Partnership Agreement

5 min read|Last Updated: September 7, 2023|
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Partnerships play a vital role in the business world, fostering cooperation and shared goals among individuals pursuing profits together. The concept of partnership is defined and regulated by the Hong Kong Partnership Ordinance, a fundamental legal framework that outlines the nature of partnership and its various forms.

What is Partnership?

As outlined in Section 3 of the Hong Kong Partnership Ordinance, partnership is essentially the relationship established between individuals who engage in a common business endeavor with the intention of reaping financial gains. In simple terms, when two or more people come together to operate a business with the goal of making profits, they form a partnership.

Notably, a partner need not necessarily be an individual; corporations and other business entities can also fulfill this role. It is essential to specify a partner’s legal status as it can carry significant tax implications.

However, it’s important to note that certain forms of business associations, such as registered companies or those formed under specific ordinances or enactments, do not fall under the definition of partnership as per the Ordinance. These entities, often known as corporations or associations, are distinct from partnerships in legal terms.

Determining Partnership Existence

The Partnership Ordinance further elaborates on how to determine whether a partnership exists or not. Section 4 of the Ordinance the following to consider in determining partnership:

  • Ownership of shared property alone does not automatically indicate a partnership. For a partnership to exist, the intent to share profits from the business venture is a critical factor.

  • Merely sharing gross returns generated by a business endeavor does not inherently establish a partnership. Even if participants have a common interest in the generating property, the presence of profit-sharing is crucial to establish a partnership.

  • Receiving a portion of the business’s profits is a sign of partnership. However, specific circumstances outlined in the Ordinance need to be considered.

Types of Partnerships

There are three primary categories of partnership:

  • General Partnership: In this traditional form of partnership, all partners share equal responsibility for the business’s management and financial obligations. Each partner is personally liable for the partnership’s debts.
  • Limited Partnership: A limited partnership involves a combination of general partners and limited partners. General partners are responsible for the business’s operations and debts, while limited partners have limited liability, meaning their financial exposure is restricted to their investment

  • Limited Liability Partnership (LLP): An LLP offers a blend of partnership and corporation features. Partners enjoy limited liability for the partnership’s debts while having the flexibility of operating and managing the business collectively.

Read more about types of partnership here.

What is a Partnership Agreement?

A Partnership Agreement functions as a formal contract binding two or more business partners together. This agreement serves as a blueprint to delineate their respective rights, duties, and the division of profits and losses. Additionally, it establishes fundamental guidelines governing the partnership, encompassing aspects like capital contributions, withdrawals, and financial reporting.

Termed variously, a Partnership Agreement is also recognized as a General Partnership Agreement, Partnership Contract, Articles of Partnership, or Business Partnership Agreement. This document functions akin to a conventional legal contract, and its enforceability hinges on adhering to fundamental tenets of contract law. These foundational principles entail unanimous agreement among partners, a customary financial investment, and the presumption that all partners possessed the legal capacity to sign a binding document.

Partners’ Rights and Obligations

Within a partnership, every partner assumes equal accountability for the company’s financial obligations, debts, and the actions undertaken by their fellow partners.

This agreement can be spoken or written down. If the partners didn’t discuss something in their agreement, then the Partnership Ordinance – a set of rules for partnerships comes into play. It acts like a backup plan for situations not covered in the partnership agreement.

What Do I include in a Partnership Agreement?

Before drafting your Partnership Agreement, it’s important to address essential aspects of the partnership with your fellow partners. Consider these key factors when creating your partnership agreement:

  • Basic Company Information
    Provide details like the partnership’s name, location, individual partner names, effective agreement date, and other necessary information required by tax authorities to officially recognize your business.
  • Partnership Rules and Structure
    Outline whether new members can join the partnership and establish protocols for decision-making, including dispute resolution, delegation of powers, termination and partners’ participation.
  • Capital Contributions
    Specify the contributions in terms of time, money, or assets that each partner brings into the partnership. You can even include non-monetary contributions, as long as their value is agreed upon.
  • Property
    This involves specifying the equipment, assets, or real estate that each partner brings into the business and how it affects their respective ownership in the venture.
  • Dispute Resolution
    A business partnership agreement aims to prevent conflicts, so it often includes specific steps for handling partner disputes. This might involve requiring partners to try mediation before pursuing litigation. The agreement could also specify the jurisdiction for any legal proceedings, such as a state court where the business is located.
  • Profit and Loss Distribution
    Determine how profits and losses will be distributed among partners. Options include equal shares, proportional to capital contributions, or fixed percentages.
  • Management and Voting
    For instance, unanimous agreement might be needed for hiring employees with high salaries, selling valuable partnership assets, incurring large expenses, taking on substantial new debts, assigning check signatories, releasing partnership claims, making unconventional use of equipment, or firing employees. Requiring unanimous agreement underscores the partnership’s dedication to collective decision-making and minimizes potential risks.
  • Tax Matters
    Most partnerships are pass-through entities for taxes, meaning profits flow directly to partners who report them on personal tax returns. However, IRS rules can treat partnerships as taxable units during audits based on partnership size and structure. Partnerships with up to 100 partners can opt out annually. Partnership agreements decide audit policies. If not opting out, a partnership must assign a representative to communicate with the IRS under new tax rules.

Relevant Documents To Prepare for a Partnership Agreement:

  • Partnership Withdrawal Notice
  • Partnership Interest Transfer Agreement
  • Partnership Amendment Agreement
  • Joint Venture Contract
  • Limited Liability Company (LLC) Operating Agreement
  • Business Strategy Plan
  • Concise Business Plan

Partnership Agreement FAQs

What are the implications of ending a partnership?2023-09-07T05:22:45+00:00

If a partnership is dissolved, partners should follow the dissolution procedures outlined in the partnership agreement. Debts and obligations should be settled, assets distributed, and necessary notifications made to relevant authorities.

How is taxation handled in a partnership?2023-09-07T05:09:33+00:00

In Hong Kong, partnerships themselves are not taxed. Instead, partners are individually responsible for reporting their share of partnership income on their personal tax returns.

What happens if there’s a dispute between partners?2023-09-07T05:09:29+00:00

The partnership agreement should outline dispute resolution procedures. In Hong Kong, mediation or arbitration is often recommended to resolve disputes amicably and efficiently.

Can a partnership agreement be changed after it’s established?2023-09-07T05:09:27+00:00

Yes, a partnership agreement can be amended if all partners agree to the changes. It’s important to document any changes in writing and ensure that all partners are aware of and agree to the modifications.

What’s the difference between a general partnership and a limited partnership?2023-09-07T05:09:24+00:00

In a general partnership, all partners are jointly and individually liable for the partnership’s debts and obligations. In a limited partnership, there are both general partners (liable) and limited partners (liable only up to their contributions).

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