Limited Partnership vs. Limited Company in Thailand: Which Business Structure Should You Choose?

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The two forms of juristic person: the starting point

When an entrepreneur decides to move from trading as an individual to registering a juristic person, the first question is usually: "Should it be a limited partnership or a limited company?" The answer depends on several factors — the number of co-investors, the management structure, future fundraising needs, and the level of liability each party is prepared to accept.

The Civil and Commercial Code lays down the rule on the contract for the organization of a partnership or company in Section 1012:

"A contract for the organization of a partnership or company is a contract whereby two or more persons agree to unite for a common undertaking, with a view of sharing the profits which may be derived therefrom."
— Civil and Commercial Code, Section 1012 (English text as published in the Thailand Law Library; unofficial translation)
Thai original: "อันว่าสัญญาจัดตั้งห้างหุ้นส่วนหรือบริษัทนั้น คือสัญญาซึ่งบุคคลตั้งแต่สองคนขึ้นไปตกลงเข้ากันเพื่อกระทำกิจการร่วมกัน ด้วยประสงค์จะแบ่งปันกำไรอันจะพึงได้แต่กิจการที่ทำนั้น"

Section 1013 recognizes three kinds of partnership or company: the ordinary partnership, the limited partnership, and the limited company. In practice, entrepreneurs who want to limit the liability of their co-investors choose between the limited partnership and the limited company. A limited partnership limits liability only for the limited partners, whereas a limited company limits the liability of every shareholder.

The limited partnership: structure and liability

A limited partnership has two classes of partner within the same entity, with significantly different levels of liability. Section 1077 provides:

"A limited partnership is that kind of partnership in which there are:
(1) One or more partners whose liability is limited to such amount as they may respectively undertake to contribute to the partnership; and
(2) One or more partners who are jointly and unlimitedly liable for all the obligations of the partnership."
— Civil and Commercial Code, Section 1077 (English text as published in the Thailand Law Library; unofficial translation)
Thai original: "อันห้างหุ้นส่วนจำกัดนั้น คือห้างหุ้นส่วนประเภทหนึ่ง ซึ่งมีผู้เป็นหุ้นส่วนสองจำพวก ดังจะกล่าวต่อไปนี้ คือ (๑) ผู้เป็นหุ้นส่วนคนเดียวหรือหลายคนซึ่งมีจำกัดความรับผิดเพียงไม่เกินจำนวนเงินที่ตนรับจะลงหุ้นในห้างหุ้นส่วนนั้นจำพวกหนึ่ง และ (๒) ผู้เป็นหุ้นส่วนคนเดียวหรือหลายคนซึ่งต้องรับผิดร่วมกันในบรรดาหนี้ของห้างหุ้นส่วนไม่มีจำกัดจำนวนอีกจำพวกหนึ่ง"

In practice, the partner with "unlimited liability" (usually called the managing partner) runs the business and is answerable for the partnership's debts with his or her personal assets, without any ceiling, while a "limited-liability" partner is liable only up to the agreed amount of the contribution.

A limited partnership must be registered under Section 1078, and the consequence of not yet being registered is set out in Section 1079:

"Until registration a limited partnership is deemed an ordinary partnership in which all the partners are jointly and unlimitedly liable for all the obligations of the partnership."
— Civil and Commercial Code, Section 1079 (English text as published in the Thailand Law Library; unofficial translation)
Thai original: "อันห้างหุ้นส่วนจำกัดนั้น ถ้ายังมิได้จดทะเบียนอยู่ตราบใด ท่านให้ถือว่าเป็นห้างหุ้นส่วนสามัญซึ่งผู้เป็นหุ้นส่วนทั้งหมดย่อมต้องรับผิดร่วมกันในบรรดาหนี้ของห้างหุ้นส่วนโดยไม่มีจำกัดจำนวน จนกว่าจะได้จดทะเบียน"

This means that even if the co-investors have agreed that some of them will be limited partners, until the partnership is registered every partner is jointly and unlimitedly liable for its debts. Registration should therefore be completed before any transaction is entered into in the partnership's name.

Advantages and limitations of the limited partnership

The advantages of a limited partnership are that registration is far simpler than for a limited company, the registration fee is lower, and the financial statements of a partnership whose capital, assets, or revenue do not exceed the thresholds set by Ministerial Regulation need not be audited by a certified public accountant under Section 11 of the Accounting Act B.E. 2543 (2000) (the audit and certification of accounts for tax purposes must still be performed by a person licensed by the Director-General of the Revenue Department under Section 3 Septem of the Revenue Code). Its key limitation is that the unlimited partner is liable with his or her personal assets, which makes it harder to raise funds from outsiders; banks and institutional investors are generally reluctant to invest in this form.

