This is the English version of an article originally published in Turkish: Limited Şirket Ortaklarının Sorumluluğu.
The limited liability company (limited şirket) is the most common vehicle for doing business in Turkey, including for foreign investors. Its main attraction is that the shareholders’ liability is limited and their personal assets are, as a rule, protected. That protection is not absolute. Turkish law removes it in certain situations, most importantly where the company owes taxes or other public debts. This article explains where the limits lie.
Separate legal personality
A limited company has legal personality separate from its shareholders. The company is liable for its own debts, and the shareholders are obliged only to pay the capital they have undertaken to contribute. The company’s creditors cannot, in principle, proceed directly against a shareholder’s personal assets. This is the principle of limited liability. Public receivables, however, are treated differently.
The capital contribution
Each shareholder must pay the capital it has committed to the company. For ordinary commercial debts, a shareholder’s liability is limited to this capital contribution. Once the contribution has been paid in full, creditors cannot pursue the shareholder personally. If part of the contribution is still outstanding, that amount can be claimed from the shareholder, usually through the bankruptcy administration if the company becomes insolvent. Making capital payments through the bank makes them easy to prove later.
Article 602 of the Turkish Commercial Code
Article 602 of the Turkish Commercial Code (No. 6102, “TTK”) sets the rule clearly:
“The company is liable for its debts and obligations only with its assets.”
Under this provision the company is the only party facing its creditors. Commercial creditors can attach only the movable and immovable assets of the company. A shareholder’s home or personal bank account falls outside their reach. This rule covers debts owed to private creditors; for public receivables, the protection is weaker.
Liability for public debts
Public debts are the main exception to limited liability. Law No. 6183 on the Collection Procedure of Public Receivables gives public receivables special protection, and tax offices and the Social Security Institution (SGK) can turn to the shareholders when the company does not pay. The shareholder’s liability is proportionate to its shareholding. For example, a shareholder holding 25% of the shares is liable for one quarter of the debt, and that liability extends to the shareholder’s personal assets.
How the debt is collected
The tax office must first pursue the company’s assets. Only if the debt cannot be collected from the company does the process move on to the shareholders. The administration must establish that collection from the company is not possible. It then serves a payment order (ödeme emri) on the shareholder for the portion corresponding to its share, and the shareholder pays that portion personally. Tax restructuring schemes, when they are introduced, can therefore be of real value to shareholders.
Managers carry a heavier burden
Company managers (müdür) carry a much heavier burden than shareholders. While shareholders pay in proportion to their shares, managers are held liable for the whole of the public debt with all their assets. A shareholder who is also a manager therefore takes on this heavier liability. The law places a duty on those in management positions to run the company properly, and anyone accepting the role of manager should first understand what it entails.
Additional payment obligations
The articles of association sometimes include clauses requiring additional payments (ek ödeme). These raise the ceiling of the shareholders’ liability: when the company is in difficulty, shareholders may be required to make the additional payments. Such an obligation exists only if it is expressly provided for in the articles of association. Investors should review the articles for such clauses before acquiring shares.
Share transfers and liability
A shareholder who transfers its shares is not liable for debts arising after the transfer, provided that the transfer has been registered with the trade registry. Until registration, the former shareholder remains liable towards third parties.
Leaving the company does not, however, release a shareholder from public debts that arose before the transfer. The transferring shareholder remains liable for them, and the new shareholder is liable for both earlier and later public debts, because the law adopts joint liability to secure collection of public receivables. The parties may agree in the share transfer agreement who will bear these debts, but such an internal agreement never binds the tax office or the SGK.
Challenging collection proceedings
Collection proceedings started in error can always be challenged. Grounds may include a share transfer registered before the debt arose, the fact that the company’s assets were not pursued first, or the debt being time-barred. Statutory time limits for objections are short and must be observed.
Frequently asked questions
Is a shareholder liable only up to its capital contribution? For commercial debts, yes. For public debts, the shareholder is liable in proportion to its shareholding with all its assets.
Can my personal car be attached for the company’s tax debt? Yes. If the company cannot pay and you are a shareholder, your car can be attached for the amount corresponding to your share.
Are earlier debts cleared when I leave the company? No. Liability for public debts that arose before you left continues.
Can the administration pursue a shareholder directly? No. It must first pursue the company’s assets and establish that collection from the company is not possible.
More information for foreign clients: English-speaking lawyer in Ankara.
This article provides general information on Turkish law and is not legal advice. Outcomes depend on the facts of each case.
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