Are you looking to start a business with one or more partner(s) in Hong Kong? If so, you might want to consider conducting your business in the form of a partnership by entering a partnership agreement. A partnership agreement is an agreement between multiple partners that sets out the terms and conditions of the partnership for the business. The general idea behind a partnership is that each owner owns a portion of the business’ assets and liabilities and contributes to the business with their diverse skills and expertise.
Having a partnership agreement alongside this arrangement helps to govern and formalise their relations to avoid dispute. It also ensures that the firm is overall running smoothly.
We will be discussing everything you need to know about partnerships and how you can prepare a partnership agreement. Make sure to stay to the end as we have attached a partnership agreement format for downloading.
A. What is a partnership?
A partnership is a formal arrangement between multiple partners who share the management and profits of a joint business/venture.
As per the Partnership Ordinance (Cap. 38 of the laws of Hong Kong）, “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”
In partnership, the rights and obligations of the partners are governed by their partnership agreement and the Partnership Ordinance. The agreement may be oral or written
The primary features of partnership are as follows:
- Each partner is an agent of the firm and the other partners i.e. the partners have the power to bind the firms and the other partners for any actions carried out in the course of partnership business.
- Every partner may be held jointly liable with other partners for debts/liabilities of the business.
- There is a fiduciary relationship between partners – this means they owe a duty of good faith towards each other. The partners have three key duties to the firm i.e. the duty to render true accounts and full information, duty to account for private profits and duty to not to compete with the firm
What are the advantages of a partnership?
There are multiple advantages to general partnerships, such as:
- Easier to raise capital
- Simple business/working structure
- Easy business formation
- Less formality in creation and management
- More tax-efficient compared to a separate corporate entity because the partners can offset their loss against their other income so the aggregate taxable income is lower
What are the drawbacks to a partnership?
However, several adverse problems arise under the structure of the general partnership:
- There is both a lack of separate legal entity and certainty (especially when the parties do not document the arrangement)
- There may be joint and unlimited liability for debt and obligation of the partnership by the partners. Unless its a limited partner, partners can be held personally liable for the debts of the business. Therefore, there is no protection for personal assets
- If any of the partners die/go bankrupt then the partnership will end, unless the parties agreed otherwise in the Partnership Agreement.
- All the partners need to agree to make a decision, therefore a disagreement could lead to the end of the business.
B. What is a partnership agreement?
Once you have weighed the pros and cons of creating a partnership, you will need to move onto the next step, which is creating a partnership agreement. This is essential to sustain a long-running partnership relationship.
A partnership agreement is a legally binding document that outlines how a business is run and allows the partners to structure their relations to best suit their business before the actual formation of the partnership. In general, a partnership agreement details the roles of each partner, their contributions, the distribution of capital, as well as the procedures that need to be taken to terminate the partnership.
Why do I need a partnership agreement for my business?
Technically, business relationships can be established through a mere handshake between partners. However, this is too risky for a partnership, as you can be held to unlimited liability by the actions of your partner(s) once you enter a partnership. Partnerships are swarmed with uncertainties, and partners are expected to face obstacles and liabilities together until the relationship is officially dissolved. As such, you should not enter a business partnership with anyone until you and your potential partner(s) sit down and discuss every detail of the partnership arrangement and draw up a formal partnership agreement.
The primary aim of having a partnership agreement is to have all rights and responsibilities of partners set out clearly, such that all involved partners know their roles in the business relationship. Your partnership agreement will therefore need to set out protective measures to reduce the likelihood of potential disputes and misunderstandings. By being clear and comprehensive, it will ensure that even if a dispute arises in the future, a formal partnership agreement in writing serves as solid evidence for both parties if they ever run into legal implications.
Whilst drafting a comprehensive partnership agreement is not simple, it is a necessary step for your business, and will ultimately help reduce potentially expensive conflicts in the long run. In addition, prevailing law and legislation for partnership in Hong Kong may have authority over several aspects of your business in the absence of a written agreement, which may result in legal outcomes that are unfavourable to you.
C. What are the different types of partnership in Hong Kong?
In Hong Kong, there are three types of partnership:
- General Partnership governed by the Partnership Ordinance (Cap. 38 of the laws of Hong Kong)
- Limited Partnership governed by the Limited Partnerships Ordinance (Cap. 37 of the laws of Hong Kong) and the Partnership Ordinance (Cap. 38 of the laws of Hong Kong)
- Limited Liability Partnership (LLP) which is available only to the law firms under the Legal Practitioners Ordinance (Cap.159).
It is important to choose the right business structure as it will not only impact the paperwork you need to establish your business but also affect your exposure to risk, personal liability, taxes and ability to raise capital.
Therefore, once you have decided to enter into a partnership, you must determine whether the partnership should be a General partnership or a Limited partnership.
