The Revival of General Partnerships in the Age of Tokenomics, Part 1

The general partnership is an almost forgotten business form. Could it be a suitable model for doing international commerce and startups?

Adopted in England in 1890, general partnerships have become a near-forgotten practice in favor of other forms of doing business, but with the appearance of e-commerce, cryptocurrencies, tokenomics and global crowdsourcing, they may experience a comeback. This type of entity does not require incorporation — rather, it is based on a partnership agreement.

Incorporating a company is a worn-out bureaucratic procedure. Even though it has gradually become easier to organize in many countries, there are still many cash-draining obstacles in the way. For example, foreigners are generally unable to appoint themselves as a CEO in several countries around the world when setting up a company. Instead, they are required to hire a local citizen. They also aren’t allowed to open a bank account remotely, even if they have never had any intention of going to the country in question and only intend to do business online.

While governments and financial institutions are too reluctant to address the growing demand of a low-cost and prompt business start, two things can make the life of entrepreneurs’ significantly easier: general partnership and cryptocurrency.

This guide explains how to legally launch a business with no costs on registration, hiring a CEO and accountant, renting an office, and other rudiments of an old-fashioned business.

General partnerships begin with an agreement between partners who define objectives, plans, shares, rights and obligations. They decide who will run the business as a managing partner and may find a company that will be their proxy in the market, providing money transfers of money as an appointed representative. Therefore, the partnership does not even require a bank account. For online business, partners are more likely to find advantages in operating their funds purely in cryptocurrencies and tokens, with only resulting profits exchanged for fiat money.

General partnerships do not declare nor pay taxes. However, partners do, and this is something that they must keep in mind when they distribute profit. The partnership is useful for early development; when business perspectives are not fully clear, chances of failure are high, and the administrative costs for supporting a legal entity are not reasonable. 

When choosing between incorporation and having no company at all, general partnerships allow partners to agree on business terms to avoid future misunderstandings. At the same time, the partnerships do not cause a “suitcase without a handle” — that is, an abandoned company that partners are unable to bear the costs and responsibilities for, were they to halt their business.

Eventually, general partnerships can be transformed to more traditional, incorporated forms of business at any time, such as a limited liability company, or LLC. The disadvantage in this is that the general partnership is obscure. Doing business and reassuring all existing and potential stakeholders about the legality of one may become a spoon of tar that spoils the jar of honey. The following sections enlighten readers on the legal subtleties of the general partnership business form.

Investment model

It is recommended to use a general partnership to regulate relationships between the partners of a project. Such partnerships are created upon mutual agreement,, and do not require incorporation of a legal entity. Partners, of course, may wish to have a written agreement.

Business with partners can be commended just by shaking hands — this is a partnership agreement as well.

Advantages of a general partnership:

• No need to register a legal entity.
• Partners can enter into a partnership agreement defining shares, distribution of profits, intellectual rights and other important conditions.
• Can enable agreements with individuals and legal entities.
• A chosen partner or partners may act on behalf of the general partnership and may also assign a third party to act on their behalf as a hired manager. But by default, if nothing is specified in the agreement, all partners may act on behalf of their general partnership.
• No administrative expenses (e.g., legal address registration, accountant services, etc.).
• No corporate taxes, as each of the partners is responsible for their own taxes paid from the appropriate share of revenue according to the laws of the respective jurisdiction.
• A convenient solution if partners reside in different countries.

In comparison with a general partnership, the process of forming a legal entity has several disadvantages, mainly caused by the need to bear heavy expenses on a regular basis right from the moment of incorporation.

Key disadvantages of a legal entity:

• Legal entity incorporation costs (official fees and payments).
• Legal support of the registration process.
• Paying the charter capital.
• Depending on the jurisdiction, nonresidential partners may need to assign their representative.
• Legal address registration costs and regular rent payments.
• Assigning top management and paying them on a regular basis.
• Hiring an accountant and paying for his or her services on a regular basis.
• Time spent on incorporation of a legal entity; at least one month needed in the most favorable conditions if a foreigner is involved.

In other words, the total cost of incorporation in trustworthy jurisdiction will cost around $1,000–$5,000 on average.

Partners may wish to compare the registration costs and the overall price of the project before choosing any of the available legal forms of organizations. For instance, if partners plan to spend $15,000 for a startup, registration will cost $5,000 — more than 30% of funds, and comparatively, a considerable sum of money.

At the same time, if a new project turns out to be unsuccessful, partners will still need to maintain the company. The liquidation of the legal entity may be even more expensive and time-consuming than the incorporation.

It is worth noting that another advantage of a general partnership is that partners can always transform it into a legal entity when business prospects become tangible. In such a case, partners need to follow the standard incorporation procedure.

Choosing a jurisdiction

Various countries may have different approaches to the legal status of the general partnership, and it may be tricky. For instance, in some European countries, it is not recognized as a business organization.

English common law may be suitable for many cases with its Partnership Act 1890. Even though the general partnership is not considered a legal entity and there is no need to register it, partners may need to register theirs with Her Majesty’s Revenue and Customs in case one of them is a British resident.

I reached out to two different solicitors in England for their legal opinions on the feasibility. Solicitor advocate Simon Fagan answered: 

“If the Partnership (or any legal entity) trades in the UK, then it will need to be registered with the HMRC (tax authorities) for tax purposes once it has achieved the minimum VAT threshold — which I currently believe to be £50,000. If the partnership is opening a bank account in the UK or intends to make payments in the UK from that bank account, then it will need a tax reference. If the partnership agreement is to be governed only by UK legislation and not, in itself, trade within the UK, then there is no need for there to be any HMRC registration.”

Christian Burnett at Christian Burnett, Solicitors & Attorneys shared:

“[...] You do not need to register this partnership with HM Revenue & Customs in the UK.”

English common law (e.g., the United States, Canada, Hong Kong, Australia, New Zealand, etc.) is one of the best solutions for a startup without a legal entity, especially when all partners are located in different countries. Additionally, English language is a reasonable alternative for a multilingual team.

A general partnership is a legal form of doing business that does not require any formal interplay with the government, i.e., incorporation, registration, etc. English common law — even though it is the oldest — is still one of the most suitable for governing the agreement of a partnership. Both money and time can be saved compared to a more traditional company’s organization. 

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Oleksii Konashevych is the author of the Cross-Blockchain Protocol for Government Databases and a protocol of smart laws for property rights.Oleksii is a Ph.D. fellow in the international program funded by the EU government — Joint International Doctoral (Ph.D.) Degree in Law, Science and Technology  (LAST-JD). Oleksii is visiting RMIT University in Melbourne, Australia, and collaborates with the RMIT Blockchain Innovation Hub researching the use of blockchain technology for e-governance and e-democracy. He works on tokenization of real estate titles, digital IDs, public registries and e-voting. Oleksii is the co-author of the law on e-petitions in Ukraine, collaborating with the Presidential Administration of Ukraine as manager of e-Democracy Group, NGO (2014–2016). In 2019, Oleksii participated in drafting the bill on Anti-Money Laundering and taxation issues for crypto assets in Ukraine.