If you’re thinking about starting a business, choosing the right legal formation is one of the first and most important aspects to consider. If you plan to carry out activities with other people, you’ll need to apply for a value-added tax (VAT) number for a collective business. The Italian Civil Code provides for various types of these, split primarily into two macrocategories: partnerships and limited businesses.

In this article, we’ll focus on partnerships: the different types, their characteristics, how to set up a partnership, and other useful information.

What’s in this article?

• Partnerships: Definition and characteristics
  
• Types of partnerships
  
• Formation of a partnership
  
• Differences between partnerships and limited businesses
  
• Partnership: Financial statements or report?
  
• Distribution of profits in a partnership
  

Partnerships: Definition and characteristics

The main feature of a partnership is that it is not a legal entity (as limited businesses are) and it is not a separate entity from the partners who founded it or who are part of it. This means that the partners have unlimited liability for the obligations undertaken by the partnership toward third parties. Consequently, in the event of default, the members of partnerships are also liable to contribute their own personal assets. In fact, in partnerships, partners’ income is personal income for tax purposes.

More specifically, in a partnership, members’ liability is:

• Unlimited: Members are not just liable for the corporate obligations (debts) up to the limits of the quota contributed, but with all their personal assets.

• Joint: Creditors can target any of the partners to demand that they fulfill the entire obligation. Said partner can then receive compensation from the other partners for the amounts they are not liable for.

• Subsidiary: Creditors receive payment first with the partnership’s assets, and only after exhausting this avenue can they request payment of the debt from the partners.

Types of partnerships

There are three types of partnership: simple partnership (S.s.), general partnership (S.n.c.), and limited partnership (S.a.s.). We’ll look at the differences in detail below:

• Simple partnership
  This is the basic legal formation of partnerships. It can only be used when setting up a business that carries out a noncommercial economic activity. This kind of partnership must be registered in a special section of the Business Register. In regard to liability, all partners hold joint and unlimited liability for corporate obligations, and there is no provision for bankruptcy. Liability can only be excluded for partners who do not directly manage the partnership by means of an express agreement to the contrary. For this agreement to be binding toward third parties, the latter must be notified of it using the appropriate means (e.g., registration in the Business Register). Some examples of simple partnerships are farming activities and all amateur sporting activities.

• General partnership
  General partnerships are the basic model for launching a commercial business. Just like in simple partnerships, the partners hold joint and unlimited liability for corporate obligations. But in contrast to a simple partnership, there is no option to exclude one or more members from their personal liability; all partners are directors. General partnerships may also be subject to bankruptcy (which concerns all members).

• Limited partnership
  Limited partnerships may exercise commercial and noncommercial activities. There are two types of partners: general partners and limited partners. General partners have unlimited and joint liability for corporate obligations, while limited partners are liable for the share assigned only. The establishment of a limited partnership requires the business name to bear at least one of the names of the general partners.

Formation of a partnership

The formation of partnerships can take place:

• By public deed
  
• By private agreement authenticated via a notary
  

The partnership must file the certificate of incorporation in the Business Register and notify the Italian Revenue Agency within 30 days to obtain a VAT number. Thereafter, it must request any municipal authorizations, administrative licenses, and health permits—and notify the Italian Chamber of Commerce regarding the commencement of activities. In the event the activity carried out relates to the artisan sector, it must be registered in the relevant section of the Register of Artisans.

Another important step is notifying INPS (Italian National Social Security Institute) about the registration of the partners for the payment of any social security contributions due; you should also register with INAIL (Italian National Institute for Insurance against Accidents at Work) if the activity is subject to one of the risks to be insured against accidents.

Obtaining a VAT number and any other communications, including registrations and all the various administrative obligations for establishing a partnership, must be done electronically or through a trusted tax advisor.

Once you have established your partnership, there are several elements to consider—for example, choosing a payment service provider. In fact, choosing the right provider is key to starting and growing your business while ensuring that you meet the compliance and security requirements necessary to protect your payments, your data, and your customers' data. Solutions such as Stripe Payments—with its Optimized Checkout Suite—enable you to accept payments both online and in person worldwide, increase conversion, and ensure compliance, saving thousands of hours of technical work.

