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Causes for the dissolution of partnerships

Article 2272  of the Civil Code, which governs  simple partnerships , provides that the partnership is dissolved upon the occurrence of one of the following causes:

1. expiration of the term ;

2. achievement of the corporate purpose  or subsequent impossibility of achieving it;

3. unanimous decision of the members , unless the company contract provides for majority resolutions;

4. the plurality of members ceases to exist if it is not reconstituted within 6 months, in which case the dissolution does not take place immediately, but only after 6 months have passed;

5. any other cause provided for in the articles of association.

The  snc  (general partnership) and the  sas  (simple limited partnership), whose regulations, we recall, recall those on simple partnerships, are also dissolved for the following  additional reasons :

• failure ;
• provision of the government authority  in cases established by law.

The  limited partnership  is also dissolved if  one of the two categories of partners  (limited partners and general partners) ceases to exist, unless the plurality is reconstituted within 6 months.

If all the general partners cease to exist, the law provides that the limited partners can appoint a temporary administrator for ordinary administration only  .

The  causes of dissolution come into force  as soon as they occur and therefore produce their effects immediately.

The  effects  that  are connected by law  to the occurrence of the cause of dissolution are the following:

• the directors, until the necessary measures for liquidation have been adopted, can  only carry out urgent business  ;
• unless the company contract or the members unanimously provide otherwise, the  liquidation  must be carried out by one or more liquidators, who may or may not be members, appointed unanimously by the members or, in the event of disagreement, by the President of the Court at the request of one of them;
• The  directors  must deliver the assets and company documents to the liquidators and present the management account following the last financial statement or balance sheet; the liquidators  must take delivery of the assets and documents and draw up, together with the directors, the inventory  which shows the assets and liabilities of the company assets.

In short, the company must cease operations and the liquidation phase begins  , during which the persons appointed for this purpose, i.e. the liquidators, must proceed to satisfy all the company’s creditors, after having disposed of the company’s assets and, if any, to divide them among the shareholders.

Dissolution due to lack of plurality of members

Paragraph 4 of the  first paragraph of Article 2272 of the  Civil Code, which applies to simple partnerships, also applies to  general partnerships  (snc), pursuant to the reference contained in Article 2308 of the  Civil Code, and to  limited partnerships  (sas), pursuant to Article 2323 of the Civil Code  .

The content of the rule is clear and provides that, once  the six-month period has elapsed  , the  “surviving” member , having acknowledged that the cause for dissolution has occurred, is faced with the following  alternatives :

• proceed with the  cancellation of the company from the Company Register , following the liquidation of the creditors, and, where the company complex remains from the liquidation, continue the activity as an individual entrepreneur or
• proceed with the  transformation into another type of company  in which the participation of only one shareholder is permitted.

In practice, it is not uncommon for the “surviving” partner, despite the dissolution resulting from the expiration of the six-month period, to continue managing the company without carrying out any liquidation proceedings or cancelling it from the Company Register.

It is important to remember that  failure to restore the plurality of partners  is a cause for dissolution, but  does not determine the automatic extinction of the company , which can only occur through cancellation from the Company Register.

The consequence, in this case, will be the existence of a  single-member de facto company  which, in addition to being “precarious”, will be subject to a particular liability regime for corporate obligations.

From the perspective of  financial liability , it has been observed that the provisions contained in Articles  2274  and  2279 of the Civil Code, concerning the violation of the prohibition on directors and liquidators from carrying out new transactions, do not constitute a particular deterrent in this case, considering that the managing partner is already jointly and severally liable for the obligations incurred by the company.

Even in the case of a  limited partnership  (SAS) with  only one limited partner , the latter’s continuation of the business would have resulted in the  loss of the limitation of liability pursuant to art. 2320 of the  Civil Code, except in the case of appointing a provisional administrator, who in any case would not be able to exercise such functions for a period exceeding six months, after which, in any case, the unlimited liability of the surviving limited partner would be triggered.

The continuation of the company’s business after six months have elapsed since the number of shareholders ceased to exist would not, therefore, appear to harm the interests of the company’s creditors, whose rights would be simultaneously guaranteed by the company’s assets and by the shareholder himself, and, therefore, the continuation of the business business by the sole shareholder would be an  admissible choice .

