Limited partnerships, known as Société en Commandite Simple (ScS) in Luxembourg, are a popular choice for businesses seeking to combine the expertise and capital of different partners while maintaining flexibility in their business structure. In this comprehensive guide, we will explore the intricacies of ScS formation and operation, highlighting key aspects such as partnership structure, capital requirements, management bodies, liability, legal obligations, accounting, and tax considerations. You can have a clear understanding of the ScS framework in Luxembourg and the way to establish and manage such a partnership effectively.
I. Luxembourg Limited Partnership (ScS): an overview
1.1. Nature of an ScS
A limited partnership (Société en Commandite Simple – ScS) is a commercial company that mandates at least two partners, with one designated as a general partner and the other as a limited partner. The distinction between these partners primarily lies in their respective levels of liability.
1.2. Eligible Partners
To form an ScS, a minimum of two partners is required, consisting of at least one general partner and one limited partner. Partners may be either natural persons or legal entities. Furthermore, a general partner can also serve as a limited partner simultaneously.
II. Prerequisites for Establishing an ScS
2.1. Authorization to Conduct Business
Before establishing an ScS, it is essential to ensure that the general partners possess the necessary authorization to engage in commercial activities. This requirement does not apply to limited partners. Any individual or entity aiming to establish a business in Luxembourg must obtain the required authorizations and approvals to carry out their intended activities.
III. Costs associated with setting up an ScS
3.1. Cost Elements
The establishment of an ScS entails several costs, including:
- The cost of publishing information in the trade and companies register (registre de commerce et des sociétés – RCS).
- Any expenses related to administrative authorizations.
- Notary fees (if notary services are utilized, although not legally required).
- Auditor fees (if audit services are utilized, also not legally required).
IV. Formation of an ScS: the Process
4.1. Deed of Incorporation
An ScS can be created through a private deed known as a partnership agreement. This agreement must be drafted in two original copies. Notably, there is no legal requirement to involve a notary in the creation of an ScS.
The deed of incorporation (partnership agreement) must include essential information, such as:
- The company name and the address of its registered office.
- The company’s purpose.
- A detailed description of each partner’s contributions.
This deed must be submitted to the RCS in the form of an extract.
4.2. Company Name
The ScS must have a unique company name specified in its deed of incorporation, distinct from any existing company names. To verify name availability, prospective partners can contact the RCS.
4.3. Duration and Conversion An ScS can be established for a limited or unlimited duration. It also has the option to change its corporate form during its existence, subject to partner decisions. The rules governing mergers and demergers apply in such cases.
4.4. Dissolution
An ScS is automatically dissolved at the end of the duration stated in its deed of incorporation. However, it can also be dissolved voluntarily by a majority vote representing three-quarters of ownership interests, unless otherwise specified in the partnership agreement. In specific circumstances, such as the death or bankruptcy of a sole general partner, replacement procedures are outlined either in the partnership agreement or by the district court.
Voluntary dissolution requires specific administrative certificates, including those from the Joint Social Security Centre, Luxembourg Inland Revenue, and Registration Duties, Estates, and VAT Authority. Legal rulings for legitimate reasons or due to unlawful activities can also lead to the dissolution of the company, though it retains its legal personality during the liquidation process.
V. Capital Structure of an ScS
5.1. Ownership Shares
In an ScS, the capital is represented by ownership shares, with no minimum required capital. The partnership agreement must specify either the amount of the share capital or the value of contributions made by each partner, whether general or limited.
Characteristics of contributions:
- Contributions can be in the form of cash, in kind, or “in industry” (services, know-how, etc.).
- Contributions may be made over time.
- The partnership agreement outlines the terms and conditions for contributions, without requiring valuation by an auditor.
- Contributions do not necessarily have to be made at the time of formation.
Additionally, an ScS has the authority to issue debt securities, and the distribution of dividends is governed by the partnership agreement, which can provide for unequal distribution or proportional distribution if silent on the matter.
5.2. Form and Transfer of Ownership Shares
Ownership shares in an ScS must be registered shares. The partnership agreement specifies the terms and conditions for the transfer, subdivision, or pledge of ownership shares, and any deviation from these terms under penalty of nullity.
For limited partners’ ownership shares, transfers for reasons other than death, subdivision, or pledging require the approval of the general partner(s). General partners’ ownership shares, under similar conditions, require the approval of the partners by majority vote representing three-quarters of the ownership shares, as well as the approval of the general partners, if applicable.
