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HONG KONG PARTNERSHIP COMPANY
General
Where a person joins with other people to conduct business
for getting profits, this is a partnership business. The Hong Kong Partnership
Ordinance defines partnership as the relation which subsists
between persons carrying on a business in common with a view
of profit. The law looks at the intention of the parties.
When a person receives a share of the profits of a business,
this is apparent evidence that he is a partner in the business.
A partnership can have partners up to a maximum of 20.
Partners' Rights and Obligations
The rights and obligations of the partners in a partnership
business, including their relations to outsiders, are governed
by their partnership agreement, which can be verbal or written,
and the Partnership Ordinance.
If the partners do not have an express term in their agreement
to govern a particular matter, relevant provisions in the
Partnership Ordinance will be implied into their relationship
to prescribe how they can deal with the matter.
(I) Relations of partners to persons dealing with them
1. Power of partners to bind partnership firm
Every partner is an agent of the firm and his other partners
for the purpose of the business of the partnership. If a partner
does any act for carrying on of the partnership business,
it will bind the firm and his partners. Certainly the act
should be carried on in the usual way business of the kind
carried on by the firm.
However, if the partner so acting has in fact no authority
to act for the firm in the particular matter, and the person
with whom he is dealing either knows that he has no authority
or does not know him to be a partner, the partner's act will
not bind the firm and his partners.
The outcome is logical because an outsider would not know
what has been agreed between the partners. As every partner
is an agent of the firm, it is right for the outsider to presume
that the partner has authority to sign the contract and he
would rely on such to hold the firm liable, unless he really
knows that this is not the case, e.g. he has been informed
in advance of the scope of authority of the partner in the
firm, then he can not impute that the firm is bound by the
act of the partner in that particular matter.
2. Liability of partners
Every partner in a firm is liable jointly with the other
partners for all debts and obligations of the firm incurred
while he is a partner. However, a judgment recovered against
any person liable in respect of any debt or damage shall not
be a bar to an action against any other person who is jointly
liable with him. In other words, a creditor has a judgment
against a partner liable in respect of the firm's debt cannot
be used as an excuse to prevent the creditor to hold and demand
other partners liable for the same debt. Therefore every partner
in a firm is not only jointly but also severally liable for
all the debts of the firm.
IMPORTANT : An investor may want to set up a partnership business
so as to reduce his risk in running the business, but in fact
he can be held liable for ALL the debts incurred in the partnership
business. Certainly if every partner can pay his share of
debts incurred by the firm, it is right to say that a partner
only needs to pay his own share. This also reminds an investor
how important his partners in a partnership are. They should
be reliable, trustworthy and what's more "rich"
enough to pay the debts incurred by the partnership firm.
3. Liability of firm for wrongs
Where, by any wrongful act or omission of any partner acting
in the ordinary course of the business of the firm, loss or
injury is caused to any person, the firm is liable to the
same extent as the partner so acting or omitting to act. This
is similar to the situation that an employer is vicariously
liable for the wrongful act of his employee in the course
of employment.
(II) Relations of partners to one another
The following are the main implied terms from the Partnership
Ordinance regarding the relations of partners to one another:
1. Variation by consent of terms of partnership
The mutual rights and duties of partners, whether reached
by agreement or defined by the Partnership Ordinance, may
be varied by the consent of all the partners.
It does mean that anything can be changed in a partnership
with the approval of all the partners.
2. Rules as to interests and duties of partners
Unless the partners have express or implied agreements, the
following rules shall apply to determine the interests of
partners in the partnership property, and their rights and
duties in relation to the partnership:
a. Capital and profits - partners
are entitled to share equally in the capital and profits of
the business, and must contribute equally towards the losses
sustained by the firm. In most partnerships this will not
be the case. If partners make different contributions to the
capital of the firm, this implies that the partners will share
profits of the business in accordance with their proportion
of contribution.
b. Indemnity - the firm must
indemnify every partner in respect of their payments and personal
liabilities incurred in the ordinary and proper conduct of
the business.