An acceptable choice, but, in any case,  temporary , since the company would be exposed to two  latent risks :

• the risk of  liquidation arising from an enforcement action brought by the partner’s specific creditor . Indeed, we must not forget that Article 2307, paragraph 3 , of the Civil Code provides that, in the event of a tacit extension of the partnership, the partner’s specific creditor may request liquidation of his debtor’s share pursuant to Article 2270 of the  Civil Code, with the risk that the request will result in the company’s judicial liquidation;
• the risk of  automatic cancellation by the Company Register . In fact, Article 3  of Presidential Decree No. 247 of 23 July 2004, entitled ” Regulation for the simplification of the procedure for the cancellation of inactive businesses and companies from the Company Register ,” establishes that the procedure for the cancellation of a partnership is initiated automatically when the Registrar of Companies notes that the number of partners has not been restored within six months.

If the automatic cancellation procedure is activated, following a preliminary hearing with the company administrator, the surviving partner will be faced with the following alternatives:

• continue the social activity, eliminating the cause of dissolution;
• cancel the company, assigning the business to yourself;
• transform the company into another legal form that allows for the participation of a single entity.

Transformation or succession?

The issue of whether it is permissible to transform a single-member company, whether of individuals or capital, into a sole proprietorship is a hotly debated topic, and one that is currently rife with contradictions.

The option for transformation  would allow the surviving partner who intends to continue the activity as an individual entrepreneur to continue to manage the same company, benefiting from the principle of  continuity of existing legal relationships , without being forced to go through the liquidation phase, with consequent  neutrality of the situation from an accounting and tax  perspective  .

The debate, which has been very heated in legal literature, was recently revived by the  ruling no. 496 of January 14, 2015  , of the First Civil Section of the Court of Cassation, which established that the transition from a corporation to a sole proprietorship cannot be considered a transformation in the technical sense.

According to the Supreme Court, in fact, the transformation in the technical sense would be characterized by the passage from one “entity” to another “entity,” while the so-called continuation of a single-member company into a sole proprietorship would be nothing more than a dissolution with the simultaneous assignment of the company’s assets to the sole shareholder, completely skipping the liquidation phase of the assets.

The Court of Cassation has expressed its opinion on the subject of transformation with several rulings, declaring the impossibility for a general partnership to be transformed into a sole proprietorship .

This situation is not specifically regulated in our legal system, but, according to the most accredited doctrine, it would be “possible” to transform the company into a sole proprietorship, given that there is an implicit recognition by analogical interpretation of the provision contained in  Legislative Decree 17 January 2003, no. 6 , which qualifies as a corporate transformation the transition from a joint stock company to a joint venture and vice versa.

Since the transformation into and from a joint venture is typically  permitted , and therefore with subjective discontinuity, it should not be possible to prevent the transition from a single-member company to a company managed by an individual entrepreneur.

In this regard, the Court of Cassation argues that the transformation from a single-member company to an individual business is inadmissible, based on the consideration that the transformation, characterized by the principle of continuity of legal and accounting relationships, constitutes an exceptional situation, and therefore not susceptible to analogous interpretation.

The Tax Administration has also intervened on the issue several times, leaving open various interpretations for solving the problem.

Legal effects of company cancellation

While the issue of “transformation” remains uncertain, it is now clear that the  liquidation procedure governed by Article 2275 of the  Civil Code for partnerships is  optional and interchangeable  with other forms of corporate asset disposal, including unconventional ones.

The purpose of the liquidation procedure, as provided for by our law, is explicitly to  protect creditors’ rights . In the case of partnerships, it should be remembered that creditors are protected by the continuing unlimited liability of the partners, even after the company’s closure or transformation. Therefore, liquidation is no longer essential.

Therefore, in a partnership, the partners, or the sole remaining partner, while they may avoid the formal procedure required by the code by adopting the liquidation method they deem most appropriate, pursuant to art. 2280 of the  Civil Code, are  nevertheless required to satisfy the company’s creditors before proceeding with the distribution of the residual company assets.

This distribution can take place through an agreed-upon division or through joint distribution and, if the dissolution involved a single-member company, through the assignment of the entire assets to the surviving partner.

In the event that the surviving partner wishes to continue to manage the business in the form of a  sole proprietorship , the liquidation phase  , according to the Financial Administration, would  always be necessary .

According to  resolution no. 47/E of 3 April 2006 , in this case a succession relationship would be established between two distinct subjects and this would make the preventive dissolution of the company and its consequent liquidation indispensable.

In any case, the physical division of assets between former partners or the assignment to the sole survivor must then be formalized with a  deed of assignment  that produces the “legal” effect of transferring the assets from the company to the partner, a necessity that arises, in particular, when the company assets also include real estate.

The presence of real estate in the company’s assets

The dissolution of the company determines the extinction of the legal entity and, therefore, from a subjective perspective, the owner of the assets is replaced by another entity, the partners.

The problem does not seem to be particularly relevant in the case of movable property and/or money or securities, but becomes of particular interest in the presence of immovable property.

