In Hong Kong’s dynamic business landscape, entrepreneurs and investors often seek business structures that provide a balance between limited liability and shared responsibility. The Limited Partnership (LP) is one such structure that offers flexibility while allowing businesses to raise capital efficiently.

This guide explores what a Limited Partnership is, how it differs from General Partnerships, and why it can be an attractive choice for businesses and investors in Hong Kong.

What is a Partnership?

A partnership is a business arrangement between two or more individuals who agree to share profits. Partnerships in Hong Kong can have between two and 20 partners—beyond this limit, the business must register as a company.

Unlike corporations, partnerships can be established informally in Hong Kong, meaning:

• There is no legal requirement for a written partnership agreement.
• If two or more people decide to conduct business together, they automatically form a partnership.

However, while informal partnerships are legally recognized, it is strongly recommended to have a Partnership Agreement.

Why is a Partnership Agreement Important?

A Partnership Agreement is a legally binding document that sets out:

• Roles and responsibilities of each partner.
• Profit-sharing arrangements.
• Decision-making processes.
• Dispute resolution mechanisms.
• Procedures for adding or removing partners.

This agreement provides clarity, reduces conflicts, and ensures smooth business operations.

Types of Partnerships in Hong Kong

Partnerships in Hong Kong are governed by the Partnership Ordinance and fall into two categories:

1. General Partnership (GP)
2. Limited Partnership (LP)

1. General Partnership

A General Partnership (GP) is the most basic form of partnership. Key characteristics include:

• Unlimited Liability: Each partner is personally liable for the debts and obligations of the business.
• Mutual Accountability: Partners can be held responsible for each other’s business actions.
• Ease of Formation: General partnerships require minimal regulatory compliance.
• No Audit or Account Publication: Unlike companies, GPs do not need to publish financial statements.
• Capital Raising: GPs can raise funds through partners and external financing, such as bank loans.

While a GP is easy to set up, its unlimited liability can pose financial risks, making it less suitable for high-risk businesses.

Limited Partnership (LP)

A Limited Partnership (LP) is a hybrid structure that combines features of both General Partnerships and Limited Liability Partnerships. It consists of two types of partners:

• General Partners: Have full control over management but unlimited liability for debts.
• Limited Partners: Contribute capital and have liability limited to their investment but cannot participate in business management.

Key Advantages of Limited Partnerships

• Liability Protection: Limited partners are only liable up to their capital contribution.
• Passive Investment: Limited partners can earn returns without business involvement.
• No Need to Dissolve Upon Partner Exit: Limited partners can be replaced without dissolving the partnership.
• Efficient Capital Raising: Businesses can attract investors without sacrificing management control.

General Partner vs. Limited Partner: Key Differences

Tax Treatment of Limited Partnerships in Hong Kong

• Limited Partnerships are taxed at the partnership level as a distinct legal entity.
• The assessable profits of the LP are calculated under its name, but:
  • Profits/losses are first allocated among partners based on their profit-sharing ratio.
  • Each partner’s tax liability is calculated individually.

This tax treatment allows limited partners to optimize their tax obligations based on their individual circumstances.

Conclusion: Choosing the Right Partnership Structure

The choice between a General Partnership (GP) and a Limited Partnership (LP) depends on:

• Liability Preferences: If full liability is a concern, LPs provide greater protection for passive investors.
• Investment Needs: LPs allow businesses to attract investors without losing management control.
• Operational Flexibility: GPs are simpler to manage, while LPs require clear legal agreements to define roles and liabilities.

For businesses and investors looking to expand in Hong Kong, a Limited Partnership can be an effective structure that provides liability protection, flexibility, and tax benefits.

If you are considering setting up a Limited Partnership in Hong Kong, contact us today for tailored guidance and professional assistance.