VI. Structure of the Management Bodies
6.1. General Meeting of Partners
The general meeting serves as the decision-making body in an ScS. While the partnership agreement may contain specific provisions regarding its operation, default rules apply in its absence. The general meeting decides on amendments to the partnership agreement, changes in the ScS’s nationality, and conversions or liquidations. These decisions necessitate a majority vote representing three-quarters of ownership shares.
The voting rights of partners are determined based on the proportion of ownership shares held. The general meeting also approves annual financial statements and can be convened by the manager or partners representing over half of ownership shares. Decisions are validly taken by majority vote.
In lieu of physical meetings, a written consultation may replace the general meeting, allowing partners to vote in writing on decisions.
6.2. Daily Management of the ScS
An ScS is managed by one or more managers, who may or may not be general partners. The appointment of managers follows the rules outlined in the partnership agreement. In cases where the partnership agreement is silent, all general partners can represent and bind the company. Managers should not be traders and serve as representatives for the company in dealings with third parties and legal matters.
VII. Liability of Partners and Managers
7.1. General Partner Liability
General partners in an ScS bear joint and several liability for the company’s obligations.
7.2. Limited Partner
Liability Limited partners, on the other hand, have limited liability, determined by their ownership interests. They may not engage in acts of management with third parties or participate regularly in such acts, as doing so would forfeit their limited liability. However, limited partners retain their rights unaffected by this restriction.
Managers who are not general partners have a limited liability scope, applicable only to their actions within the mandate they have been entrusted with. They can validly represent the ScS.
Restrictions on a manager’s powers, even if published, are not binding on third parties. However, through the partnership agreement, responsibility can be assigned to managers for representing the company, either individually or jointly, in various acts or legal matters. Such clauses are binding on third parties upon publication in the RCS.
VIII. Legal Obligations of an SCS
8.1. Maintenance of a Register
An ScS is required to maintain a register containing:
- A complete, certified, and up-to-date copy of the partnership agreement.
- A list of all partners, with clear identification.
- Details on ownership shares held by each partner.
- References to any transfers of ownership shares.
8.2. Oversight and Auditing
There is no legal requirement for internal auditing. However, SCSs meeting specific criteria must undergo a financial audit by an approved statutory auditor, such as when partners include SA, SARL, SECA, or comparable entities or when certain financial thresholds are exceeded.
8.3. Legal Publications
An extract of the partnership agreement is filed with the Luxembourg Business Registers for publication in the electronic repository of companies and associations (Recueil électronique des sociétés et associations – RESA). The extract includes precise details such as the joint partners’ names, company name, corporate purpose, registered office, manager names, and duration of the company. Limited partners need not be listed by name.
Additionally, the ScS must submit subsequent amendments to the deed of incorporation, information regarding managerial appointments, transfers of managerial duties, deaths of managers, details of liquidators (if applicable), specific legal decisions, and information about the dissolution of the company to the RCS.
IX. Accounting Aspects of an ScS
9.1. Accounting Requirements
An ScS must maintain appropriate accounts based on the nature and scope of its business, following the Standard Chart of Accounts. Annual accounts, including a balance sheet, profit and loss account, and an annex, are required if the annual turnover exceeds EUR 100,000 (excluding VAT) or if specific criteria apply, such as the organizational form of partners.
9.2. Reporting and Filing
Annual financial statements must be submitted to the Luxembourg Business Registers within one month of approval and no later than seven months after the close of the financial year. ScSs meeting specific criteria, such as those not exceeding two of the three criteria (balance sheet total, net turnover, average number of full-time employees), have the option to prepare a short-form balance sheet or combine certain headings in the profit and loss accounts.
X. Tax Aspects of an ScS
10.1. Taxation Overview
ScSs in Luxembourg are subject to various fees and taxes, including:
- A fixed registration fee.
- Property tax.
- Business tax.
- Net wealth tax.
- Corporate income tax.
- VAT, with the frequency of returns determined by annual turnover, excluding taxes.
- Annual returns for turnovers below EUR 112,000.
- Quarterly returns for turnovers between EUR 112,000 and EUR 620,000.
- Monthly returns for turnovers exceeding EUR 620,000.
Understanding the establishment and operation of a limited partnership (ScS) in Luxembourg involves navigating legal requirements, financial considerations, and tax obligations. This comprehensive guide has provided an in-depth overview of SCS formation, management, liability, and compliance.
Please contact your Damalion experts now, to register your limited partnership in Luxembourg.
