties, while partners in a temporary union are jointly and severally liable for the obligations under the contract but respond for penalties only in proportion to the participation in the contract.

As per section 3 of Law 1508 of 2012, PPP agreements are commonly signed with the purpose of performing activities related to the design and construction of infrastructure projects and associated services, as well as for the repair or improvement of infrastructure.

The following are the main characteristics of this type of businesses:

  • long-term duration (minimum 30 years);
  • the scope of the agreement includes the design, construction and maintenance of public infrastructure;
  • it is financed by private or public-private funds;
  • the remuneration to the contractor includes the right to operate the infrastructure or to render the related services;
  • the remuneration is subject to performance goals; and
  • tasks are distributed among the parties in accordance with experience and competitive advantages.
Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

The reasons why businesses choose to operate through a partnership structure in Colombia differ with regards to the type of partnership.

  • Regarding general partnerships and limited partnerships, the fact that only the general partners are jointly, unlimited and severally liable before third parties, certainly discourages their incorporation in Colombia. The complex procedure of incorporation, management and dissolution make these types of partnerships generally unattractive. They are, however, commonly adopted by family businesses.
  • Conversely, other types of partnership agreements that do not require the incorporation of a legal entity, such as secret partnerships, joint ventures and PPPs are very popular for the execution of specific projects, since the procedures for their creation, management and dissolution are far more simple. The issue with the mentioned agreements is that these imply joint liability by all the members.
Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

As per article 111 of the Commercial Code, in all cases, the incorporation of both general partnerships and limited partnerships require a public deed to be granted before a notary and registered before the Chamber of Commerce.

Given that other types of partnerships are essentially private contract agreements whereby the parties agree to contribute capital or services and to share the benefits, profits, losses and interests in a business without creating a separate legal entity, it is not necessary to comply with any other formality for their incorporation.

Even though consortiums and temporary unions do not generate a separate legal entity, it is required that these obtain a Tax Identification Number (NIT).

According to the provisions of paragraph 1 of section 3 of Law 1508 of 2012, PPPs may only cover projects where the invested amount exceeds 4.9 billion Colombian pesos.

Law stated date

Correct on:

Give the date on which the above information is correct.

10 June 2020.