Establishing Limited Liability Partnerships in Hong Kong

As the plan for a foreign expansion gets underway with the identification of possible business entities and structures, multinational companies should consider several options for setting up their businesses in Hong Kong, including a Hong Kong Private Limited Company (which could be a subsidiary), a Hong Kong Representative office, or even a Hong Kong Branch. Nevertheless, these are not the only choices that businesses can use to carry out business in Hong Kong. 

Besides partnerships, where two or more people put their resources to together to create profits, you may want to consider other options. Those relationships will be designated as partners. 

In Hong Kong, a partnership can take one of two forms, the General Partnership or the Limited Partnership, also known as the Limited Liability Partnership. 

More details about the mentioned Partnerships will be provided in the sections below.

What Is The Difference Between The Partnerships Modalities And The Other Entities In Hong Kong

According to Hong Kong Local Regulations on Partnerships that is 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. 

Partnerships in Hong Kong can be either the ones of general nature or limited liability partnerships. They are different, too, in the key points.

Hong Kong General Partnerships

A General Partnership can be set up with at least two partners. 

In the case that a partnership agreement is absent or not registered with the Companies Registry, the Partnership will take on the structure in which all 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.

They have the difference which is the degree of responsibilities 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 decisions to be made, and only get to be passive investors who have no real role in the management.

The responsibility of the decision-making process commonly resided with the general partner as it is subject to higher risks than other partners do.

Why Hong Kong Partnerships Can Be Better?

General Partnership

• Registration Exemption: Partnership agreements are not necessarily registered with the Companies Registry, which will significantly reduce the time needed to set up.
• 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: Substitutes can be used without affecting the operations of a company.
• Structural Adaptability: Collaborations can endure and 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 and motivates all the partner organizations to perform better.
• Reduced Compliance Burden: The partnerships don’t have the reporting obligations as significant as the corporate entities.
• Profit Distribution Protocol: The business earnings are dispatched according to the terms that have been defined in the Partnership Agreement.

What Are The Drawbacks 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 in case of default. 
• Shared Responsibility: One of the most basic principles of the partnership is that the general partners are jointly liable for the actions or mismanagement of the other general partners. 
• Good Faith Operation: Trust and fairness in decision making are the key components of any partnership or association.  If there is a disagreement, it may create a disruption in the operations. 
• Equal Profit Distribution: The profit generated by the company is divided among the partners equally and thus, the money is divided among all partners and this ensures a fair distribution and shared benefit.

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; nevertheless, they will be liable for such tasks if they engage in them.
• Partnership Formation: Of all the Partnership Agreement, the Partnership Agreement that falls under the jurisdiction of local authorities and the due to liability division constitutes an additional step compared to general partnerships.

Considerations to form Partnerships

These are some considerations that will help you have a clearer idea of what each of the partnerships is made up of.

• A partnership is not a legal entity that stands by itself. So, the liability falls to each partner individually.
• Profits generated by partnerships are taxed and passed on to partners. For example, an individual pays a specific rate of taxation differently from an entity like a company.
• The Limited Partnership structure is more complex than the general Partnership as it is needed to complete the application for a Business Certificate with the Inland Revenue Department and the Companies Registry.

Forming A Partnership

General Partnership

The formation of a general partnership can be either oral or written and does not require being registered with the authorities. It will be regulated under the Partnership Ordinance.

Limited Partnership

After the partnership is registered with the appropriate authorities, the status of the business will change from general to limited and the liabilities will be taken as per the Agreement.

Either one partner or the business representative has to apply for a Business Registration with the Inland Revenue Department. Besides, the identification documents of the people involved are also required and they have to pay a fee.

The applicant should have a Certificate of Registration with the Companies Registry and some amounts of the registration fees should be paid. Any modifications to the contributions or partners or to the partners must be amended accordingly.

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 registration 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.