For example, if John is a partner in a firm and he has to
go to Beijing on the firm's business then the firm must pay
his travelling expenses.
c. Interest on loan - a partner
is entitled to interest at the rate of 8 per cent per annum
for the money lent by him to the firm, even if there is no
agreement as to the interest rate for the lending, in accordance
with the Partnership Ordinance.
d. Interest on capital - a partner
is not entitled to interest on the capital subscribed by him.
A capital is different from a loan. The capital is for investment
in the firm's business. The subscriber gets profits in return.
However, a loan will not entitle the lender to get any profits.
What the lender gets is interest charged for the loan.
e. Management - every partner
may take part in the management of the partnership business.
Although senior partners normally have a greater right of
management than junior partners, no partner should be excluded
from management unless otherwise agreed by the partners.
f. Remuneration - no partner
shall be entitled to remuneration for acting in the partnership.
However, a partner may take a salary as a manager in the business.
g. New partner - no person may
be introduced as a partner without the consent of all the
existing partners. It requires all partners' approval before
the firm can accept a new incoming partner.
h. Disputes about ordinary matters
- any decision in the business may be made by a majority of
the partners, unless it is in relation to the change of the
nature of partnership business or terms in the partnership
agreement, then the consent of all the existing partners is
required.
i. Partnership books -
the partnership books are to be kept at the place of business
of the partnership, and every partner may have access to and
inspect and copy any of them. This is to give every partner
the right to check the books and accounts of the firm, so
even if some partners who are not actively involved in the
business, they can at least have the right to check if the
firm's business is properly conducted.
Fiduciary Duty
Every partner has a fiduciary duty to the firm and the other
partners. "Fiduciary" generally means trustworthy,
honest, fair and reliable. There are three important duties
of partners to the firm. They are :
• duty to render true accounts and full information;
• duty to account to the firm for private profits; and
• duty not to compete with the firm.
1. Duty of partners to render accounts, etc.
Partners are bound to render true accounts and full information
of all things affecting the partnership to any partner.
2. Accountability of partners for private profits
If a partner derives any benefit from any transaction concerning
the partnership or from any use by him of the partnership
property, name, or business connection without the consent
of the other partners, the partner must account to the firm
for the benefit.
3. Duty of partner not to compete with firm
A partner cannot, without the consent of the other partners,
carry on any business of the same nature as and competing
with that of the firm. If he does so, he must account for
and pay over to the firm all profits made by him in that business.
It is therefore important for a partner to consult and get
the consent of the other partners before he carries on any
business to compete with the firm.
Partnership Agreement
A partnership agreement is to regulate the relationship between
the partners. The partners can express their preferences as
to how to run a business and what their personal concerns
are so that an agreement can be reached between the partners.
This can avoid future dispute.
Generally, a partnership agreement will provide terms on
the partners' relationship, such as :
• how to conduct the business (e.g. any
particular issues that require all partners' consent);
• finance (e.g. where to obtain finance,
if partnership in financial difficulty; will each partner
be responsible for providing a loan to the business, or to
be a guarantor for the business to obtain finance from a bank);
and
• termination (e.g. if partners are not
in good terms, how a partner can retreat from the business).
Procedure for Setting up Partnership
Persons who conducts business in Hong Kong under a partnership
agreement must register with the Business Registration Office of the Inland Revenue Department within one month of the commencement
of business. For details of the required procedures, please
browse the website of the Business Registration Office at:
http://www.ird.gov.hk/eng/tax/bre.htm
Related Topics
Costs and Procedures for registration of a partnership company through Kaizen
Features of Hong Kong Company
Hong Kong Company Registration Procedures
Hong Kong Company Registration
and Maintenance Costs
Overseas Company (Branch Office)
Sole Proprietorship
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