In the past, case law, in the presence of real estate, had characterized the situation of  joint ownership of the partners  that arises following cancellation as a succession-type phenomenon.

The establishment of the joint ownership regime in this perspective would make it impossible for the partner to renounce the pro-quota assignment , since the “right” would derive from the fact of having been a partner at the time of approval of the final liquidation balance sheet.

All of this could also have significant implications for real estate advertising; since it is, so to speak, a legal effect following the company’s dissolution, it  would not be subject to transcription , since it is possible to refer, with regards to ownership, to the historical results of the Company Register at the time of the company’s cancellation.

If the company’s assets include  real estate , mortgage and land registry taxes  are   applicable proportionally  , as this may constitute a case of assignment of company real estate.

The need to ensure continuity in real estate advertising and to avoid potential tax evasion, due to the difficulty of “legal” reconstruction using the information system offered by the Company Register, leads to  preferring registration in the real estate registers and updating the land registry .

The solution appears appropriate and even necessary in the case of  a single-member company , considering that, although in this case there is no margin for choice in identifying the assignee of the asset, the need to have a  deed of origin that establishes the right of the shareholder remains firm .

Tax effects of the continuation of a single-member company as an individual

Although not referring to the legal institution of transformation, the Tax Administration considers it possible for the surviving partner to continue the business and has regulated the situation by providing for its  fiscal neutrality .

The Revenue Agency, in fact, intervened with  circular no. 54/E of 19 June 2002, p. 5, specifying that ” it is of the opinion that the dissolution of a partnership due to the failure to reconstitute the plurality of partners does not give rise to any taxable capital gain in relation to the assets forming the object of the business activity, provided that the surviving partner continues the activity in the form of a sole proprietorship and maintains the values ​​of the assets unchanged “.

The Revenue Agency, with  circular no. 329/E of 30 July 2008  , specified that, in the event that the partner decides not to continue the business activity and  allocates the assets for non-business purposes , the transaction would be subject to  tax in the ordinary manner .

The assignment of the company to the surviving partner is not subject to VAT , pursuant to art. 2, third paragraph, letter b), of  Presidential Decree no. 633/1972 , and is subject to a fixed registration tax , pursuant to  resolution no. 47/E of 2006  cited.

As regards reporting obligations, the  company , through the sole shareholder, must submit its tax return,  using the Income Tax Form for Partnerships , for the last tax period  , which runs from the beginning of the financial year until the expiration of the six-month statutory deadline for reconstituting the number of shareholders, or until the date on which the surviving shareholder communicates his or her decision to dissolve the company early, without waiting for the six-month period to expire.

The tax return must be submitted within the  standard deadlines  , as the company’s termination occurs without formal liquidation.

The  surviving partner  must declare in his/her own  Personal Income Tax form  as a sole proprietorship the  business income  generated in the remaining part of the financial year, using, as appropriate, the  RF section , if in ordinary accounting, or the  RG section , if in simplified accounting, as well as the entire income relating to the extinct partnership in the  RH section .

If the company’s tax return shows an  IRAP credit relating to the period  before the transformation , by virtue of the tax neutrality of the transaction, pursuant to  circular no. 13/E of 26 February 2008 , the individual entrepreneur will be able to indicate it in his subsequent tax return as a credit deriving from the previous period.

While the reporting obligations for income purposes are allocated to the usual PF Income (natural persons) forms for the sole proprietorship, and SP Income for the liquidated company, for VAT purposes the  form  will be unified and presented by the assigned partner .

With regard to reporting obligations,   specific procedures for completing and submitting the  annual VAT return are provided .

For the purposes of this tax, in fact, the sole proprietorship effectively takes  over  the position of the entity that ceases to exist as a result of the transaction. Essentially, this creates a situation of  continuity  that imposes on the entity resulting from the transaction the obligation to fulfill all subsequent VAT obligations.

It follows that the VAT return for the tax year in which the transaction takes place must be submitted exclusively by the sole proprietorship established by the surviving partner, and must report both the transactions carried out by the sole proprietorship, starting from the date of its incorporation, and those carried out by the partnership, up to the date of its dissolution.

The  declaration submitted by the sole proprietorship  will consist of the cover page, the VAT form and  2 modules or intercalations :

• the  first form  will contain the transactions carried out by the sole proprietorship, as well as the transactions carried out by the partnership in the fraction of the month or quarter during which the transformation took place;
• The  second form  will report the transactions carried out by the partnership from the beginning of the tax year until the last month or quarter ending before the transformation. This form must include  the  VAT number  of the entity to which it refers in line VA1 .