Incorporating the catering partnership before a hotel contract
Marina and Eleni run Taste of Larnaca, a general partnership providing event catering. Annual sales are €480,000, net profit €62,000, and they employ nine staff. A hotel group offers a two-year contract worth €310,000 per year, but requires a €1 million public liability insurance certificate and a €150,000 bank guarantee. Their bank will provide the facility only if the business is a separate legal entity; the partners' personal assets include Marina's apartment and Eleni's savings. Marina wants to incorporate as a private limited company. Eleni fears public disclosure of accounts, audit costs of about €4,500, and losing the flexibility to withdraw profits. She also plans to leave the business in three years and wants to sell her share. The current partnership agreement is silent on exit and dispute resolution.
1. Assess the liability and financing consequences of remaining a general partnership versus incorporating as a private limited company in this situation.
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General partnership: Marina and Eleni are jointly and severally liable for business debts. If the hotel contract goes wrong - for example, a food-poisoning claim or a €150,000 guarantee called in - creditors can pursue Marina's apartment and Eleni's savings. The bank's condition is rational: a guarantee from an unincorporated partnership offers no separation between business and personal assets.
Private limited company: a separate legal person. Shareholders' liability is limited to unpaid share capital unless they give personal guarantees. It can grant the bank guarantee, sign the hotel contract, and issue shares. Costs include audit and filing of about €4,500, public accounts, and compliance.
Judgement: the €310,000 contract and €1 million insurance requirement make unlimited liability disproportionate. Incorporation is preferable, but it is not a complete shield if the bank demands personal guarantees; negotiate a guarantee limited in amount and duration. Also compare tax: company profits are taxed, then dividends; partnership profits are taxed differently. The decision should be driven by risk exposure and contract access, not only by the €4,500 compliance cost.
2. Recommend a legal structure and a transition plan, addressing Eleni's exit and the absence of a partnership agreement.
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Recommend a private limited company with a shareholders' agreement. Steps:
- Value the partnership assets and goodwill; transfer contracts, insurance, employees and stock to the new company.
- Issue shares reflecting agreed capital, not necessarily 50/50; retain Eleni's shares for three years with a put option.
- Include a share transfer clause: pre-emption rights, a valuation formula such as four times maintainable EBITDA adjusted for net debt, and 90 days' exit notice.
- Define deadlock resolution, reserved matters, dividend policy and roles.
- Obtain bank consent and the guarantee; arrange €1 million insurance; register with tax and social insurance.
- Set a three-month transition and communicate with staff and the hotel client.
A limited liability partnership may be an alternative, but the bank may still require personal guarantees. Judgement: incorporation plus a bespoke agreement solves the financing condition and Eleni's exit. Her fear of disclosure is outweighed by access to the contract; the agreement should protect her minority position and set a fair exit price.