Business Law - Partnerships (Prof. Veronese)

Business law – partnership (Veronese)

Università degli Studi di Torino, Business and Management, 2nd year

Lecture one

In this unit we will deal with the basics of business law and partnership law. Business law is a broad area of law, which covers different topics; generally, we refer to the body of law which covers business and commerce. Moreover, it is considered to be a branch of Civil Law (the other is criminal law). It deals with matter of public law and private law.

It is composed by a group of law which specify how to set up a business and to run it (how to manage, close, sell, buy any type of business). It establishes the rules that all business must follow. However, we will deal with the Italian business law: a part of the Italian private legislation (in the Italian Civil Code, more precisely the 5^th book) and its object is the organization and performances of the business (società).

The Italian business law include all the law which refers to every entrepreneur or business. Entrepreneurs have the duty to respect the Italian business law, in order to conduct its activity correctly. So, on one side we have businesses and on the other we have entrepreneurs. The rules of Italian business law are made to indicate how to constitute, run and manage any type of business. The legislator has the duty to ensure the free circulation of wealth.

Topics to study

• Laws related to the entrepreneur or business (imprenditore)
• Rules linked to the "Business as going concern" (azienda)
• The different types of business organization
  • Sole trader
  • Partnerships (società di persone)
    • Simple P.
    • General P.
    • Limited P.
  • Companies (società di capitali)
    • Private company
    • Public company – listed or not
    • Limited Partnership by shares

Partnership

Simple partnership: It is not present in the UK legislation, so the translation is not common: società semplice (SS). It is possible to create them just in Italy.

General partnership: In Italy it is called società in nome collettivo (SNC).

Limited partnership: In Italy it is called società in accomandita semplice (SAS). Only here we have at the same time two kind of partners:

• Unlimited partners: so unlimitedly liable for the partnership obligation, so there is no liability limitation admitted in their regards. They are jointly an unlimitedly liable for the debts of the partnership, there is not the possibility to put in the deed any clauses that limits this liability.
• Limited partners: which have liabilities limited to the amount contributed; it is also called silent partner.

Companies

Private Company: In UK we have the LTD, in Italy it is translated as società a responsabilità limitata (SRL).

Public Company: Can be listed or not, in UK is called PLC while in Italy is società per azioni (SPA).

Limited Partnership by shares: In Italy is called Società in accomodità per azioni (SAA).

Entrepreneur

In general term we can say that the entrepreneur is a subject with the function of organizing the factors of production (capital and labour) and distributing the wealth generated by the activity. In the Italian Civil Law, the Article 2082 stated the definition of a businessman: “An entrepreneur is the person that carries out, professionally an economic activity; this activity being organized for the purposes of producing and/or exchanging goods or services”.

He can be a sole trader, because it carries out the business alone, in a partnership or company. He has four fundamental characteristics at the same time:

1. Professionalism
2. Economic activity or economic nature
3. Organization
4. Productive activity

Professionalism

It means the usualness of an activity (stability) of the business activity during the year. Without this element there is no activity but only a single act. So, for example you cannot just buy one asset and then resold after one month, to be considered an entrepreneur, because there is not stability. It is not required by our law, that this activity is the main one; the person can have also more than one activity, moreover, it is not required that the activity lasts for the whole year (seasonal activity).

Economic activity/nature

The purpose is to cover costs with revenues, otherwise there is not production but only consumption or redistribution. So, a business can also not make profit but at least it has to cover costs with revenues (for example public business have other purposes, not profit).

• Profitable organization for:
  • Creation of wealth
  • To pursuit a profit

So, you can also not have a lucrative purpose.

Organization

It means to coordinate the productive factors:

• Labour
• Capital

In this specific case, capital refers to assets tangible (real estate, goods) and intangible (trademarks and patents). There would be no activity if there were no such organization; activity here is intended as a certain number of acts coordinated for certain purpose. If organization is totally lacking, there is no entrepreneur, but only a worker.

(Market orientation)

If production is not offer to the market but is only for the consumption of the producers, is there an entrepreneur or not? The answer is no, the definition of businessman, usually, is not met for the subject who produces goods and/or services only for Personal needs. However, there are some exceptions, we have to analyse the singular cases.

Productive Activity

Production and exchange of goods and services: “productive activity”. It is required that the activity creates new services and/or goods. It is not enough to merely enjoy what is already existing.