The limited company: structure and protection

The limited company is designed so that every shareholder's liability is limited to the amount, if any, unpaid on the shares held by that shareholder (Section 1096). The formation of a limited company is governed by Section 1097:

"Any two or more persons may, by subscribing their names to a memorandum and otherwise complying with the provisions of this Code, promote and form a limited company."
— Civil and Commercial Code, Section 1097 (English text as published in the Thailand Law Library; unofficial translation)
Thai original: "บุคคลใด ๆ ตั้งแต่สองคนขึ้นไปจะเริ่มก่อการและตั้งเป็นบริษัทจำกัดก็ได้ โดยเข้าชื่อกันทำหนังสือบริคณห์สนธิ และกระทำการอย่างอื่นตามบทบัญญัติแห่งประมวลกฎหมายนี้"

Under the current text of Section 1097, a limited company may therefore be formed by two or more promoters. Technically there is no minimum registered capital, but the registration fee is calculated on the registered capital; in practice, companies commonly register capital of 1 million baht or more so that the business appears credible.

The management structure of a limited company

A limited company has a three-tier management structure: the shareholders (the ownership tier), the board of directors (the policy tier), and the executives or managing director (the operating tier). This separation of powers creates checks and balances and allows the company to raise funds from outside investors without disturbing its management, because an investor merely holds shares and need not take part in running the business.

The shareholders' meeting has the ultimate authority over major decisions such as amending the articles of association, increasing or reducing capital, amalgamation, and dissolution of the company. Under Section 1171, the first ordinary general meeting must be held within six months of the company's registration, and thereafter at least once in every period of twelve months; under Section 1197, the balance sheet, once audited, must be submitted to the general meeting for approval within four months of the date of the balance sheet.

Tax burden: the differences that affect net profit

Both the limited partnership and the limited company are "juristic persons" subject to corporate income tax under Section 66 of the Revenue Code. The standard rate is 20% of net profit, but SMEs with paid-up registered capital of not more than 5 million baht and revenue of not more than 30 million baht per year enjoy the following special rates:

As for the owners' salaries, the Revenue Code applies the same test to both forms. Section 65 Ter (8) disallows, as an expense in computing net profit, "the part of salary of a shareholder or partner which is paid in excess of appropriate amount" (official translation by the Revenue Department). A salary at a reasonable rate is therefore deductible whether the business is a limited partnership or a limited company. The decision should thus turn on liability, management, and fundraising rather than on the tax burden.

Comparison table: which form should you choose?

A caution: holding yourself out as a partner, and liability to third parties

Section 1054 applies to a person who is not in fact a partner but who represents himself or herself, or allows others to represent him or her, as a partner. Paragraph one provides:

"Any person who represents himself as a partner, whether by spoken words, in writing, or by conduct, or who consents to the use of his name as the name of the partnership, or who, knowing that he is being represented as a partner, does not object and allows it, is liable to third persons for all the obligations of the partnership as though he were a partner."
— Civil and Commercial Code, Section 1054, paragraph one (unofficial translation)
Thai original: "บุคคลใดแสดงตนว่าเป็นหุ้นส่วนด้วยวาจาก็ดี ด้วยลายลักษณ์อักษรก็ดี ด้วยกิริยาก็ดี ด้วยยินยอมให้เขาใช้ชื่อตนเป็นชื่อห้างหุ้นส่วนก็ดี หรือรู้แล้วไม่คัดค้านปล่อยให้เขาแสดงว่าตนเป็นหุ้นส่วนก็ดี ท่านว่าบุคคลนั้นย่อมต้องรับผิดต่อบุคคลภายนอกในบรรดาหนี้ของห้างหุ้นส่วนเสมือนเป็นหุ้นส่วน"

In other words, a person who consents to the use of his or her name as the partnership's name, or who knows that someone is representing him or her as a partner and does not object, is liable to third parties for the partnership's debts as though a partner — even without actually contributing capital or taking part in management. Before allowing anyone to use your name in documents or business dealings, this legal consequence deserves careful thought.

When should you consult a legal consultant before deciding?

Choosing the right form of juristic person from the outset reduces the burden of changing it later. Today a registered partnership or a limited partnership may be converted into a limited company under Sections 1246/1 to 1246/7: the company takes over all the assets, debts, rights, and liabilities of the former partnership under Section 1246/6, but the conversion requires the consent of every partner, the creditors must be notified and given thirty days to lodge an objection, and if the company cannot pay a debt taken over from the partnership, the creditor may still enforce it against the partners under Section 1246/7.

Eksiam Chaisorn, a legal consultant whose practice covers partnership, company, and business law, is available to advise on choosing the appropriate form of juristic person and to plan the shareholding structure and shareholders' agreement from the outset, so as to prevent problems that may arise later.