How to convert a limited partnership into a general partnership?

Both a limited partnership and a general partnership are partnerships characterised by the fact that they do not have legal personality; however, the law grants them legal capacity and the provisions governing legal persons apply to them mutatis mutandis. The most significant consequences of granting legal capacity to partnerships are the ability to acquire and incur liabilities in their own name, to have capacity to be a party to legal proceedings, to hold assets separate from those of the partners, and to operate a business under their own trade name.

The conversion of a limited partnership into a general partnership is a complex process that requires proper planning and involves the need to carry out numerous practical steps and prepare the documentation required by law.

In the course of business operations, converting a limited partnership into a general partnership may prove to be an effective solution for simplifying the management of the partnership and increasing the partners’ involvement in the running of the partnership’s affairs. This is because a limited partnership is divided into two types of partners, namely general partners and limited partners.

General partners generally represent the partnership, as the partnership agreement or a final court ruling may deprive a general partner of the right to represent the partnership; they manage the partnership’s affairs and are liable for the partnership’s obligations towards creditors without limitation. Limited partners, on the other hand, are partners who, as a rule, do not have the right to represent the company (a limited partner may represent the company as a proxy), have neither the right nor the obligation to manage the company’s affairs, and are liable for the company’s obligations up to the amount of their limited partnership contribution.

In a general partnership, the general rule is that any partner may represent the partnership. The right of representation applies to all judicial and extrajudicial acts of the partnership. Furthermore, the right to represent the partnership cannot be restricted with effect against third parties.

The partnership agreement may modify the above rule and provide that a particular partner is deprived of the right to represent the partnership, or that they are authorised to represent it only jointly with another partner or a proxy. In a general partnership, every partner also has the right and duty to manage the partnership’s affairs.

As regards the partners’ liability for the company’s obligations, pursuant to Article 22 § 2 of the Commercial Companies Code, each partner is liable for the company’s obligations without limitation with all their assets, jointly and severally with the other partners and with the company. However, the possibility of enforcing the company’s liabilities for which a partner is liable against that partner’s assets is limited, as, pursuant to Article 31 § 1 of the Commercial Companies Code, such enforcement may only be carried out if enforcement against the company’s assets proves ineffective. Due to this limitation, this liability is referred to as subsidiary liability, as opposed to the primary (first-rank) liability borne by the company.

How to convert a limited partnership into a general partnership?

Once the business decision to convert a limited partnership into a general partnership has been taken, the first step is to carry out a detailed audit of the limited partnership’s documentation, including in particular the contracts entered into, to ascertain whether these contracts impose a requirement to obtain consent for the conversion or to notify the counterparty of the planned conversion.

Pursuant to Article 556 of the Commercial Companies Code: The conversion of a company requires:

• the preparation of a plan for the conversion of the partnership, together with annexes, and in the case of conversion into a public limited company – together with an auditor’s report;
• the adoption of a resolution on the conversion of the company;
• the appointment of members of the governing bodies of the transformed company or the designation of shareholders to manage the affairs of that company and represent it;
• entering the transformed company in the register and striking off the company being transformed.

One of the first steps necessary in the process of converting a limited partnership into a general partnership is the preparation of a conversion plan. In the relevant literature, most commentators argue that the conversion plan is a factual act and that its preparation does not give rise to direct legal consequences.

In the case of a limited partnership**, the conversion plan** is drawn up by all partners managing the affairs of the company being converted, in writing, on pain of nullity.

Pursuant to Article 558 of the Commercial Companies Code:

1. The conversion plan should contain at least:

• a determination of the balance sheet value of the assets of the company being converted as at a specified date in the month preceding the submission of the conversion plan to the partners;
• in the case of the conversion of a capital company into a partnership, a determination of the fair value of the partners’ shares.

2. The transformation plan must be accompanied by:

• a draft resolution on the conversion of the company;
• a draft of the articles of association or statutes of the transformed company;
• in the case of conversion into a public limited company, a valuation of the assets and liabilities of the company being converted;
• financial statements prepared for the purposes of the conversion as at the date referred to in § 1(1), using the same methods and in the same format as the most recent annual financial statements.

