While setting up a Hong Kong Private Limited Company, Representative Office, or Branch Office are the common structures, they are not the only available options for doing business in Hong Kong.
For professional service providers and firms seeking flexibility and shared ownership, partnership structures is an alternative choice. In particular, Limited Liability Partnerships (LLPs) are gaining attention for their unique combination of limited liability protection and partnership management. This blog explores the concept of LLPs in Hong Kong, their legal framework, and how they compare to other business entities.
Content Outline
Key Takeaways
Differences Between General and Limited Partnerships
General partnerships involve unlimited liability and shared management, while limited partnerships distinguish between general partners (with full liability and control) and limited partners (with restricted liability and no managerial power).
Benefits of Partnership Structures
Partnerships offer advantages such as lower compliance obligations, flexible capital contribution, and simplified management structures, especially when compared to corporate entities.
Risks and Limitations of Partnerships
General partners face full personal liability, and limited partners lose liability protection if they engage in management; disagreements and profit-sharing issues may also arise.
Steps to Establish a Limited Liability Partnership in Hong Kong
Setting up an LLP requires drafting a partnership agreement, obtaining a Business Registration Certificate, registering with the Companies Registry, and maintaining compliance with reporting and documentation duties.
What is a Limited Liability Partnership (“LLP”)?
A Limited Liability Partnership (LLP) is a specialized form of partnership specifically for local solicitor firms and foreign law firms operating in Hong Kong. LLP allows partners to limit their personal liability for the negligence or misconduct of other partners, while retaining the operational flexibility of a traditional partnership. This structure helps protect individual personal assets without compromising the partnership.
Key Difference Between General Partnership And Limited Liability Partnership (LLP)
According to Hong Kong Local Regulations on Partnerships that are written in Partnership Ordinance, Partnership can be formed between one or more people who come together with a Partnership Agreement and the aim of making profits.
Hong Kong General Partnerships
A General Partnership can be set up with at least two partners.
If there is no partnership agreement or the partnership is not registered with the Companies Registry, it will take on the structure where the general partners are held equally and legally accountable for all the business debts and obligations. It means that they have unlimited liability.
Hong Kong Limited Liability Partnership (LLP)
Hong Kong limited liability partnerships are set up by a general partner and limited partners.
There is some degree of difference in responsibilities that each of the parties has. Limited partners will only be responsible for the percentage of their investment contribution. Meanwhile, the general partner of the company will not have a limit on the debts of the business.
The limited partners will not have the final say on the direction of the business, the expansions, or the business decisions and they can only be the passive investors who have no real role in the management. The general partners have the responsibility of the decision-making process as it is subject to higher risks than other partners do.
Advantages of Hong Kong Partnerships
General Partnership
- Registration Exemption: Partnership agreements are not necessarily registered with the Companies Registry .
- Minimal Maintenance: There is no need to keep accounts, financial statement audits and annual tax reports to the Inland Revenue Department, which makes the administrative loads lighter. On the other side, the individual partners are accountable to the filing of their Individual Income Tax returns annually.
- Capital Acquisition: Capital may be provided by the business partners’ resources, or taken as business debt from financial institutions as a loan for personal use.
Limited Partnership
- Partner Replacement Flexibility: One or more partners can be replaced without affecting the operations of a company.
- Structural Adaptability: The partnerships can build up funds through the entry of new partners.
- Streamlined Management: A sole authority figure of the partner agency has a quick decision-making process which makes the management flow streamlined.
- Reduced Compliance Burden: The partnerships do not have the reporting obligations to the authority like the corporate entities.
- Profit Distribution Protocol: The business profits are dispatched according to the terms that have been defined in the Partnership Agreement.
Disadvantages Of Hong Kong Partnerships
General Partnership
- Personal Liability: The partners are by default held personally liable for business debts and losses with the use of their personal assets as collateral.
- Shared Responsibility: The general partners are jointly liable for the actions or mismanagement of the other general partners.
- Disagreement in Decision: If there is a disagreement in the decision making, there could be a disruption in the operations.
- Profit Distribution: The profit generated by the company is divided among the partners equally to ensure a fair distribution.
Limited Partnership
- Disparate Liability: In the event of an insolvent or bankrupt partnership, the general partner with the majority investment share is personally liable for unlimited liability, while others are liable only for the investment amount they have contributed.
- Management Constraints: Limited partners, who are personally protected from business liabilities, are not allowed to participate in the managerial decisions of the company. A limited partner loses this protection as soon as they start managing the company.
- Partnership Formation: Unlike general partnerships, limited partnership requires an additional step in the form of a partnership agreement that is subject to local jurisdiction and the due to liability division.
What To Consider Before Setting Up Partnerships
Before establishing a partnership in Hong Kong, it is important to understand the legal and operational implications of the structure. Some of the key points to consider are:
- A partnership is not a separate legal entity, so each partner is personally liable for the business’s debts and obligations.
- Profits are taxed at the partner level which means each partner pays tax based on their individual tax rate, which can be different from corporate rates.
- A General Partnership can be formed orally or in writing and does not require registration with authorities, making it relatively simple to establish.
- A Limited Partnership involves more complexity and formalities.
This makes limited partnerships more suitable for arrangements where liability limits and capital contributions must be clearly defined.
How To Establish Limited Liability Partnerships
1. Draft a Limited Liability Partnership Agreement that includes each partner’s rights, responsibilities, and liability protections.
2. Apply for a Business Registration Certificate from the Inland Revenue Department:
- Submit the application with identification documents.
- Pay the applicable registration fee.
3. Register the LLP with the Companies Registry to obtain a Certificate of Registration.
4. Ensure compliance with ongoing requirements:
- Maintain accurate records of partners and capital contributions.
- File amendments for any changes in partnership structure.
Ensure to follow these steps ensures the LLP is legally recognized and benefits from limited liability protections under Hong Kong law.
Conclusion
Although partnerships are among the most simple business structures in Hong Kong, some issues must be evaluated to determine which option could be the most suitable for the envisioned business plan.
For example, the limited Partnership grants some protection to the ones who participate while taking away their ability to voice their opinion and influence the events of business.
Moreover, it is crucial to always take into account that with the development of the business other business structures like incorporating as a legally independent business such as Hong Kong Private Limited company can be the best.
How FastLane Group Can Help?
Ready to establish your partnership in Hong Kong? FastLane Group is here to streamline the process for you. Our expert team can handle everything from formation to compliance, ensuring your business gets off to the right start. Contact us today and let’s get started on your journey to success in Hong Kong.
Frequently Answered Questions
If you want to register a limited partnership in Hong Kong, you will need to:
- Apply the Business Registration Certificate to be issued at the Inland Revenue Department to be issued.
- Get a Certificate of Registration from Companies Registry.
- Provide identification documents
- Pay the registration fees
In Hong Kong, the general partnership means that the partners equally share the risks and responsibilities. On the other hand, a limited partnership has limited partners who enjoy restricted liability by their investment amount and general partners who manage the business with unlimited liability.
Partnership in Hong Kong is a good option, as it brings low cost, flexibility, easy capital raising, and profit sharing among all the other benefits.
One of the disadvantages of a partnership formation in Hong Kong is personal liability for business debts and losses, a common liability for the actions of other partners, relationship disagreements between the partners, and a substantial lack of legal independence.
