Since the election of the new government, almost every well-thinking Jamaican tries to make a contribution to the debate about how economic growth can be achieved in Jamaica, both immediately and in the long term. In this article, I dare to add my two cents to the debate by agreeing with persons who state that small and medium sized businesses must be stimulated.

Stimulation of businesses usually requires some form of investment, either as equity or loan. In some cases, loans may not be the most suitable or available option, having regard to the relatively high interest rates, some businesses or individuals may be already too highly leveraged. In other cases, some businesses simply need someone to provide capital for a new venture for which financing is not readily available in Jamaica.

In this article, we take a brief look at the legal structures that can be used to facilitate new equity investments. Two options for establishing a business that involves two or more persons are partnership and company. Joint venture entities are also available options. The joint venture entity may be incorporated for example, a company) or unincorporated. An unincorporated joint venture entity is usually unregistered but is ascribed a business name. The parties would usually establish the terms of their arrangement in written agreements.

Partnerships are unincorporated entities. This means that their existence is not dependent on the completion of a registration process. A partnership exists by virtue of agreement between the parties, and arises where two or more persons (but not more than twenty) agree to enter or do business together for profit. The agreement may be formal or informal, but once all the indicia of a partnership are in place all the legal implications of a partnership will follow. I highly recommend that partners put in place a written partnership agreement to govern this business relationship.

If no written agreement is put in place or if it is inadequate the law will imply that certain rules govern that partnership relationship. Some of these rules can be avoided if the parties agree, and evidence their agreement in writing, that those terms do not apply. For example, unless there is an agreement to the contrary the following rules apply:

(i) all profit and losses are to be shared equally between or among the partners. This applies irrespective of whether there are differences in the capital contribution of the partners. Profit and losses are not shared in accordance with capital contribution.

(ii) A partner who works in the business is not entitled to remuneration. However, if an employment contract can be proved he may be paid a reasonable salary.

(iii) A partner is not entitled to receive interest on capital. The partner’s return on capital is derived from profits only.

Unless the partners expressly agree, partners are not entitled to any regular payment which may be treated as an expense of the partnership account. Profit must be declared before a partner would be able to make claims to any payments. Any interim drawings made must be reconciled with profit at some point.

(iv) All partners are entitled to participate in the management of the partnership. So, unless there is an agreement to the contrary, a new investor will not be automatically designated a sleeping partner.

(v) No partner is entitled to join the partnership without the consent of all the existing partnership.

I believe that one of the most important implications of a partnership relationship is the agency created by the partnership. Once it is established that persons are in a partnership, each partner becomes an agent of the other(s). As a result, decisions made or acts done in the course of the business by each partner are binding on all other partners. This will be the case, irrespective of whether the other partners knew of the actions or decisions; irrespective of whether the partnership deed or any other agreement between the parties prohibited the conduct; and also irrespective of whether the conduct is unlawful. The partnership will be bound by a partner’s actions where his/her conduct is of such nature that third parties would normally expect a partner to be able to perform it. Examples of such binding conduct include: taking a loan, granting a mortgage or other security over partnership assets, sign cheques, receive payment of debts, buy and sell goods, engage employees, etc.

Another important characteristic of partnerships is that the liability of partners is usually unlimited. This means that their liability for business losses is not limited to the capital investment that the partner contributed to the business. Each partner may be liable to the maximum amount that he can afford, which takes into account his personal assets (house, car, investments and financial assets).

Becoming a partner in a business also comes with some responsibilities in the form of legal duties, which are expected to foster the relationship of good faith that the law deems to be a characteristic of partnerships. These implied duties include: accounting to the other partners for profit made from competing businesses, account to the partnership for profits or private property made from the use of the partnership name or business connection; and render true accounts and full information about the affairs of the business.

In terms of registrations, a partnership name is to be registered under the Registration of Business Names Act, if the partnership trades under a business name. A business name is a word or set of words used to identify the business which is a name other than the exact use of the owners’ surnames and/or Christian names. If the partnership does not trade with a business name, registration is not legally required. But I appreciate that there is some disconnect between the legal requirement and the practice encouraged by some entities, such as banks.

Unlike a partnership, a company is an incorporated entity. It comes into existence after successful completion of registration under the Companies Act.

The most fundamental feature of a company is that it is a separate legal entity from its owners. The company is treated by law as a person. The company has all the powers, rights and privileges of an individual person. The liabilities, contracts and actions of a company are distinct and different from those of its owners. The liability of members of the company is limited in the manner set out in the Articles of Incorporation, which is usually that it is limited to the capital contribution paid in exchange for shares in the company. The directors and company secretary act as agents of the company and have the authority to bind the company. The shareholders have no authority to bind the company in a transaction.

In this type of structure an investor may be a shareholder and would be entitled to receive a return on his investment when dividends are declared. Dividends are to be declared from distributable profits. A shareholder does not necessarily have to participate in the management of the company, and unless he is a director or company secretary will have no authority to bind the company in third party transactions.

There is greater legal protection for shareholders of a company than there are for partners in a partnership. However, for both types of entities it is very important that the parties set out their business intentions as clearly and as fully as possible in the constitutive documents, which may be the partnership deed or Articles of Incorporation.

Andrea Scarlett-Lozer is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Commercial and Intellectual Property Department. Andrea may be contacted via andrea.scarlett@mfg.com.jm or https://www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.