Distinction of Entrepreneurs

We can have several kinds of entrepreneurs based on various criteria:

• Quality:
  • Commercial
  • Agricultural
• Size:
  • Small
  • Medium/Large
• Number:
  • Sole or individual trader
  • Collective trader
• Nature of the owner:
  • Public
  • Private

Agricultural Entrepreneur

The definition is in the Art. 2135 of the Italian Civil Code. When he performs activities such as:

• Farming
• Cultivation
• Wood-caring
• Animal-breeding and raising
• And connected activities – transformation and selling (commercial nature)

They are not subjected to bankruptcy, so the business is not subject to bankruptcy costs. Another definition of agricultural activity was given later: everything connecting to the biological cycle that includes animal breeding in close spaces and also fishing.

Commercial Entrepreneur

The definition is in the Art. 2195 of the Italian Civil Code. When he performs activities such as:

• Industrial (I produce goods or services)
• Intermediary (I buy and then I sell something)
• Transport
• Banking and insurance
• Auxiliary activities

They are subject to bankruptcy.

Small Entrepreneur

The first definition is in the Art. 2083 of the Italian Civil Code: “Direct farmers, craftsmen and small tradesmen are small entrepreneurs. Whoever carries out an organized professional activity mainly by his own labour and the labour of the members of his own family is a small entrepreneur”. They can be:

• Direct farmer
• Craftsman
• Small tradesman

The second definition is in the Bankruptcy Law, at Art. 1: “they do not meet, jointly, the criteria of Art. 1 of Bankruptcy Law and they do not reach a certain amount of assets, revenue and debts”. Precisely:

• Having in the 3 years prior to the date of filing for bankruptcy – or from the beginning of the activity if less – an asset side not exceeding 300.000 euro for year
• Having in the 3 years prior to the date of filing for bankruptcy – or from the beginning of the activity if less than 3 years before – annual gross revenues not exceeding 200.000 euro
• Have a level of debts, also not expired, not higher than a total of 500.000 euro

The third definition is contained in a sectorial legislation the Craftsmen’s Act 1985 n. 443 “Framework Law for the Craftsman” that gives a definition valid only in relation to and for the purposes of that law, mainly fiscal incentives. When there are not the conditions to define a businessman like small, he’s considered medium or large. The three-different definition are independent, because they define different concepts.

Fully Private Entrepreneur

He is controlled by a private entity and structured using private-law juridical instruments (e.g. Fiat).

Fully Public Entrepreneur

He is controlled by a public entity and structured using public-law judicial instruments (not subject to company law, business law or private law (e.g. IRI or Ferrovie dello Stato).

Hybrid Entrepreneur

They are neither fully private nor fully public: these are former fully public entrepreneurs that have been privatized, but only formally. To this type of entrepreneur, company law is applicable because the juridical instrument chose of private law. They are subject to Bankruptcy rules as the other companies. When we have a formal privatization, it means that the controller is still a public entity (such as the State), but the juridical instrument used is private-law. When we have a real privatization, it means that not only has the State adopted a private-law juridical instrument, but also it has transferred control to private subjects.

Collective Traders

Remember that this distinction is applicable only to the private entrepreneurs. Are collective traders:

• Partnerships
• Companies
• Associations
• Foundations, etc.

These distinctions are important in order to establish the rules applicable. All debtors have to pay for their debts, however if they are subjected to bankruptcy costs, also their assets will be sued for the repaid of the debts (a “curator” will be called to manage them) and all the creditors have to meet for the principle.

Statute of Commercial Entrepreneur

If we meet the requirement of commercial entrepreneur (based on features of article 2195 of the Italian Civil Code) we will apply some rules called Statute. In particular the rules cover these aspects:

1. Legal publicity
2. Accounting records
3. Rules on representation
4. Bankruptcy and other procedures

Legal Publications

Business Register: a database in which the most important information regarding enterprises must be collected. This can be asked to the Camera di Commercio (Chamber of Commerce). Include all the main acts and facts regarding the life of an enterprise. The commercial entrepreneurs shall enrol within 30 days by the foundation of the enterprise the name, the address etc…

What are the effects of the registration in the Business Register?

• Advertising news, by exclusive information effect for third parties
• Declarative Effect, which makes the registered acts or facts opposable to third parties; known by everybody, without possibility of opposite evidence (positive nature). An act or fact which is not registered is considered not known by third parties unless it is proved that they had knowledge of it (negative nature).
• Constituent Effect, a consequence of the registration of the company comes to existence by acquiring legal personality.

