General
Where a person joins with other people to conduct business for
getting profits, this is a partnership business. The 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.
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.
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
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Costs
Overseas Company (Branch Office)
Sole Proprietorship |