Limited Partnership in Hong Kong
When setting up a business entity in Hong Kong, there are several structures to choose from. One of the available structures is a limited partnership, which we will explain in this article. Partnerships are suitable for business partners looking to work on commercial activities together.
What is a Limited Partnership?
A partnership in Hong Kong is a business entity established and co-owned by two or more parties with a view to sharing profits. There are two types of partnerships in Hong Kong: General Partnership and Limited Partnership. Both are governed by the Partnership Ordinance.
In a general partnership, every partner in the company is personally liable for the business’s debts and liabilities. In addition, a general partner can be held responsible for the actions of other partners in the business.
In a limited partnership, there are both general and limited partners. A limited partner’s liability is limited to the amount of their capital contribution to the partnership. They are not personally liable for any business debts or wrongful actions of other partners. However, limited partners cannot be involved in the management and decision-making process of the business. That has to be done by a general partner, who will be responsible for the day-to-day operation of the business.
As a business entity, you need to register with the Registrar of Companies in order to take the form of a limited partnership. When the entity is not registered, it becomes a general partnership by default.
Advantages and disadvantages of a Limited Partnership
There are several advantages to a limited partnership as set out below.
- Business liability: Limited partners are not personally liable for business debts or the actions of other partners in the business.
- Flexibility: Limited partners can be replaced without dissolving the partnership. Business profits can be distributed any way within the boundaries of Hong Kong laws.
- Investment is separate from management: As the general partner(s) and limited partner(s) in a limited partnership have different roles, greater efficiency can be achieved. General partners have the freedom to run the business, while limited partners can earn a passive return on their investment without getting involved in the business operations.
- Taxation: In Hong Kong, the assessable profits of a limited partnership are computed and charged in the name of the partnership as a separate legal entity. However, if a partnership is comprised of both individuals and corporations (on which a higher tax rate is applied when compared to individuals), or if some partners have losses to carry forward from prior years’ tax assessments, or the individual partners elect for personal assessment, the partnership’s assessable profits/tax loss will first be allocated to each partner based on their profit sharing ratio and tax liabilities are calculated individually.
- Less compliance: A limited partnership has fewer compliance requirements than companies, although it is required to hold annual general meetings and create a detailed partnership agreement.
Besides the advantages, there are some disadvantages as well, possibly making it unsuitable to choose a limited partnership in some cases.
- Personal liability of general partners: General partners in a limited partnership have unlimited personal liability. It may be difficult to find suitable partners willing to take on this risk in the business.
- Limitations for limited partners: Limited partners are required to be passive investors only, which may be an advantage in many cases. However, they are not allowed to be involved in the decision-making process, dissolve a partnership, or consent to the introduction of new partners.
Comparison with other business entities
The business structure you choose when setting up your company can impact the success or failure of your business. Therefore, it is important to know how a limited partnership compares to other business entities.
Here we will compare the limited partnership with the most common entity type in Hong Kong, the Limited Liability Company (LLC).
|Separate legal identity||No||Yes|
|Business liability||Limited for limited partners, unlimited for general partners||Limited|
|Perpetuity and succession||Enduring structure||Enduring structure|
|Ease of expansion||Less easy than LLC to raise capital; Moderate business growth||The easiest entity to raise capital; Strong public perception regarding financial stability|
|Transfer of ownership||Difficult to transfer business ownership||Easy to transfer partial or full business ownership|
|Public perception||Moderate public perception||Strong public perception|
|Dissolution||Complex, expensive, and time-consuming||Complex, expensive, and time-consuming|
How HKWJ can help
A limited partnership is ideal if you are looking for a simple business setup with limited business risk. You could consider running a business through a limited partnership to potentially enjoy a lower tax rate in Hong Kong.
At the HKWJ Group we can help in registering and setting up your limited partnership and creating a detailed partnership agreement. Our experienced tax professionals can advise you regarding tax planning in the partnership.
In addition, we provide company secretary services and cloud accounting to keep you compliant with the legal and tax obligations.
Feel free to get in touch with us via the form below for more information about setting up your limited partnership or tax advice.