1. General partnership
Under a general partnership, there is unlimited liability, meaning that each partner is liable for all business decisions made by other partners and all liabilities of the venture.
It consists of a minimum of 2 partners and each partner is personally responsible for the business debts/liabilities. The partners have the power to bind the partnership and the other partners. Generally, the profits are shared equally amongst the partners unless otherwise agreed by the partners. There are several advantages of having a general partnership such as:
- Simple set up procedures
- Less expensive than setting up a corporation
- Flexible internal structure
Setting up general partnership in Hong Kong is fairly simple as it does not require a written agreement although it is advised to have an agreement in writing to avoid dispute.
2. Limited partnership
Limited partnership consists of at least one or more limited partners and one general partner. The general partners are responsible for the management and operations of the business while the limited partners cannot participate in the management and decision making processes. The liability of general partner is unlimited liability while that of the limited partner liability is upto to the amount of capital contributed in the partnership.
The advantages of a limited partnership are:
- Sensitive details of the venture can remain completely private between partners
- Limited partners can be changed without dissolving the whole partnership
- Limited liability – limited partners are not liable for other debts and liabilities accrued by other partners
- Flexibility – limited partners can be replaced
3. Limited liability partnership (LLP)
Limited Liability partnership is governed by the Legal Practitioners (Amendment) Ordinance 2012 (Cap. 159 of the laws of Hong Kong) and was mainly introduced for solicitors firms and foreign law firms in Hong Kong.
The key characteristic of LLP is that the partners are not personally liable for any liability arising out of services rendered by the LLP and/or as a result of the actions /omissions of another partner, employee or agent of the LLP.
Therefore, LLPs as a special type of partnership were introduced only for law firms (including foreign law firms) in Hong Kong.
D. How to draft a partnership agreement?
1. What should I include in my partnership agreement?
General information such as the name of the proposed business, names of the partners, the main objective and general business information of the proposed business should be included in the partnership agreement.
You and your partners should always set out details of your potential business’ operation to facilitate effective communication between relevant parties. Read the article below to learn more about the important things to be aware of when drafting a partnership agreement! You can also scroll to the bottom of the article to download FREE TEMPLATE of partnership agreement.
In addition, you and your partners should let lawyers review your partnership agreement before signing it to ensure all important terms and issues are sufficiently dealt with and are included in the partnership agreement.
2. What is the role of each partner? How should partners divide capital contributions and ownership among themselves?
Capital such as time, resources, and money are essential to starting a business, meaning that each partner should share the responsibilities of contributing. However, it is common for partners to not contribute an equal amount of capital. Some might prefer to contribute more of their managerial and operational expertise rather than injecting monetary funds. Regardless, the specific roles of each partner should be set out in the agreement to avoid misunderstandings down the road.
The amount of ownership a partner is entitled to in a business is usually tied to his capital contributions unless otherwise specified in the partnership agreement. It may be more effective for a business to divide contributions and ownerships to prevent unfair situations such as one partner remaining entitled to his/her original portion of ownership even though he/she stops contributing to the business. Hence, the details of the distribution of ownership and the conditions of retaining ownership must be specified in this type of agreement.
As an unfair ownership interest decreases the attractiveness of the business to new investors, you might consider adding a clause of membership vesting scheme. A partner subject to a vesting schedule would earn his/her interests when he meets a certain condition; this scheme prevents a partner from getting more than the legitimate limit.
Here are some essential elements for your partnership agreement to include:
- Specific roles of each partner;
- Whether all partners can participate in the management;
- Amount of capital each partner must contribute to starting the business;
- Amount of anticipated capital each partner would be responsible for;
- In the scenario where the business requires more capital than expected, who should be responsible for the additional contributions;
- Percentage of ownership of each partner; and
- Whether partners are subject to vesting membership of your business, and relevant details of the scheme.
3. How to divide profit and loss between the partners?
We all know the old saying – money is the root of all evil. Unfortunately, financial disagreement is a common cause for the destruction of partnerships. Division of profit and loss between partners is quite complex and tough to do – especially before starting your partnership.
Before talking about profit distribution, you and your partners should discuss the future of your business as the change in scale of development will inevitably cause the financial distribution to change from time to time. For example, if you and your partners are aiming to expand your business shortly after its formal launch, each partner will be entitled to a lesser profit share as a large portion of the payback will go back into the business. On the other hand, if the business is a mom-and-pop style or a small-scale business, partners might be entitled to receive profits early on.
To reduce direct conflict throughout the whole business relationship, the following should be considered by you and your partners before drafting your partnership agreement:
- What percentage of the profits will be reinvested back into the business?
- How much will each partner get? Are all partners are entitled to distribution (in the first place)?
- Will allocation of profits be made in proportion to partners’ ownership or to be made equal to each partner regardless of their ownership?
