Taking on a partner or leaving a partnership: how does a share transfer work in a limited company?

Nermin Hanım's café and the partner who is leaving

The rules described in this lesson are those of Turkish law.

Four years ago Nermin Hanım and Kenan Bey opened a café. They set up a limited company with 100,000 lira of capital, split half and half. This year Kenan Bey is moving to another city and wants to give up his share. Nermin Hanım's cousin Elif Hanım is ready to buy the share and offers 300,000 lira.

Kenan Bey's first idea is simple: "Elif and I shake hands, I take the money and I'm out." In a limited company it is not that short. In this lesson we look at the steps of a share transfer, what to check before the transfer, and the other ways of leaving a partnership.

First, a distinction: a sole proprietorship cannot take on a partner

In a sole proprietorship (şahıs işletmesi) the business and its owner are the same person (Sole proprietorship or limited company?). So you cannot take on a partner in a sole proprietorship by selling a "share". An owner who wants to work together with someone has two paths: setting up an ordinary partnership (adi ortaklık), or setting up a company together and moving the business into it. Ask your mali müşavir (accountant) which one suits you and what tax the move involves. The rest of this lesson is for limited companies; in a joint-stock company (anonim şirket) the rules on share transfers are different.

A share transfer is like transferring the title deed of a flat

When you sell a flat, agreeing is not enough; an official procedure is done at the land registry and the new owner goes on record. A share in a limited company works the same way. The bargaining is done between the partners, but for the transfer to be valid the steps the law requires are completed (Turkish Commercial Code, Türk Ticaret Kanunu, art. 594, 595 and 598). The body that gives the approval is called the "general meeting of partners" (ortaklar genel kurulu) in the law (general meeting for short; under the old law it was called the partners' board, ortaklar kurulu):

A few details:

• A notary is a must. A transfer contract whose signatures have not been certified by a notary is not valid. Unless the articles of association say otherwise, the transfer becomes valid with the approval of the general meeting.
• The general meeting can refuse without giving a reason, if the articles of association contain no other rule. If it does not refuse within three months of the application, it is deemed to have given its approval (TTK art. 595).
• There is a deadline for registration. If the managers do not apply within thirty days, the departing partner can apply himself to have his name removed from the registry (TTK art. 598). The list of documents the trade registry office asks for may change; ask the registry office or your mali müşavir before you apply.

Kenan Bey and Elif Hanım followed this order. After the contract at the notary, Nermin Hanım and Kenan Bey wrote up the general meeting decision, and Nermin Hanım, who is the manager, made the application to the trade registry.

Three papers on the table before the transfer

Before paying 300,000 lira, Elif Hanım should look at where the company stands today. If the company's unpaid tax debt cannot be collected from the company, it can be claimed from the partners in proportion to their shares (Law No. 6183, art. 35); partners have a similar liability for SGK (social security) premium debt. If a partner is also the manager, he can be held liable for the whole of the tax debt that cannot be collected from the company (Law No. 6183, repeated art. 35). The same article makes the transferor and the transferee jointly liable (müteselsilen, meaning the creditor can go to either of them if it wishes) for debt that relates to the period before the transfer and is unpaid on the transfer date. As the transfer date, the date of the transfer contract at the notary is usually taken; ask your mali müşavir which date counts in your case.

So the transferee should ask for these:

1. The latest balance sheet (bilanço) and trial balance (mizan). What does the company own, and how much does it owe to whom? We explained how to read a balance sheet in the lesson The balance sheet: assets equal liabilities plus equity.
2. Tax and SGK debt status. Does the company have overdue tax and premium debt? Your mali müşavir can check this in the tax office and SGK systems; if you wish, a "no debt" letter can also be obtained from the tax office and SGK in the company's name.
3. The partners' account. Does the departing partner owe the company anything, or does the company owe him? If so, how it will be closed with the transfer should be written into the contract. Also check whether the capital owed on the share has been paid in full. If any part is unpaid, take it into account when discussing the price; before the contract, ask your mali müşavir or lawyer who will be liable for this debt after the transfer, and to what extent.

The tax and SGK side

• For the transferor: If you sell your share for more than it cost you, the difference may be subject to income tax (Income Tax Law, Gelir Vergisi Kanunu, repeated art. 80, capital gains). Kenan Bey's share cost him 50,000 lira and he is selling it for 300,000 lira; ask your mali müşavir how the calculation is done and whether a return is needed.
• For the transferee: Partners in a limited company are, as a rule, covered by Bağ-Kur, the social security scheme for the self-employed (Law No. 5510, art. 4/1-b); in a share transfer this registration starts on the date the general meeting approves the transfer, and the company's authorised person reports it to SGK within 15 days. If Elif Hanım works somewhere else, she should have her mali müşavir check in advance how this affects her.

Other ways of leaving a partnership

A share transfer is the most common way, but not the only one:

• Right to exit: If the articles of association provide for it, or if there is a just cause, a partner can leave the company; where the ground is just cause, the court decides (TTK art. 638).
• Expulsion: The expulsion of a partner can be sought on grounds written in the articles of association or on just cause (TTK art. 640).

Both of these paths are long and costly. If the partners write a partners' agreement at the start and answer the question "if one of us wants to leave, to whom must they first sell their share, and on what calculation?", most disputes never begin. It is best to prepare this agreement with a lawyer.

In one sentence

In a limited company a share transfer does not end with a handshake: it needs a written contract certified by a notary, the approval of the general meeting and registration with the trade registry; and the buyer first looks at the company's debts.