A partnership is a form of business where two or more people come together intending to conduct a business. Partners will share the business responsibilities, the profits and losses that comes with the business operations.
There are three (3) types of partnership businesses that the partners who have decided to do business can start and operate. The partnerships include:
Can be formed by two or more person. It is as simple as two people agreeing to join hands in conducting business activity. Liabilities and profits are evenly distributed.
It requires at least two members to form. Some general partners enjoy more control over the partnership and are exposed to greater partnership liability. Limited partners have no control over daily decisions, they are not liable to debts or legal obligations of the business.
Are formed by at least two members who can be companies or individuals. There is a legal agreement specifying the level of control for each partner.
What are the advantages of choosing partnerships over other forms of business?
It is easy to set and maintain over a short time. The process requires a business owner to only register with the Inland Revenue Department’s Business Registration Office. This is as stated in the Business Registration Ordinance (Cap. 310): that any person carrying on sole proprietorship or partnership business shall apply for business registration within one month of the commencement of such business.
The ability to offer key employees the potential to one day become a partner, will motivate them to work hard. This results in making the business profitable and the employees more encouraged.
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What are the disadvantages of a partnership business?
The partnership business also has its own drawbacks, and as an investor, there are certain disadvantages of starting and operating a partnership business.
Unlike corporations that shield the business owners from being liable, partnerships have individual liability. All the partners will then become liable for their actions on behalf of the companies as well as become liable for other partners.
You lose out on various corporate tax incentives available in business-friendly Hong Kong. Including zero tax on business activities conducted overseas. If your business may include dealings in foreign markets, a partnership will require you to incorporate in those markets and pay the relevant taxes there.
Alternatives of partnership
One alternative to a partnership is to instead incorporate a private limited company. This will provide a separate entity from the owner of the business. This means that the owner is not personally liable for the finances of the business and that banks and financial institutions will be more likely to loan money to the private limited company. Read more on how to register your company in Hong Kong. Private Limited companies can fully utilize corporate tax incentives in Hong Kong. This includes not having to pay tax on business activities conducted overseas.
In drafting a partnership agreement, the following elements should be included:
The name and address of the partnership
The duration of the partnership. This states the termination date or a clause stating that the partnership exists until all partners agree to dissolve it or upon the death of a partner.
The purpose of the business. This can be left open for purpose of future expansion or stated to avoid ambiguity.
Bank account information. In this section, you list the bank accounts that apply to the partnership business.
Contributions of partners. A partner’s contribution may be in cash or in-kind e.g., property or service rendered or service to be rendered.
Compensation for partners. These details the distribution of profits and/or salary.
Management authority. Here you state the obligations and operational responsibilities of each partner. You also state which decisions require the consent of all partners and which decisions can be voted on. You also state what happens in case of a tie.
Terms to be adhered to when adding new partners. State the terms that may require the inclusion of new partners and how to go about accepting new partners in the business setting.
Working hours and vacation periods. State the period in which the partnership is opened or closed each day or as a vacation period.
The outside business activities that partners may engage in. You can list what partners can do or what they cannot engage in terms of business activities so that to avoid conflicting interests.
Disposition of the name of the partnership should a partner leave
How to solve disputes in the partnership
Terms in which the partnership can be bought or sold
In summary, anyone who intends to start and run a partnership business in Hong Kong must first register with the Business Registration Office of the Inland Revenue Department (IRD) within the first month of starting the business. It is important to note that both the Limited Partnership and the Joint Venture are treated the same way when it comes to taxation and both are legal entities in the Hong Kong government.
At Paul Hype Page, we are well versed in corporate tax planning and can help ensure you make full use of the various incentives for businesses, to ensure you do not overpay for your taxes. This includes knowledge on existing Double Tax Avoidance agreements in the region and around the world, for wherever you decide to expand your business.
What is a partnership in Hong Kong? FAQs
What is a conflict of interest in the partnership business?Tiwi2020-12-21T03:31:24+00:00
A conflicting interest in the business sector is a business activity that exists as competition to the business or organization in which you are a partner or an employee. Any activity that competes for the same customers and contracts as your partnership or your employer.
Conflict of interest can lead to one being sued for compensation in terms of harm caused. This can be done through termination of partnership or dismissal from the employment and sometimes both compensation and termination/dismissal can be dole out to the perpetrator.
Because of this, partners, employers, and any relevant business relationship is usually advised to state in clear terms the activities that comprise conflict of interest right at the time of drafting a contract.
What are partnership agreements?Tiwi2020-12-21T03:31:05+00:00
Reliability. When forming a Hong Kong partnership, look for someone you can rely on.
Ability to build a strong relationship: Your potential partner should be well connected to you in such a way that they complement your small circle of the client network.
Passionate: Your potential partner should be more if not equally committed to your business just as you are committed.
Compatibility: Choose someone who has skills that complement what you lack as opposed to choosing someone with whom you have everything in common.
Open-Minded: when looking for a partner to form a partnership with, look for someone who can accept different perspectives or ideas in the way you look at things.
Risk-taker: this characteristic cannot be stressed enough. If you partner with someone afraid to jump into the unknown, your business will not prosper. Because in business, you do not know for sure how your investment will turn out. You can only hope for the best.
Accountable and Responsible: choose a partner who is accountable for each action they take and one who is responsible. You don’t want to follow up with a partner to fulfill their end of the bargain.
Creativity: this is the ability to be able to come up with fresh original ideas consistently. This partner will help you create a brand and a unique image in the business sector.
What is the difference between limited partnerships and joint ventures?Tiwi2020-12-21T03:28:05+00:00
Limited partnership is less flexible than a joint venture.
A limited partnership must be formed with at least one limited partner and one general partner, unlike joint ventures whose terms vary according to the specific needs of its members.
Limited partnerships are usually formed to offer limited liability to some of its partners and in the process attract investment while joint ventures, on the other hand, are forced to develop a new product or to invest in a domestic partner.
Joint ventures are formed for a specific period until it is dissolved legally.