What is an Ordinary Partnership? How to Establish an Ordinary Partnership?

An ordinary partnership is a frequently encountered form in business life, established between two or more people to achieve a specific purpose, without legal personality, and generally operating on the basis of a written agreement.

While it brings many advantages during the establishment phase, it also harbors some risks. Therefore, let's discover in detail the answers to questions such as what is an ordinary partnership and how is it established!

What is an Ordinary Partnership?

The answer to the question of what an ordinary partnership is can be given in the simplest way as a written or oral cooperation agreement made by two or more people to achieve a specific goal.

At this point, you might wonder whether an ordinary partnership has legal personality. The most prominent feature of an ordinary partnership is that it does not have legal personality. This means that an ordinary partnership is not recognized as an independent entity, and when it fails to meet its liabilities, the partners became individually liable.

In addition, an ordinary partnership is not registered with the trade registry and is not a taxpayer. The profits earned by the partners are taxed as personal income. When ordinary partnerships are established for the execution of a specific project or business, they terminate once that business is completed. However, as long as the agreement between the partners continues, the partnership's activities persist.

What are the Characteristics of an Ordinary Partnership?

The defining and distinguishing characteristics of an ordinary partnership are as follows:

• Since ordinary partnerships do not have legal personality, they are not a separate entity.

• Ordinary partnerships can be established orally or in writing. However, making the agreement in writing prevents potential disputes.

• Since ordinary partnerships are not registered in the trade registry, they do not have official business status.

• Partners bear unlimited and joint liability for the debts of the ordinary partnership.

• Ordinary partnerships do not have a tax liability, but the income earned by the partners from this partnership is taxed as personal income.

• Ordinary partnerships can be established for a specific period or for the purpose of completing a specific job.

• Ordinary partnerships established for an indefinite period can be terminated upon the resignation or death of one of the partners.

• In ordinary partnerships, the transfer of a partner's share requires the consent of the other partners.

• Management and decision-making mechanisms are shaped by an agreement freely determined among the partners.

Thanks to these features, ordinary partnerships can be preferred especially for small-scale businesses or for the purpose of carrying out a specific project. However, due to the principle of unlimited liability, partners must carefully evaluate potential risks.

Ordinary Partnership Agreement

An ordinary partnership agreement is an contract formed between partners during the establishment of the ordinary partnership. This contract can be made in written or oral form; however, to prevent potential disputes, a written form is generally preferred. The agreement specifies the operation of the partnership and the rights and responsibilities of the partners in detail.

It includes basic information such as the full names and addresses of the partners, the business subject of the partnership, the duration of the partnership, the capital contributions of the partners, how profits and losses will be distributed, the management and representation of the partnership, the duties of the partners, the conditions for the dissolution of the partnership, and the actions to be taken in case of dispute. 

This agreement increases trust among partners during the operating period of the partnership, regulates operations, and is used as a reference in case of disputes that may arise.

Since an ordinary partnership does not have a legal personality, preparing the agreement in a detailed and clear manner is of critical importance for maintaining a healthy relationship between partners.

How to Establish an Ordinary Partnership?

In order to establish an ordinary partnership, steps such as defining the business plan and partners, and preparing the agreement must be completed.

1. Define the business plan and partners

The first step in the process of establishing an ordinary partnership is to create a clear business plan among the partners. The business plan should include information such as the field in which the partnership will operate, the strategy to be followed, the amount of capital with which it will be established, and other essential details.

Crucial decisions must be made regarding who the partners will be, their respective roles in the partnership, their responsibilities, and their capital contributions. A distribution of roles should be made in accordance with the general structure of the company, taking into account the strengths and weaknesses of each partner.

2. Prepare a partnership agreement

The operations of the ordinary partnership and how the relationships between partners will be conducted are determined by the ordinary partnership agreement. Although the agreement can be made orally, it is highly recommended to draw up a written agreement to prevent disputes that may arise.

Additionally, the ordinary partnership agreement must clearly and explicitly state all responsibilities of the partners defined in the business plan, as well as details such as how profits and losses will be shared.

3. Apply to the Trade Registry Directorate

Since ordinary partnerships do not have a legal personality, they do not bear the obligation to register with the trade registry. However, if opening a place of business is planned or if the aim is to benefit from specific sectoral rights and advantages, registering with the trade registry can be considered.

