In Hong Kong's dynamic business environment, companies frequently look for arrangements that provide the ideal balance between restricted liability and shared responsibility. The Limited Partnership (LP) is one of these structures that offers this equilibrium.
Let's examine what LP is and why it can be a wise decision for companies looking to expand and stabilise in Hong Kong's dynamic market.
What is a partnership
Partnerships are collaborative ventures established and co-owned by two or more individuals with the aim of sharing profits. Partnerships can have between two and 20 partners, beyond which registration as a company becomes necessary.
In Hong Kong, partnerships can be established informally, without the requirement for formal written documentation. It also means that a comprehensive partnership agreement is not always required when two or more people get together and decide to conduct business together. Although there is nothing illegal about this informal agreement, it is highly advised that you have a formal Partnership Agreement in place.
A Partnership Agreement is a legally binding document that outlines the rights, responsibilities, and obligations of each partner within the partnership. It serves as a crucial tool for clarifying important aspects of the partnership, such as profit-sharing arrangements, decision-making processes, dispute resolution mechanisms, and the handling of partner exits or additions.
General Partnership vs. Limited Partnership
Partnerships in Hong Kong are governed by the Hong Kong Partnership Ordinance and come in two primary forms: General Partnership and Limited Partnership.
General Partnership
In a general partnership, each partner assumes unlimited liability for the debts and liabilities of the business. Furthermore, partners can be held accountable for each other's actions concerning the partnership business.
At the same time general partnerships are relatively simple to establish, and face fewer statutory controls than companies, with no audit or publication of accounts required. Moreover, general partnerships can raise capital from partners and external sources like banks.
Limited Partnership
A Limited Partnership combines elements of general and limited liability partnerships. It consists of general partners with unlimited liability and limited partners whose liability is restricted to their capital contribution. Limited partners earn a passive return on their investment without getting involved in the business operations.
One of the main advantages of this type is structure is that Limited partners can be replaced without dissolving the partnership. This clear delineation between general and limited partners allows capital to be raised without impacting business management, this because Limited partners are passive investors and cannot participate in decision-making processes or dissolve the partnership without consent.
A limited partnership's assessable profits are calculated and charged in Hong Kong under the partnership's name as a distinct legal entity. However, the partnership's assessable profits/tax loss will first be allocated to each partner based on their profit-sharing ratio and tax liabilities are calculated individually.
General Partner vs Limited Partner
|
|
GENERAL |
LIMITED |
|
Control/ Management |
Full Control |
Minimal to No control |
|
Profit and Loss Sharing |
Equal |
As stated in agreement |
|
Personal Liability |
Unlimited |
Limited |
|
Structure |
Simple |
More Complex |
|
Ownership |
Equal |
As listed on agreement |
Conclusion
In conclusion, the choice between a General Partnership and a Limited Partnership depends on various factors, including the desired level of liability protection and flexibility in management.
For tailored guidance on establishing your Limited Partnership in Hong Kong, reach out to us today.