Partnerships are businesses that are established and co-owned by two or more people who join together to carry on the business with a view of sharing profits. Generally, all partners have equal rights in the management of the partnership. There is no requirement to have any written documentation, although a Partnership Agreement is advisable. Partnerships may have between two and 20 partners. Once there are more than 20 partners, the business must be registered as a company
Partnerships enable a sharing of responsibility and enable a business to raise capital. However a partnership does not have a separate legal personality so the partners are jointly and individually liable for the debts and liabilities of the business. Additionally, each partner can be held responsible for the actions of another partner in respect of the partnership business.
Partnerships in Hong Kong are governed by the Hong Kong Partnership Ordinance and are of two types: General Partnership and Limited Partnership.
If a partnership registers with the Hong Kong Registrar of Companies, it takes the form of a limited partnership as defined in the Hong Kong Limited Partnership Ordinance. Until it has registered, it will not have the status of a limited partnership and the law applicable to general partnerships will apply.
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 another partner that are taken on behalf of or in service of the business.
- Set up – Partnerships are simple to set up and manage in comparison to companies and the internal structure of partnerships can be very flexible
- Maintenance – Partnerships face fewer statutory controls than companies. There is no requirement to audit or publish accounts or to register the Partnership Agreement. No returns are required to be made by partnerships, except for income tax
- Partnership as an incentive – General partnerships tend to attract and retain employees because 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
- Liability for partners’ actions – Each partner can also be held responsible for the actions of other partners that are taken on behalf of, or in service of, the business
- Personal conflict – Disputes can disrupt business management and operations
- 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 business debts and are involved in the decision-making process of the business. The 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 business.
- 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 – Delineation between general partners and limited partners allows capital to be raised without affecting business management
- Personal liability for general partners – General partners are personally liable for business debts or liabilities, and for the actions of other partners
- Limitations for limited partners – Limited partners are required to be passive investors. They cannot be involved in the decision making process, dissolve a partnership or consent to the introduction of new partners