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PrimeLaw>Hong Kong Company Law (2nd Edition)>Chapter 2 Business Structures>2.1 Choosing the Appropriate Business Vehicle

2.1 Choosing the Appropriate Business Vehicle

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[N.B. Throughout this study guide, references to section numbers (e.g. Section 20) are to the Companies Ordinance (Cap 622) unless otherwise stated].

Types of Business Format Allowed under Hong Kong Law – Company, Partnership, Limited Partnership or Sole Proprietorship

Hong Kong has its own legal system and its sources of law are mainly based on a combination of common law/case law (law made by judges in court decisions) and
statute law (ordinances made by the Legislative Council). Under the laws of Hong Kong, there are six types of business structures:

1. Sole proprietorship – business owned by one person. This is the simplest form of business organisation. A sole proprietor does not need to draw up a formal
document to set up a business in Hong Kong, but the proprietor must register his or her business with the Inland Revenue Department for profits tax purposes.

2. Partnership – business owned by two or more persons. In law, a partnership is an association of two or more persons who jointly set up a business venture with a view
to profit.1 Partners do not need to draw up a formal document to establish a partnership, but it is advisable for them to have a written contract so that the partners are
clear about what they have agreed. A partnership can be formed simply by verbal agreement and it may be formed even if the business that was anticipated has not yet
started – see Khan v Miah and others [2001] 1 All ER 20 (HL).

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3. Limited partnership – Limited partnerships are governed by the Limited Partnerships Ordinance (Cap 37). Section 3(2) of the Limited Partnerships Ordinance provides
that a limited partnership must consist of one or more persons called general partners, who are liable for all debts and obligations of the firm, and one or more persons
to be called limited partners, who are at the time of entering into such partnership contribute a sum or sums as capital or property valued at a stated amount, and who
are not liable for the debts or obligations of the firm beyond the amount so contributed. Section 3(3) of the Limited Partnerships Ordinance provides that a limited
partner is not allowed, during the continuance of the partnership, either directly or indirectly, to draw out or receive back any part of this contribution, and if he or she
does so draw out or receive back any such part, he or she will be liable for the debts and obligations of the firm up to the amount so drawn out or received back. Section
3(4) of the Limited Partnerships Ordinance provides that a body corporate may be a limited partner. Section 4 of the Limited Partnerships Ordinance provides that every
limited partnership must be registered as such in accordance with the provisions of the Ordinance, or in default it is deemed to be a general partnership and every
limited partner is deemed to be a general partner.

A limited partner is not entitled to take part in the management of the partnership business and has no power to bind the firm, provided that a limited partner may by
himself / herself or his / her agent at any time inspect the books of the firm and examine into the state and prospects of the partnership business, and may advise with
the partners thereon. If a limited partner takes part in the management of the partnership business, he or she will be liable for all debts and obligations of the firm
incurred while he or she so takes part in the management as though he or she was a general partner. A limited partnership is not dissolved by the death or bankruptcy of
a limited partner, and the lunacy of a limited partner is not a ground for dissolution of the partnership by the court unless the lunatic's share cannot be otherwise
ascertained and realised. In the event of the dissolution of a limited partnership, its affairs will be wound up by the general partners, unless the court otherwise orders:
Sections 5(1), (2), (3) of the Limited Partnerships Ordinance (Cap 37).

To wind up a limited partnership, it can be done by presenting a winding-up petition to the Court under the Companies (Winding up & Miscellaneous Provisions)
Ordinance (Cap 32), and the provisions of that Ordinance relating to the winding-up of companies by the court and of the rules made thereunder (including provisions
as to fees), shall, subject to such modification (if any) as the Chief Executive in Council may by rules provide, apply to the winding-up by the court of limited partnerships,
with the substitution of general partners for directors: Section 5(5) of the Limited Partnerships Ordinance (Cap 37).

Registration Procedure

The registration of a limited partnership is effected by sending by registered post or delivering to the Registrar of Companies a statement signed by the partners
containing the following particulars (see section 7 of the Limited Partnerships Ordinance (Cap 37)):

• the firm name;

• the general nature of the business;

• the principal place of business;

• the full name of each of the partners;

• the term, if any, for which the partnership is entered into, and the date of its commencement;

• a statement that the partnership is limited, and the description of every limited partner as such;

• the sum contributed by each limited partner, and whether paid in cash or how otherwise.

