As the plan for an overseas expansion unfolds and business entities and structures are being explored, some of the most common options for foreign companies to consider are a Hong Kong Private Limited Company (a subsidiary), a Hong Kong Representative office, or even a Hong Kong Branch. However, these are not the only options available to conduct business in Hong Kong.
Another option to explore is Partnerships, in which two or more people join together to generate profits. The parties involved in this relationship will be known as partners.
There are two types of Partnerships in Hong Kong, the General Partnership and the Limited Partnership, also known as the Limited Liability Partnership.
Specifics of each of the Partnerships will be discussed in the following sections.
Differences between the Partnerships modalities and other entities in Hong Kong
Under the local regulations of Hong Kong, stated in the Partnership Ordinance, Partnerships are considered a relation between one or more people that come together through a partnership agreement with the purpose of making profits.
Partnerships in Hong Kong can be formed as General Partnerships or as Limited Liability Partnerships. Both have their key differences.
Hong Kong General Partnerships
A General Partnership can be formed by a minimum of two partners.
If there is a lack of a partnership agreement or if it is not registered with the Companies Registry, the Partnership will assume this denomination, in which all the general partners are legally and equally accountable for all the engagements and all the debts of the business. In other words, they have unlimited liability.
Limited Liability Partnership in Hong Kong (LLP)
On the other hand, Hong Kong limited partnerships are formed by limited partners and a general partner.
The unique distinction is the amount of liability by each of the parts involved. As the name implies, the limited partners will only be responsible for the percentage of their investment contribution, while the general partner will have no limit on the business’s debts.
However, the limited partners will not have the power to decide on how the business is run, business expansion, or the decisions taken, and only act as passive investors.
The decision-making capacity is reserved for the general partner due to being highly exposed, while the other partners are not.
What advantages do Hong Kong Partnerships offer?
- Basic setup: there are no requirements to register the Partnership Agreement with the Companies Registry.
- Low maintenance: there is no need to prepare or keep accounting records, audit financial statements, or annual tax returns to the Inland Revenue Department. Individual partners must comply with their Individual Income Tax returns every year.
- Raising capital: It can be done through the personal resources of partners or through personal loans from financial institutions in the form of business debts.
- The shift in the number of partners: a partner, or more, can be replaced, allowing the business to continue without disruptions.
- Structure flexibility: the Partnership is not so easily over in the case of losses; new partners can be added to raise capital.
- Ease to run the business: with one of the partners having all the power to decide the operations and the direction of the company, it is less likely to fall into disputes.
- Minimum compliance: compared to a company, this type of Partnership has almost no obligations to report to the authorities.
- Distribution of profits: the amount of business profit generated will be split according to the amounts stated in the Partnership Agreement.
What are the cons of Hong Kong Partnerships?
- Personally liable: in the case of default on the business debts or losses, the personal assets of all the partners should be used as collateral to cover them.
- Shared responsibility: the general partners must assume responsibility for the actions and mismanagement of another partner.
- Good faith: since the business runs on a good faith basis and all the partners have the same weight for making decisions; the business operations can be affected if a dispute surges.
- Profit sharing: the amount of profit created from the business must be shared equally among all the partners.
- Uneven liability: the partner with the most significant percentage of investment will have unlimited personal liability. In contrast, the other partners will be only liable for the share of their contributed investment.
- Management limitations: with the protection that comes from limited partners, a restriction from participating in the decision-making of the business. This protection is lost once a limited partner partakes in running the business.
- Forming the Partnership: with the division of liabilities, the local authorities must be informed of the Partnership Agreement, which is an extra step compared to a general partnership.
Considerations to form Partnerships
Here are some suggestions for you to have a better idea of what each of the partnerships encompasses.
- A partnership is not a legally independent entity. Therefore, the liability falls on the partners respectively.
- The taxes on profits generated by the partnerships are passed down to the partners. For example, individuals pay a different tax rate compared to companies.
- The limited partnership setup is more complex than the simpler process of the general Partnership since it is necessary to apply for a Business Certificate with the Inland Revenue Department and the Companies Registry.
Forming a Partnership
A general partnership can be formed in an oral or written agreement and does not need to be registered with the authorities. It will be regulated through the Partnership Ordinance.
Once a partnership is registered with the authorities, it will change its status from general to limited, and the liabilities will be assumed according to the Partnership Agreement.
One representative or partner must apply for a Business Registration with the Inland Revenue Department. All the identification documents of the people participating must be provided, plus pay a fee.
A Certificate of Registration must be obtained with the Companies Registry, and some registration fees must also be paid. Any changes to the contributions or to the partners must be amended in the documentation.
As partnerships present themselves as one of the most simple and flexible ways of conducting business in Hong Kong, some aspects must be evaluated to decide which option is the best option for the intended business plan.
For example, the limited Partnership allows a certain level of protection to some partners while taking away their voice on how to conduct the business.
It is also important to consider that once the business grows and evolves, another form of conducting the business, such as establishing a legally independent business entity, such as a Hong Kong Private Limited company, might be the best option.
How to register a limited partnership in Hong Kong?
What are the main differences between a general partnership and a limited partnership in Hong Kong?
What are the advantages of forming a partnership in Hong Kong?
What are the disadvantages of forming a partnership in Hong Kong?