A partnership in Hong Kong is a business entity formed under the Partnerships Ordinance, and is defined as “the relation between persons carrying on a business in common with a view of profit” that is not a joint stock company or an incorporated company.
A partnership entity allows two or more people to share the ownership and liabilities of a business. Partners are jointly and/or individually responsible for the business, as well as being liable for the actions of the other business partners. One of the key benefits of using a partnership is that with shared liability and multiple partners, more capital can be raised.
If the business entity registers with the Registrar of Companies, it takes the form of a limited partnership defined in the Limited Partnerships Ordinance. However, if the business entity fails to register with the Registrar of Companies, then it becomes a general partnership as a default.
A general partnership requires that each partner in the company is held responsible for the debts and liabilities of the business. Each partner can also be held responsible for the actions of the other partner taken on behalf of or in service of the business.
- Set up and maintenance – Partnerships are simple to set up and manage in comparison to limited companies.
- Partnership as an incentive – General partnerships tend to attract and retain employees as partnership can be offered as an incentive.
- Raising capital – Capital can be raised from partners and outside sources such as banks.
- Liability – Partners are personally liable for the business’s debts and liabilities. Partners’ personal assets can be held accountable for business debts and losses.
- Liability for partners’ actions – Each partner can also be held responsible for the actions of the other partner taken on behalf of, or in service of, the business.
- Personal conflict – Overall company growth can be deterred by conflicting opinions and goals. Personal disputes can cause issues in the management and daily business practices of the company.
- Profit sharing – Profits from a general partnership must be shared between all parties.
A Limited Partnership has both general and limited partners. General partners have unlimited liability for the company’s debts and are involved in the decision-making process of the business. Limited partners’ liability is restricted to the amount of their contribution to the capital of the partnership. Limited partners are not able to be involved in the decision making process of the company.
- Limited liability of limited partners – Limited partners are not personally liable for business debts or liabilities, or for the actions of other partners.
- Flexibility of limited partners – Limited partners can be replaced without dissolving the partnership.
- Investment separate from management – Clear delineation between managing partners and limited partners, allows for funds to be raised without affecting how the business is managed.
- Personal liability for general partners – General partners are personally liable for the debts and liabilities of the company. Also, general partners are liable for actions taken by other partners on behalf of the company.
- Limitations for limited partners – Limited partners are required to be passive investors. They cannot dissolve a partnership and the introduction of a new partner does not require the consent of the existing limited partners.