Ordinary partnerships engaged in commercial activities are advised to inform the trade registry or comply with certain legal processes. This step increases the reliability of business relations by contributing to the transparency of business activities.

4. Register your partnership by applying to the Tax Office

Income earned by ordinary partnerships is subject to taxation. However, the ordinary partnership tax plate is obtained separately for each partner. Therefore, before your business becomes active, you must apply to the tax office of your region and create a taxpayer registration.

By following these steps, you will fulfill your tax obligations completely while maintaining your operations within a legal framework.

5. Obtain business start-up permits and licenses

Depending on the sector and line of business in which the ordinary partnership will operate, various permits and licenses must be obtained, just like with other company types. For example, an ordinary partnership to operate in the food sector must obtain a permit from the Ministry of Food, Agriculture and Livestock, and a business opening and working permit from the municipality.

In the construction sector, compliance certificates for certain standards or engineering reports may be requested. Therefore, researching which permits and licenses are necessary in your sector is of critical importance for the process to proceed without disruption.

6. Open a bank account

The order of financial transactions in ordinary partnerships forms the basis of trust among partners. In order to clearly track the partnership's income and expenses, having a bank account is essential. This account can be opened either in the name of all partners or in the name of a specific partner.

It is highly important that transactions in the account are presented to all partners in an open and transparent manner. Also, this bank account must be the center for financial transactions such as invoice payments, payment of salaries, and management of investor funds.

What are the Required Documents to Establish an Ordinary Partnership?

Ordinary partnerships have fewer bureaucratic obligations compared to other company types and can generally be established with fewer documents.

However, this situation may vary depending on the sector you will operate in and relevant legal regulations. Generally, the documents required when establishing an ordinary partnership are as follows:

• Ordinary Partnership Agreement

• Photocopies of Partners' Identity Cards

• Business Opening and Working License

• Tax Plate

• Workplace Lease Agreement

• Bank Passbook

• Special Permits or Licenses

• CVs of the Partners

What is the Taxation in Ordinary Partnerships?

Since ordinary partnerships do not have a separate legal personality according to Turkish tax legislation, they are not subject to tax on their own. Instead, the partners of the company are taxed individually on their share of the income or loss.

For example, an ordinary partner is obliged to declare the income received from the partnership in their own income tax return. However, whether the partner is a real person or a legal entity may affect the taxation process. While the income tax schedule is applied for real person partners, corporate tax may apply for legal entity partners. 

If the ordinary partnership exceeds a certain turnover, it must become a VAT taxpayer. After this point, submitting a VAT return for the partnership becomes mandatory. Additionally, it should not be forgotten that ordinary partnerships exceeding a certain income level must keep books on a balance sheet basis.

Partners share their duties and rights regarding taxation according to the ratios specified in the partnership agreement. However, to obtain more detailed information on this matter and to avoid potential errors, assistance from a financial advisor should be sought.

Under What Circumstances Does an Ordinary Partnership Terminate?

The first reason that leads to the termination of an ordinary partnership is the completion of the designated period of the agreement that forms the partnership's reason for existence. If the partners do not agree on a new contract, the partnership is automatically terminated. Additionally, any partner requesting the dissolution of the partnership also terminates its activities.

The accomplishment of the ordinary partnership's establishment purpose or the impossibility of achieving this purpose also leads to the termination of the partnership. The death, limitation, or bankruptcy of one of the partners may also require the termination of the ordinary partnership.

The occurrence of severe disputes among partners, creating an environment where cooperation cannot continue, is also among the reasons for terminating the partnership. 

Circumstances determined by legal regulations or court decisions may also cause the partnership to terminate.

With the termination of the partnership, how assets and debts will be shared must be determined among the partners. If necessary, the advice of a legal expert can be sought during this process.

Why is an Ordinary Partnership Preferred?

The most important reason for choosing an ordinary partnership is that a simple agreement made solely between partners is sufficient, without a complex establishment process. This flexible structure gives speed and dynamism to decision-making processes.

On the other side, since the partners of an ordinary partnership bear unlimited liability, there must be a stronger environment of trust in business relationships. 

In addition, operating costs of ordinary partnerships are lower compared to other company types. It is also advantageous because the partnership's operating and financial details are not open to the public.

However, in addition to these advantages, risks such as partners bearing unlimited liability also exist. Therefore, evaluating all aspects before deciding to establish an ordinary partnership helps you make the most accurate decision for your business.