Limited partnerships have general partners, who manage the business and take on full liability, and limited partners, who invest money but are not responsible for debts.
General partners bear unlimited liability, while limited partners only risk losing their investment. This structure protects investors while requiring general partners to take on financial risks.
LPs benefit from pass-through taxation, meaning profits are only taxed once at the partner level, avoiding double taxation faced by corporations.
Limited Liability Companies (LLCs) offer stronger investor confidence, easier ownership transfers, and full liability protection, making them more attractive for raising capital compared to LPs.
Registering an LP in Hong Kong is quick and straightforward, with fewer legal regulations, but general partners must carefully manage risks and responsibilities.
Hong Kong is a great place to start a business because it's easy to set one up. But choosing the right type of business is important.
If you want to run a business with others while also protecting yourself from big risks, a limited partnership might be a good choice. In this article, we'll explain how it works, why it can be helpful, and what to think about before deciding.
What Is a Limited Partnership?
A limited partnership (LP) is a type of business where two kinds of partners work together: general partners and limited partners. Each has a different role in running the business.
- General partners make decisions and run the business, but they also take on full responsibility for any debts or problems. This follows the rules in section 38 of the Partnership Ordinance.
- Limited partners invest money in the business but don’t make decisions. They only risk losing the amount of money they put in. This follows the rules in section 37 of the Partnership Ordinance.
This setup allows businesses to get both money from investors and leadership from experienced managers.
A limited partnership is different from a limited liability company (LLC). An LLC protects all its owners from business debts, while in a partnership, general partners are fully responsible for any money owed. Because of this, some business owners prefer LLCs instead.
Limited partnerships are especially useful in industries like real estate, private equity, hedge funds, and venture capital. They allow people with money and business experts to work together without taking on all the risks.
How a Limited Partnership Works
A limited partnership is structured around the distinct roles of general and limited partners, each playing a key part in the business. General partners handle management and decision-making, while limited partners mainly invest money. A business becomes a limited partnership once it is officially registered, with each partner’s responsibilities and risks clearly outlined in the Partnership Agreement.
Role of General Partners
General partners run the business and make all the big decisions, from daily operations to long-term planning. However, they also take on the biggest risk—if the business owes money or faces legal trouble, general partners are personally responsible for those debts.
Role of Limited Partners
Limited partners, on the other hand, are investors. They put money into the business but don’t help manage it. Their biggest advantage is that they can’t lose more than they invest—they are not responsible for the company’s debts beyond what they’ve put in. However, if a limited partner starts making business decisions, they could lose that protection.
Importance of Partnership Agreement
A partnership agreement is a set of rules that helps everything run smoothly. It includes:
- How profits and losses are shared
- The responsibilities of general and limited partners
- How much each partner owns in the business
- What happens if a partner leaves or passes away
This agreement is important because it makes sure everyone knows their rights and responsibilities, preventing confusion or disputes in the future.
How Are Limited Partnerships Taxed
Taxes play an important role in how a limited partnership (LP) operates, setting it apart from other business structures. Unlike corporations, LPs are pass-through entities, meaning the business itself doesn’t pay federal taxes. Instead, profits and losses are passed on to the partners, who report them on their personal tax returns.
Tax Benefits of Limited Partnerships
Limited partnerships can take advantage of tax deductions for business expenses like rent, salaries, and utilities, which reduce the taxable income distributed to partners. This helps lower the overall tax burden and manage business costs more efficiently.
Avoid Double Taxation
One of the biggest tax benefits of an LP is that it avoids double taxation—a common issue for corporations. In a corporation, profits are taxed twice: first at the corporate level and again when distributed as dividends to shareholders. In contrast, an LP only taxes profits once, at the individual level, making it a more tax-efficient option for investors.
Different Tax Responsibilities of General Partners
General partners, who actively run the business, have a different tax obligation. Since they participate in daily management, they must pay self-employment taxes on their share of the profits and any guaranteed payments they receive. These taxes cover Social Security and Medicare contributions, similar to what self-employed individuals pay.
By understanding these tax rules, limited partnerships can structure their finances more effectively while offering a tax-friendly option for both investors and business operators.
How Does a Limited Partnership Compare to Other Business Entities
A Limited Partnership (LP) and a Limited Liability Company (LLC) are two common types of businesses in Hong Kong, each with its own benefits and drawbacks. One big difference is that an LLC is its own legal entity, which means it exists separately from its owners. In contrast, an LP does not have a separate identity, so general partners are personally responsible for the business’s debts and problems.
When it comes to business liability, general partners in an LP have unlimited responsibility, meaning they must pay for any business debts. However, limited partners only risk losing the amount they invest. LLCs, on the other hand, protect all owners from personal financial loss, so they aren’t responsible for company debts beyond their investment.
Both LPs and LLCs can continue running even if ownership changes. However, LLCs are easier to expand because they are seen as more financially stable and can raise money from investors more easily. Transferring ownership is also simpler with an LLC, where owners can sell part or all of their shares. In contrast, LP ownership is harder to transfer.
Public trust is another important factor. LLCs have a stronger reputation, which makes them a popular choice for business owners looking to attract investors. LPs, however, have a more moderate public image, which can make it harder to raise funds.
Finally, dissolving a business or shutting it down is a long, expensive, and complicated process for both LPs and LLCs. Business owners should carefully think about these differences before deciding which type of business structure works best for them.
What are the Pros and Cons of Limited Partnership
Choosing the best business structure in Hong Kong is an important decision. Understanding both the advantages and risks of a limited partnership can help business owners make the right choice for their goals.
How to Set Up a Limited Partnership in Hong Kong
Once you understand how a limited partnership (LP) works, the next step is learning how to form and register one. Below is a simple step-by-step guide.
Step 1: Create a Partnership Agreement
A partnership agreement is a contract that sets the rules for how the business will operate. This document is important because it helps avoid misunderstandings between partners. It usually includes:
- Each partner’s roles and responsibilities
- How much money or resources each partner contributes
- How profits will be shared
- How decisions will be made
- What happens if the business closes or a partner leaves
Once all partners agree on these terms, the business is officially considered a general partnership under the Limited Partnership Ordinance.
Step 2: Register the Business with the Government
To change the business into a limited partnership, it must be registered with the Hong Kong Companies Registry (CR). The following documents and fees must be submitted:
- Form 1 – Application for registering a limited partnership
- HK$340 registration fee
- HK$8 for every HK$1,000 (or part of HK$1,000) contributed by each limited partner
The registration can be completed in person at the Companies Registry on the 14th floor of the Queensway Government Offices or online through the e-Registry system.
Step 3: Get the Certificate of Registration
Once the registration is approved, the Companies Registry will issue a Certificate of Registration within 5 working days. This certificate will be sent to the person or company that applied.
After the business is officially registered, each partner’s responsibilities and liabilities will follow the terms set in the Partnership Agreement. Once this step is complete, the limited partnership is ready to start operating.
How to Report Changes in the Partnership
If any important details about the limited partnership change, they must be reported to the Registrar of Companies within 7 days. Some common changes include:
- Firm name
- Nature of the business
- Business address
- Partner names (adding or removing partners)
- Changes in the amount of money invested by a partner
- A general partner becoming a limited partner, or vice versa
To report these changes, partners must submit Form 2 – Notice of Change in the Limited Partnership, along with any required fees. Keeping this information updated ensures the business stays legally compliant.
Conclusion
A limited partnership (LP) in Hong Kong lets general partners manage the business while limited partners invest without control. It offers tax perks and fewer rules but comes with full liability for general partners and limited decision-making for others. A clear agreement and understanding the risks help ensure success.