Differences between partnerships and limited businesses

In partnerships, the subjective element—i.e., personal liability—prevails. In contrast, the asset element prevails over the subjective element in limited businesses. Here are the key differences between them:

• Liability and asset autonomy
  Limited businesses are legal entities (i.e., they separate the partner from the business). This leads to two different types of asset autonomy: in partnerships, this involves imperfect autonomy (partners contribute their own personal assets to the corporate obligations), while limited businesses enjoy perfect autonomy (member liability is limited solely to the subscribed capital).

• Formation of the business
  Partnerships do not need to pay a minimum amount of capital. Meanwhile, when incorporating limited businesses, members must pay a minimum amount of capital.

• Transfer of shares
  In partnerships, the transfer of shares is normally subject to the consent of all partners. But in limited businesses, unless specified otherwise in the bylaws, they can be freely transferred to third parties.

• Administration
  In partnerships, all or some partners are usually responsible for administration. In contrast, in limited businesses, the role of member is altogether independent from that of director, and the latter does not need to be a member. Furthermore, administration in limited businesses takes place through a corporate body (sole director, board of directors).

Limited businesses are divided into:

• Società per azioni (S.p.A.): Joint-stock businesses
  
• Società a responsabilità limitata (S.r.l.): Limited liability businesses
  
• Società a responsabilità limitata semplificata (S.r.l.s.): Simplified limited liability business
  
• Società in accomandita per azioni (S.a.p.a.): Partnership limited by shares
  

Partnership: Financial statements or report?

With reference to partnerships, the terms “financial statements” and “report” are often used as synonyms. However, from the perspective of the legislation governing partnerships, a report refers to a document that aims to simply inform nonmanaging partners of the work of the directors.

By contrast, other parts of the legislation mention a document aimed at determining the operating profits, therefore constituting the equivalent of a set of annual financial statements. In a partnership, the financial statements are a legal accounting document that the directors draft to summarize the other accounting entries’ data and to highlight the overall financial position of the business, including the relevant profits and losses. It is an important business tool that fulfills two key functions: fact-finding and control.

Given that the law does not provide a specific regulation in this regard, the prevailing legal theory appears to establish that, based on the general guidance set forth in Article 2217 of the Italian Civil Code, there is always an obligation to draft the financial statements for simple partnerships and general partnerships. On the other hand, in relation to the report, (in the sense of a document intended to inform nonmanaging partners about the governance by managing partners), this obligation only applies when the members are not directors. In practice, a single document that the business drafts annually can fulfill the functions of both the financial statements and the report.

Distribution of profits in a partnership

In regard to the distribution of profits in partnerships, Articles 2262 and 2303 of the Italian Civil Code are the main references in regulation. Article 2262 establishes the right for all partners to receive their share of the profits following approval of the report, unless there is an agreement to the contrary. In other words, the right for the partner to receive profits results upon approval of the document. The right to the report is therefore one of the most important rights in partnerships, given that it affords nonmanaging partners the opportunity to check the corporate activities performed by the directors. In fact, the right to information in partnerships is noted in particular, considering the unlimited liability. In a limited partnership, the right to reporting is also a tool available to limited partners to check the correctness of operations (Article 2320 of the Italian Civil Code).

Article 2303 places limits on the distribution of profits. It states that sums cannot be distributed to partners unless the profits have actually been achieved and that, in the event of a share capital loss, the profits cannot be distributed until the capital has been replenished or reduced to a corresponding extent. These limitations aim to protect both corporate assets from creditors and the partnership itself by establishing the obligation for the financial coverage of debts before the distribution of profits to members.

The Code does not provide any specific provision regarding the method of approval for the report, as it does for limited businesses. However, the most widely accepted opinion in legal theory seems to be that all members are responsible for the approval, including the managing partners. This is based on the fact that the right to profits of some members (managing partners) would otherwise depend solely on the decision of the other partners (nonmanaging partners).