Advantages of Limited Partnership

Advantages of a limited partnership include the following:

• ease of attracting investors since the only liability for limited partners is the capital they invest in the business;

• general partners can focus their efforts on running the business;

• limited partners can leave or be replaced without dissolving the limited partnership; and

• to be used in sophisticated financings and investments by reason of ability to share tax losses.

4. Limited Liability Partnership (LLP)

The principal disadvantage of an ordinary partnership is the personal and unlimited liability of the partners. A limited partner's liability is limited, but such partners
cannot take part in the firm's management. The partners of a number of professional firms were concerned regarding their liability for professional negligence for
reasons demonstrated in the following example.

Stephen & Co (SC) is a firm of accountants that operates via an ordinary partnership. It has 100 partners and more than 1,000 staff. It audits a number of extremely large
companies in Hong Kong. Grace, one of SC's partners, is engaged to audit the accounts of a large listed company, but she performs the audit negligently, which results
in SC being liable to pay $100 million in damages.

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As the liability of the partners is joint, all of the other 99 partners could be liable for Grace's negligence. To avoid this exposure to liability, a number of large accountancy
firms are limited liability partnerships (LLPs).

A Limited Liability Partnership (LLP) is a new form of partnership introduced by the Legal Practitioners (Amendment) Ordinance 2012 for law firms in Hong Kong. A
partner in a limited liability partnership is not, solely by reason of being a partner, jointly or severally liable for any partnership obligation that arises from the provision of
professional services by the partnership as a limited liability partnership as a result of a default of another partner or an employee, agent or representative of the
partnership.

A firm must comply with the following conditions at the time of the default in order that its innocent partners might be given protection under the Legal Practitioners
Ordinance (Part IIAAA):

1. the firm was an LLP;

2. the client knew or ought reasonably to have known that the firm was an LLP;

3. the firm had maintained a top-up insurance policy of not less than HK$10 million per claim; and

4. the firm had informed the client of the identity of at least one partner with responsibilities for overall supervision for the matter (“OSP”) within 21 days it
accepted instructions on the relevant matter and had kept the client informed of the identity of at least one OSP for the matter throughout the time that the matter
was handled by the firm.

5. Limited Partnership Fund

The Limited Partnership Fund Ordinance (Cap. 637), which took effect on 31 August 2020, introduces a new legal structure for private funds to be established in the form
of limited partnerships in Hong Kong. A limited partnership fund (LPF) is an onshore fund in Hong Kong in the form of a limited partnership primarily aimed at private
funds with private fund managers looking for a cost-effective, onshore LP-GP structuring solution as it facilitates and attracts private equity investment funds to set up
and register in Hong Kong.

Under s. 7 of Cap. 637, a fund is eligible to be registered as a limited partnership fund if, on its registration as a limited partnership fund–

(a) the fund is constituted by a limited partnership agreement, and the arrangements in the agreement do not contravene Cap. 637 or any other applicable law;

(b) the fund has one general partner and at least one limited partner;

(c) the general partner in the fund is–

(i) a natural person who is at least 18 years old;

(ii) a private company limited by shares incorporated under the Companies Ordinance (Cap. 622) or a former Companies Ordinance;

(iii) a registered non-Hong Kong company;

(iv) a limited partnership registered under the Limited Partnerships Ordinance (Cap. 37);

(v) a limited partnership fund;

(vi) a non-Hong Kong limited partnership with a legal personality; or

(vii) a non-Hong Kong limited partnership without a legal personality;

(d) every limited partner in the fund is–

(i) a natural person (whether in the person's capacity as trustee, or in the person's own or any representative capacity); or

(ii) a corporation, a partnership of any kind, an unincorporated body or any other entity (whether in its capacity as trustee, or in its own or any representative capacity);

(e) the fund's name complies with the requirements in section 8;

(f) registration of the fund by its name will not contravene the restrictions in section 9;

(g) the fund has an office in Hong Kong to which communications and notices may be sent;

(h) the fund is not set up for an unlawful purpose; and

(i) not all the partners in the fund are corporations in the same group of companies.