Accounting Records

All the commercial entrepreneurs (except for the small ones), must document their activities on an ongoing basis through the keeping of specific accounting records.

In particular commercial entrepreneurs have to keep two accounting books:

• The Daily Book, where daily operations must be registered in chronologic order.
• The Inventory Book, that must show and evaluate the enterprise’s assets and liabilities.

Rules on Representation

These are the rules regarding Legal Agent, Nominee or Procurators. They are subordinate auxiliaries or employees entitled to deal directly with third parties in the name and on behalf of the entrepreneur. Here we can find three important figures:

• Chief Executive Officer: he is at the top of the employees hierarchy and at the top of the business unit; he has a general representative power; he may be placed at the head of the entire enterprise, or of a secondary unit or of a particular branch; he has to refer directly to the entrepreneur (meaning that he is directly subordinate to him). If while managing a certain business he did not disclose his quality (meaning he did not make use of the entrepreneur’s name) he would be personally liable for the concluded business.
• Nominee: he has a limited power of representation. In particular he has the power to carry out on behalf of the entrepreneur the activities related to the enterprise, even if they are not at the top of the hierarchy.
• Clerk: he has a limited power of representation too. He may carry out activities normally implied by the operations they are in charge of, they may carry out activities which are within their competence.

Lecture two

Business as going concern

The definition is given by the Art. 2555 of Italian Civil Code: “Business as a going concern is a nexus of assets organized by the entrepreneur for the exercise of the firm”. The complex of goods or instrumental system is composed by:

• Premises
• Machinery
• Equipment
• Raw materials
• Goods

They are organized by the entrepreneur in order to carry out the enterprise activity. Note that Enterprise and Business are not the same thing:

• Enterprise means the activity carried out by the entrepreneur
• Business means a set of goods and relationships
• Company is the means by which the entrepreneurs carry out and conduct their business activities

The business consists and is made of:

• Tangible and intangible assets (necessary to conduct business)
• Contracts (not a duty)
• Credits and debts

From one side, Business is made by the assets composing it; on the other side, Business is characterized by the attitude of creation of new wealth through the organization – by the entrepreneur – on those same goods. The Business can have a greater value than that corresponding to the mere sum of the assets constituting it. Such higher value is called goodwill: the ability of the business to realize profits.

Goodwill

We can distinguish between objective goodwill and subjective goodwill:

• Objective goodwill refers to the business’s material factors that do not change as a consequence of change of ownership.
• Subjective goodwill refers to the personal qualities of the entrepreneur and his ability to maintain and, possibly, increase his customers and therefore, the ability to generate “personal” profits.

Transfer of business

There is the possibility to transfer a business and now we are going to look at the regulations. First of all, we must notarize that, and we must distinguish two effects of the form of the contract:

1. The form of the contract to the effect of the contract validity: the law does not set any particular formal requirements, but it establishes that the contract shall be proved in writing. So, the written form is required only for proof. The contract can also be orally drawn up and perfectly valid.
2. The form of the contract to the effect of its registration in the Business Register: it is necessary to use the authenticated written form or a public deed.

There are two exceptions regarding the freeform:

• The written form is required if the assets complex also includes fixed assets or registered assets
• The written form is necessary when required by the nature of the assets transfer contract (e.g. donation).

Non competition clause – No trade competition right

The definition is given by the Art. 2557 ss: “who sells the Business is not allowed – for a period of time of 5 years from the transfer – to start a new enterprise which, because of its purpose, its location or other circumstances could subtract customers from the original Business”

The object is the possibility to the seller to open a new business; the contract could also be extended to additional areas, but such prohibitions should not limit any activity for the transferor. The duration of this prohibition of competition may not exceed five years and if the contract provides a longer duration or the duration is not precisely indicated, the prohibition of competition is effective only for five years from the transfer.

Succession in contracts

Usually, all the contracts pertaining to the Business can be transferred together with the Business itself (Art. 2558 c.c.) However, there are two different exceptions:

• Contracts with a personal profile (for instance, the contract with the legal counselling)
• Contracts specifically excluded by the Business transfer contract

These two types of contracts are not transferred. Moreover, it is forbidden to exclude from the transfer so many contracts that the productive potentiality of the transferred business comes to be at risk: in this case it would be a transfer of individual goods rather than a transfer of the entire Business. It is not necessary to notify the transfer of the contract to the transferred contract party nor to obtain its assets.