- When can partners expect to receive their distribution?
- Are partners will be permitted to take draws out of business?
- Which partner will have priority to get their distribution first?
4. Who will be responsible for making decisions?
Making regular decisions is crucial to every business in every industry. Partners might come across situations where their business is stagnant if the decisions were held unresolved. Hence, to reduce disputes arising whilst decisions are pending, a well-written partnership agreement should set out how partners tackle decision-making processes and the details of the relevant procedures.
Here are some questions you need to discuss with your partners to reduce potential arguments:
- Whether consensus is reached by a voting system or by delegation?
- Under what circumstances can minor decisions be made by a single partner?
- What types of major decisions require a unanimous vote by partners?
- What constitutes a major or minor decision?
Note that the list above is not an exhaustive list of questions for you to consider as you and your partners might have other decision-making procedures in mind that are more suitable for your business.
5. How will disputes be resolved?
Disputes are inevitable in business relationships, setting out details of the dispute resolution process in your partnership agreement is particularly important for both you and your partners to reduce unnecessary costs when a dispute, unfortunately, arises.
Here are some questions you might want to consider before writing them down in the partnership agreement:
- Whether mediation would be the first step for you and your partners when a particular dispute becomes deadlocked?
- Whether you and your partner wish to rely on arbitration to settle differences?
- Whether you and your partner wish to directly terminate the partnership relationship without seeking mediation/arbitration?
- What is the role of your business advisory board when disputes arise?
Going to court should always be your last resort as lawsuits are extremely costly. Again, we want to emphasise the importance of having a well-written partnership agreement – disputes can be settled without intervention if clear procedures are outlined beforehand. No court intervention necessary.
6. What happens if one partner dies or becomes disabled/ incapacitated?
It might be weird talking about death and unfortunate situations with your partners, but you should still do so as it would be stressful for the remaining partners to continue the business after their occurrence without clear guidance as to what to do. Making arrangements beforehand by setting out the relevant procedures clearly in partnership agreements can minimize the effect on your business.
Here are some questions you need to discuss with your partners beforehand:
How will other partners carry on the business?
- Whether the deceased/ disabled/ incapacitated partner would take over the original share of the partnership?
- If one partner dies or becomes disabled/ incapacitated, whether the partnership relationship will dissolve immediately?
- Whether a buy-sell agreement would be involved?
7. What happens if partners want to terminate the relationship?
Again, while it is natural to avoid talking about a future separation before even starting the business, business separations happen all the time. You must include details of the process and procedures for the termination of business relationships to avoid unnecessary expenses.
Here are some elements you should include in your partnership agreement:
- What steps should be taken to legally end the partnerships?
- What laws govern the dissolution process in your jurisdiction?
- What forms and documents are you legally compelled to submit?
- How assets and interests are dealt with upon termination?
- What are the details of the valuation process of your business?
- Where can the business be sold and under what circumstances?
E. Procedure for setting up partnership in Hong Kong
If you are conducting business in the form of partnership then you must register your business with the Business Registration Office within one month after commencement of business activities. If you fail to provide proof of commencement of operations then your application for registration will be rejected. To register your business, you need to submit an application form – Form 1(c), provide your proof of identity and pay the applicable business registration fee and levy.
A copy of the business registration certificate must be displayed in a conspicuous place at the business address. In addition to business registration, other licenses may also be required depending on the nature of business.
A limited partnership must also be registered with the Companies Registry.. In absence of registration, it will be considered a general partnership. For registration with the Company Registry,, you need to submit the Form 1 – Application for registration of a limited partnership along with any applicable registration fee to the Companies Registry. Upon registration, you will receive a Certificate of Registration of a Limited Partnership.
In the event of any change in the registered particulars of the limited partnership, you must file a statement in the prescribed Form 2 – Notice of change in the limited partnership and deliver it within 7 days to the Registrar of Companies for registration
A limited liability partnership must also obtain the business registration certificate and it should also:
- notify the the Hong Kong Law Society in a prescribed manner within 7 days before commencement of the limited liability partnership; and
- Submit the commencement notification to the law Society within 14 days of commencement.
F. Partnership agreement template
The complexity of conducting business makes it almost impossible for you and your partners to predict all possible obstacles and challenges lying in the future. Hence, full preparation remains the only way to cope with these uncertainties.
We understand that writing a partnership agreement from scratch is very difficult – so instead of stressing, download our FREE PARTNERSHIP AGREEMENT TEMPLATE below before you start writing one! We also would advise you to consult lawyers after customizing your partnership agreement with the templates below to make sure the necessary elements needed to protect your business venture are all included.
Please note that this is a guide on the general position of Partnership Agreements under the Laws of Hong Kong SAR . This does not constitute legal advice.