A partnership is a formal arrangement between two or more persons to carry, conduct and manage a business and to share profits and losses. A partnership is one of the common forms of doing business since it provides both formal and informal freedom for the participants, as well as sharing risks and profits, however, it does have certain legal and economic implications.
Content Outline
Types of Partnership
1. General Partnership (GP)
A general partnership (GP) in Hong Kong is an unincorporated entity with unlimited liability, subject to fewer statutory and reporting obligations compared to incorporated and limited companies.. The profits and losses are shared equally by all the partners and this has been duly documented.
2. Limited Partnership (LP)
A Limited Partnership is a position that requires at least one General Partner who has the authority to manage the business and who bears unlimited liability on the business debts and one or more limited partners who invest capital in the business and share income but have limited liability and no management authority.
3. Limited Liability Partnership (LLP)
An LLP provides a limited liability shield to all the partners where they do not lose their personal assets under any circumstances of the LLP. The LLP is advantageous to the partners in that they can manage the business of the LLP without personal exposure of their assets for the liabilities of the business and therefore is most popular in professional practices such as accountancy firms.
4. Joint Venture
A Joint Venture is a contractual association of parties for a limited duration for the purpose of a specific task or undertaking. They are collaboration of resources and skills in a specific activity in which the partners often terminate after completion of the activity.
Key Takeaways for Partnership
Shared Responsibility
Responsibility for the operations, revenues, and expenses are also divided equitably between the partners which also entails that risks and legal obligations are divided in the same proportion.
Types of Partnerships
Different types of partnerships offer varying levels of liability protection and management control.
Taxation
Partnerships usually apply the concept of pass-through taxation which means that the business is not subjected to taxes. Instead, the profits and the expenses are shared among the members and they are included in their individual tax returns.
Legal Agreement
It is crucial to prepare a detailed partnership agreement that describes the functions and duties and, the distribution of profits among partners.
Taxation Of Partnerships
Partnerships enjoy the pass-through taxation of income tax, and thus, do not apply such taxation to the partnership itself. Instead, all revenues and expenses are allocated to the individual partners, who then report them in their personal tax returns. In Hong Kong, partners declare their share of the partnership’s profits and losses directly in their tax filings.
Advantages Of A Partnership
- Ease of Formation: The legal formation of partnerships is easier and less costly than forming a corporation.
- Shared Resources: Business partners may also be in a position to share resources, knowledge and skills to develop the business.
- Pass-Through Taxation: There is no issue with double taxation as income is only taxed in the partner’s hands.
- Flexibility: Management and profit-sharing arrangements are flexible and depend on the agreement of the partners in a partnership.
Disadvantages Of A Partnership
- Unlimited Liability: Under general partnerships, every partner is legally responsible for the organization’s liabilities and commitments, including personal property.
- Potential for Disputes: Conflict may arise between the business partners, which may be detrimental to the formation and smooth running of the business.
- Shared Profits: It is mandatory that profits should be attributed to all the partners and may contribute to less earnings per individual.
Limited Lifespan: A partnership can come to an end if one of the partners retires or dies unless otherwise agreed to continue.