Are you planning to start a business with partners in Hong Kong? A partnership agreement is a key tool to formalize your partnership. This agreement outlines the terms and conditions governing the business relationship among partners, who each own a portion of the business’s assets and liabilities while contributing diverse skills and expertise.
A partnership agreement helps govern these relationships to prevent disputes and ensures smooth business operations. This guide covers everything you need to know about partnerships in Hong Kong, including how to draft a partnership agreement. At the end, you’ll find a downloadable partnership agreement template.
A. What is a Partnership?
A partnership is a formal arrangement between multiple partners who share the management and profits of a joint business or venture.
Per the Partnership Ordinance (Cap. 38), “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”
The rights and obligations of partners are governed by the partnership agreement (oral or written) and the Partnership Ordinance. Key features include:
- Each partner acts as an agent of the firm and other partners, with the power to bind them for actions taken in the course of business.
- Partners may be jointly liable for the business’s debts and liabilities.
- Partners have a fiduciary relationship, owing duties of good faith, including:
- Rendering true accounts and full information
- Accounting for private profits
- Not competing with the firm
What are the Advantages of a Partnership?
General partnerships offer several advantages:
- Easier to raise capital
- Simple business structure
- Easy formation
- Less formality in creation and management
- More tax-efficient than corporations, as partners can offset losses against other income, reducing taxable income
What are the Drawbacks to a Partnership?
However, general partnerships have drawbacks:
- No separate legal entity, leading to uncertainty without documentation
- Joint and unlimited liability for debts, with no protection for personal assets (except for limited partners)
- Partnership ends if a partner dies or goes bankrupt, unless otherwise agreed
- Decision-making requires consensus, and disagreements can terminate the business
B. What is a Partnership Agreement?
A partnership agreement is a legally binding document that outlines how the business is run and structures partner relations before the partnership forms. It details each partner’s roles, contributions, capital distribution, and procedures for termination.
Why Do I Need a Partnership Agreement for My Business?
While partnerships can be formed informally, this is risky due to unlimited liability for partners’ actions. Partnerships face uncertainties, and partners share obstacles and liabilities until dissolution. A formal partnership agreement is essential to:
- Clearly define rights and responsibilities
- Reduce disputes and misunderstandings
- Serve as evidence in legal disputes
- Override default legal provisions that may be unfavorable
Drafting a comprehensive agreement is complex but necessary to minimize costly conflicts.
C. What are the Different Types of Partnerships in Hong Kong?
Hong Kong recognizes three partnership types:
- General Partnership: Governed by the Partnership Ordinance (Cap. 38)
- Limited Partnership: Governed by the Limited Partnerships Ordinance (Cap. 37) and Partnership Ordinance (Cap. 38)
- Limited Liability Partnership (LLP): Available only to law firms under the Legal Practitioners Ordinance (Cap. 159)
Choosing the right structure impacts paperwork, risk exposure, liability, taxes, and capital-raising ability.
1. General Partnership
In a general partnership, partners face unlimited liability, meaning each is liable for all business decisions and liabilities. It requires at least two partners, with profits typically shared equally unless otherwise agreed. Advantages include:
- Simple setup
- Less expensive than a corporation
- Flexible internal structure
While a written agreement isn’t required, it’s recommended to avoid disputes.
2. Limited Partnership
A limited partnership includes at least one general partner (with unlimited liability) and one or more limited partners (liability limited to their capital contribution). General partners manage the business, while limited partners cannot participate in management. Advantages include:
- Privacy of venture details
- Ability to change limited partners without dissolving the partnership
- Limited liability for limited partners
- Flexibility in replacing limited partners
3. Limited Liability Partnership (LLP)
Governed by the Legal Practitioners (Amendment) Ordinance 2012 (Cap. 159), LLPs are exclusive to solicitors and foreign law firms. Partners are not personally liable for liabilities arising from services or actions of others in the LLP.
D. How to Draft a Partnership Agreement?
1. What Should I Include in My Partnership Agreement?
Include general information like the business name, partner names, objectives, and operational details. Have lawyers review the agreement to ensure all critical terms are covered. A free template is provided below.
2. What is the Role of Each Partner? How Should Partners Divide Capital Contributions and Ownership?
Capital (time, resources, money) is vital, but contributions may vary. Some partners may contribute expertise rather than funds. The agreement should specify each partner’s role to avoid confusion.
Ownership typically correlates with capital contributions unless otherwise stated. To prevent unfair scenarios, consider a membership vesting scheme, where partners earn interests based on conditions. Essential elements include:
- Specific roles of each partner
- Whether all partners can manage
- Initial and anticipated capital contributions
- Responsibility for additional capital
- Ownership percentages
- Vesting scheme details
3. How to Divide Profit and Loss Between the Partners?
Financial disagreements can destroy partnerships. Profit and loss division is complex and depends on the business’s scale. For expanding businesses, profits may be reinvested, reducing payouts. For smaller businesses, partners may receive profits earlier. Consider:
- Percentage of profits reinvested
- Each partner’s share and eligibility
- Proportional or equal profit allocation
- Distribution timing
- Allowance for draws
- Priority for distributions
4. Who Will Be Responsible for Making Decisions?
Decision-making is critical to avoid stagnation. The agreement should outline decision-making processes. Discuss:
- Voting system or delegation for consensus
- When a single partner can make minor decisions
- Major decisions requiring unanimous votes
- Definitions of major vs. minor decisions
5. How Will Disputes Be Resolved?
Disputes are inevitable. A clear dispute resolution process reduces costs. Consider:
- Mediation as a first step
- Arbitration for settling differences
- Direct termination without mediation
- Role of a business advisory board
Court should be a last resort due to high costs. A well-written agreement can resolve disputes without intervention.
6. What Happens if One Partner Dies or Becomes Disabled/Incapacitated?
Discussing death or disability is uncomfortable but necessary. The agreement should outline procedures to minimize disruption. Consider:
- How surviving partners continue
- Whether the deceased/disabled partner’s share is retained
- Immediate dissolution upon such events
- Use of a buy-sell agreement
7. What Happens if Partners Want to Terminate the Relationship?
Business separations are common. The agreement should detail termination procedures:
- Steps to legally end the partnership
- Governing laws
- Required forms and documents
- Asset and interest distribution
- Business valuation process
- Sale conditions
E. Procedure for Setting Up a Partnership in Hong Kong
Partnerships must register with the Business Registration Office within one month of starting operations, using Form 1(c), proof of identity, and applicable fees. A business registration certificate must be displayed at the business address. Additional licenses may be required based on the business nature.
Limited partnerships must register with the Companies Registry using Form 1. Without registration, they are treated as general partnerships. Changes to registered particulars must be reported via Form 2 within seven days.
Limited liability partnerships require a business registration certificate and must:
- Notify the Hong Kong Law Society within seven days before commencing
- Submit commencement notification within 14 days
F. Partnership Agreement Template
The complexity of business makes predicting challenges difficult. A partnership agreement is essential for preparation. Download our free Partnership Agreement Template to get started. Consult lawyers after customizing to ensure all necessary protections are included.
Please note that this is a guide on the general position of Partnership Agreements under the Laws of Hong Kong SAR and does not constitute legal advice.
