Limited partnerships offer unique advantages for businesses, such as flexibility in management and limited liability for certain partners, but they also come with potential drawbacks. This article examines the pros and cons of forming a limited partnership to help you determine if it’s the right structure for your business.
The pros of setting up a Limited Partnership?
Nonetheless, you need to know that a limited partnership has its fair shares of advantages and disadvantages in equal measure. Some of the limited partnership include:
Liability Protection
Unlike general partnership where every partner is responsible for the company’s actions that include the company debts, liabilities, and wrongful acts, one of the key benefits of a limited liability partnership is its liability protection rights. This type of partnership helps in protecting other partners’ assets from the negligence of other partners that can lead to the company’s loss.
The limited liability partnership is advantageous on partners especially if the business risks a potential lawsuit on the negligence claims against it by other parties.
Tax Advantages
Individuals who are the owners of a partnership need to file their personal income taxes to the IRD (Inland Revenue Department), the tax authority in Hong Kong. However, the partnership entity is not responsible for filing its taxes. The company often passes its credits and deductions down to the individual partners for them to file on their personal taxes. The process can prove beneficial to partners who have a limited interest in the company or those who have a special tax requirement following their interests in other businesses.
Flexibility
The other significant importance of a limited liability partnership is the fact that it offers flexibility in business ownership. If you are one of the partners in a business, then the good news is that you will have the chance to contribute to the operations of the business. This means the partners will equally divide the company’s managerial duties and responsibilities based on their experience.
Besides, the company partners who have a financial interest can still decide not to engage in any of the managerial decisions but still maintain their ownership rights according to their percentage of shares in the company. Flexibility can equally prove disadvantageous if the partners make their decision based on their personal interests but not considering the company’s interests.
The Amount of Capital is Generous
Since a limited liability company brings together more than one person who is willing to contribute an amount towards running and managing the business, partnerships thus have a reasonable amount of money that allows them to smoothly run their business. A generous capital is more likely to increase the flexibility of the business as well as a surge in the amount of profit that the company is likely to make.
Easy to start
Unlike other business entities that are a little expensive to start, a limited liability is cheaper to start and operate. Besides, the partners could share responsibilities like capital contributions and managerial roles. Therefore, they do not have to limit the personal liabilities in case anything happens to the business. Further, the partners have an opportunity to increase their profits.
It has no turnover issues
If a Limited Partner wants to exit the partnership company then he or she can do so without necessarily having to dissolve the business. Additionally, they can be replaced if they choose to be.
Less paperwork
The process of forming a corporation is a bit tedious relative to when one is forming a limited liability partnership.
The Cons of setting up a Limited Partnership
The profits that are made is treated as a personal income
The managing partners in a limited partnership are taxed on their profit returns annually. The Inland Revenue Department expects all the partners in a limited company to file their personal taxes on the returns that they receive on the company every tax year. However, the business itself does not have to file taxes annually as with the case of private or public limited companies. The partners thus will be expected to pay for the self-employed tax in addition to other regular taxes in casethey are employed elsewhere.
General Partners in a limited partnership are held responsible for business debts
If a limited liability partnership runs into debt, then the general partners will be held personally responsible. This means they must use their personal assets to settle the company’s outstanding debts. Another disadvantage is that all partners share the debts created by any one partner. It means that if one partner makes a loss of say $ 100,000 and the other makes a profit of $ 50,000 then the two partners will equally share the $ 50,000 loss ($100,000-$50,000).
Difficulty in finding additional capital
The other problem that the limited liability partnership faces is the difficulty in raising more capital if there is a need to either expand the business or to roll out a new idea. Investors who come into limited liability partners will automatically assume the risks if they opt to participate in managerial roles. However, that is something that not many investors would like to engage themselves. This leaves the options of raising funds limited like selling more equities to passive investors. Acquisition of extra capital thus becomes one of the major capitals that investors in the limited liability business face.
Limited partners have not voting power
In a limited liability, the limited partners will typically receive dividend payments depending on the amount of profit that the business makes. Therefore, employees do not have to pay self-employment taxes but must pay capital gains tax. It happens so since the limited partners do not risk their personal assets in the case that the business makes a loss and they also do not participate in the day-to-day operations of the business.
Breach in agreement
The process of decision-making in a limited liability partnership requires all partners contribute. Additionally, considering every partner’s ideas can slow down the decision-making process. In addition to slowing down the decision-making process, it might also lead to disagreements. If the partners fail to come to a consensus, then it could result in a breach of the agreement that might sabotage the entire business operation all even result in the dissolution of the business in case the disagreement persists.
Summary
In summary, the limited liability partnership business has both pros and cons that can either lead to successful operations or termination of the company before it achieves its goal. The decision to venture into such a business is thus significantly dependent on the decision of the partners and their ability to bear the risks as well as cope with the cons that might come along with starting such a business in Hong Kong. We at Paul hype page will assist you with the incorporation process including the relevant requirements if you are willing to start and operate a limited liability partnership in Hong Kong.
FAQs
Yes, a limited liability company is one of the most common business entities that exist in Hong Kong and it is usually preferred since it is a separate legal entity. Partners, unless in the general partnership, cannot lose their personal properties in case that a business makes a loss.
The key difference between a general partnership and a limited liability partnership is the fact that in general partnerships all the partners are always held responsible for all the obligations of the business while in limited liability partnership, an innocent partner is not at risk of losing personal assets in the case that the business runs into debt
Anyone in Hong Kong can start a limited liability partnership as long as you meet all the predefined qualifications that are permitted to venture into the limited liability partnership in Hong Kong
The straight answer is no. Since all the profits and losses are passed to the individual partners, they are thus responsible for filing their personal income tax as per the amount of money that they receive from their shares.
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