The fund's name must comply with the requirements in s. 8 of Cap. 637:

- must have an English name or a Chinese name or both

- English name: “Limited Partnership Fund” or “LPF” as the last words

- Chinese name: “有限合夥基金” as the last 6 character

S. 9 of Cap. 637 provides that a fund must not be registered as a limited partnership fund by a name –

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(a) that is the same as a name appearing in the LPF Index;

(b) that is the same as a name appearing in the index of limited partnerships kept under section 13 of the Limited Partnerships Ordinance (Cap. 37);

(c) that is the same as a name of a body corporate incorporated or established under an Ordinance;

(d) the use of which by the fund would, in the Registrar's opinion, constitute a criminal offence; or

(e) that, in the Registrar's opinion, is offensive or otherwise contrary to the public interest.

Except with the Registrar's prior approval, a fund must not be registered as a limited partnership fund with –

(a) a name that, in the Registrar's opinion, would be likely to give the impression that the fund is connected in any way with –

(i) the Central People's Government;

(ii) the Government; or

(iii) any department or agency of the Central People's Government or the Government;

(b) a name containing any word or expression for the time being specified in an order under section 10 of Cap 637; or

(c) a name that is the same as a name for which a direction of the Registrar has been given under section 42(1) or (2) or 43(1) of Cap. 637.

The LPF is not a legal person and there must be one general partner and at least one limited partner in an LPF.

A general partner (GP) is responsible for the management and control of the LPF. There is only one GP which may be an individual, a Hong Kong private company, a
registered non-Hong Kong company or a domestic or offshore limited partnership. The general partner has unlimited liability for all debts and obligations of the LPF.

Limited partners (LP) are investors who contribute capital to the LPF. There should be at least one LP, which may be an individual, a corporation, a partnership, an
unincoporated body or any other entity or body. A limited partner has liability limited to the amount agreed to be contributed by the LP if such LP takes no part in the
management of the LPF. Certain activities are explicitly excluded in Schedule 2 of the Limited Partnership Fund Ordinance to be regarded as management of the LPF,
including but not limited to serving on a board or investment committee of the LPF, taking part in a decision of admission or withdrawal of a partner and advising or
approving the GP or an investment manager (IM) on business, accounts and valuations.

An investment manager (IM) carries out day-to-day investment management activities of the LPF. GP must appoint in the capacity of the LPF an IM (who may be the GP
itself). An IM has to be a Hong Kong resident who is at least 18 years old, a company or a registered non-Hong Kong company.

A qualified auditor should be appointed to carry out annual audits of financial statements of the LPF.

6. Company – business owned by the company. A company is a separate legal person from the people who own the company's shares (i.e. the members or
shareholders) or its managers (i.e. the directors). Companies in Hong Kong can only be formed in two ways. Most small to medium sized companies in Hong Kong are
formed by following a specific registration procedure that is set out in the Companies Ordinance (Cap 622). Whereas some organisations such as the Mass Transit
Railway Corporation (by the Mass Transit Railway Ordinance (Cap 556)) or the Hong Kong Polytechnic University (by The Hong Kong Polytechnic University Ordinance (C
ap 1075)) are created by the passing of a special Ordinance through the Legislative Council. Most Hong Kong companies’ members also have the benefit of limited
liability, which means that even if the company fails financially and becomes liquidated, the members will only lose the amount they have invested in the company's
shares; they will not lose all their personal wealth. Company law is governed mainly by the Companies Ordinance, but case law is also a very important source of the law
relating to company administration, management and liabilities.

All business formats must also have a Business Registration Certificate from the Inland Revenue Department for profits taxation purposes. Thus, if someone wants to set
up a new business, they have to decide which business format is most appropriate. There are advantages and disadvantages to each format.

Differences between Company and Partnership

Company Partnership
Created by
Created by registration
agreement
Not a
Artificial legal entity with separate personality separate
legal entity
Unlimited
liability
Limited liability except
limited
partnership
Dissolution
Perpetual succession on demise or
leaving
Partnership
needs at
Company needs only one member
least two
members
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Raising
capital by
loans from
Raising capital by issuing shares or charges etc. partners or
taking on
new partners
etc.
Partners
have more
freedom to
carry out the
Powers and duties more closely regulated by legislation
business
without
legislative
control
More formalities, e.g. registration, annual return etc. Flexible
Shares not
transferable
except with
Shares freely transferable in public companies
permission
of all
partners
All partners
can take part
in the
Shareholders of a company cannot take part in the management of the company
management
of the
partnership
All partners
are agents of
Shareholders are not agents of the company
the
partnership
Privacy
Greater publicity generally
protected

1 Partnership Ordinance (Cap 38), Section 3(1) reads: “Partnership is the relation which subsists between persons carrying on a business in common with a view of
profit.”

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