It follows from the above that the transformation plan is a document which sets out in detail the conditions, rules and timetable for the transformation, enabling all partners of the company to fully understand the entire transformation procedure and its associated consequences.

Importantly, for the purposes of converting a limited partnership into a general partnership, financial statements must be prepared; these are separate statements, drawn up in the same format and using the same methods as the annual financial statements. These statements are prepared as at a specific date in the month preceding the submission of the conversion plan to the partners. The balance sheet value of the assets of the company being converted is determined on the basis of these financial statements.

Another obligation arising from the provisions of the Commercial Companies Code concerning the process of converting a limited partnership into a general partnership is the requirement to notify the partners twice of the intention to adopt a resolution on the conversion, in the manner prescribed for notifying the partners of the company being converted. The first notification should be made no later than one month before the planned date of adopting the resolution, and the second at an interval of no less than two weeks from the date of the first notification.

The notice should contain the essential elements of the conversion plan, as well as specify the place and date on which the partners of the company being converted may examine the full text of the conversion plan and its annexes. Furthermore, the draft resolution on the conversion and the draft articles of association of the converted company must be attached to the notice.

Following two successful notifications to the partners regarding the planned conversion, and provided the deadlines have been met, all partners of the limited partnership are required to attend a notary in order to adopt a resolution on the conversion.

In accordance with Article 563 of the Commercial Companies Code, a resolution on the conversion of a limited partnership into a general partnership must contain at least:

• the legal form of the company into which the partnership is being converted,
• the scope of rights granted personally to the partners participating in the converted partnership, if the granting of such rights is provided for,
• the surnames and first names of the partners managing the company’s affairs and authorised to represent the transformed company,
• approval of the conversion plan, as well as the proposed wording of the articles of association of the converted company.

Importantly, pursuant to Article 563(2) of the Commercial Companies Code, the adoption of a resolution on the conversion replaces the conclusion of the articles of association of the converted company.

The next step following the adoption of the resolution on the transformation is to submit an application for the registration of the transformed company in the Register of Entrepreneurs of the National Court Register. This application is submitted by all partners entitled to represent the transformed company. The court fee for the application is PLN 600.

Once the transformed company has been entered in the Register of Entrepreneurs of the National Court Register, an announcement of the transformation must be made. This announcement is made at the request of all partners managing the affairs of the transformed company.

In addition to the above, once the transformation has been registered, the company’s customers and business partners must also be informed.

It is also advisable to ensure that the company’s internal documentation is updated, including stamps, letterheads and any regulations. Contracts must also be reviewed and adapted to the new legal form, namely a general partnership.

The conversion of a limited partnership into a general partnership is a complex process which, depending on the complexity of the company’s structure and the efficiency of the Registry Court, may take between 1.5 and 3 months.

One of the key aspects of converting a limited partnership into a general partnership is the issue of the limited partnership’s undistributed profits. At the time of conversion, these may be subject to taxation, which means that the partners must carefully analyse the value of these profits and prepare for potential tax liabilities.

In summary, it should be noted that the conversion of a limited partnership into a general partnership may entail numerous benefits, in particular such as simplifying and increasing the transparency of the company’s management structure. In a general partnership, as a rule, all partners have equal rights and obligations. The unlimited liability of all partners in a general partnership may be perceived by business partners as a sign of greater commitment and responsibility for the business, which may translate into increased trust and better relations with business partners.

Author

Adrian Łukasik

Radca prawny, Senior Associate

He gained his professional experience in one of Lublin's renowned law firms, dealing with civil and business law in its broadest sense. At the law firm Hewelt Wojnowski i Wspólnicy spółka komandytowa, he deals on a daily basis with current counseling in the field of business and the development of corporate documentation of companies, such as. Company agreements, bylaws of company bodies, agreements regulating relations between shareholders, resolutions of company bodies, M&A transactions. In addition to…

View profile →