Partnership Agreement HK: Cap. 38 ss. 26, 27 and 35

Section 3(1) of the Partnership Ordinance (Cap. 38) treats a partnership as the relation that exists between persons carrying on a business in common with a view of profit. Nothing else is needed: no filing at the Companies Registry, no minimum capital, no written instrument, not even a conscious decision to become partners. Two people who share the profits of a venture can find themselves in partnership by conduct alone, because section 4 makes receipt of a share of profits prima facie evidence of the relationship. The partners collectively are the firm under section 6, but the firm is not a separate legal person: it sues and is sued through the partners, and each partner is personally exposed to every liability it incurs.

The partnership agreement overrides those defaults. It is not a shareholders agreement, which regulates the owners of a company incorporated under the Companies Ordinance (Cap. 622) and sits alongside articles of association; both routes are compared in our business and incorporation documents for Hong Kong. It is equally distinct from a limited partnership registered under the Limited Partnerships Ordinance (Cap. 37) and from the limited liability partnership that only solicitors may use under the Legal Practitioners Ordinance (Cap. 159). A general partnership agreement does not cap anyone's liability, whatever the drafting says. It allocates money, control and exit rights between the partners; the outside world still sees people jointly liable for the firm's debts.

Cap. 38 works as a default code rather than a mandatory one. Section 21 lets the partners vary the statutory rules by express or implied consent, which is why a well drafted agreement displaces so much of the Ordinance. Left untouched, section 26 delivers a package that rarely matches commercial reality: partners share capital and profits equally and bear losses equally under section 26(a), a partner who advances money beyond his agreed capital earns 8 per cent annual interest under section 26(c), and nobody is entitled to remuneration for working in the business under section 26(f). Ordinary matters go to a majority, but changing the nature of the business or admitting a partner needs unanimity.

The agency and liability provisions cannot be contracted out of against third parties. Under section 7 every partner is an agent of the firm and of the other partners, so one signature in the usual course of business binds everyone. Section 11 makes each partner jointly liable for all debts incurred while a partner, and sections 12 and 14 add joint and several liability for wrongful acts in the ordinary course of the firm's business. A restriction on a partner's authority under section 10 only helps against a counterparty who knows of it. Incoming partners escape pre-existing debts under section 19(1), while a retiring partner stays liable for what was incurred before departure unless creditors agree otherwise.

Registration sits in a separate layer. A partnership business must be registered with the Business Registration Office of the Inland Revenue Department within one month of commencement under section 5 of the Business Registration Ordinance (Cap. 310), on Form 1(c). The Inland Revenue Department guidance on which businesses must apply for business registration sets out the forms and the renewal cycle. Where the firm hires staff, the Employment Ordinance (Cap. 57) applies to the partners as employers, so the contracts in our Hong Kong employment and HR document templates are issued in the firm's registered name.

Two professionals opening a consultancy, a design studio or an accounting practice are the classic case. They put in unequal money, expect unequal time, and want the split to reflect that rather than the flat equality of section 26(a). The second recurring scenario is the food and beverage venture where one partner funds the fit out and the other runs the kitchen: without a written agreement the operating partner draws no salary, and the investor holds an equal vote on every operational decision. Family trading businesses run on a handshake for years form a third group, formalising when a second generation joins or when a bank asks for papers.

Corporate partners are common too. Two Hong Kong companies pooling resources for a single project often prefer a partnership to a joint venture company because it avoids incorporation. Watch the premises there, since the lease is normally taken by individual partners or by one company, and the terms in our Hong Kong tenancy and commercial lease templates must align with the partnership's own term.

Two edge cases justify getting this on paper early. The silent investor taking a percentage of turnover rather than a fixed return may be treated as a partner under section 4, with unlimited liability attached, and only clear drafting rebuts that presumption. The other is conversion of a sole proprietorship, where the incoming partner needs section 19(1) protection recorded explicitly.

• The identification of the partners and the firm records each partner's name and identity document reference alongside the trading name on the business registration certificate. Where a company joins, the agreement names the corporate entity and the individual authorised to act for it.
• The capital contributions and capital accounts clause separates true capital from loans. The distinction matters because section 26(c) awards 8 per cent annual interest on advances beyond agreed capital, and section 46 repays advances ahead of capital on a winding up.
• The profit and loss sharing clause replaces the equal split imposed by section 26(a) with agreed percentages, and deals separately with losses, which need not follow the profit ratio. Drawings and retained working capital are settled here rather than argued at year end.
• The management and remuneration clause fixes which decisions a managing partner takes alone, which need a majority and which need unanimity. It sets any partner salary, since section 26(f) gives a working partner nothing unless the agreement says otherwise, and it addresses deadlock in a two partner firm.
• The admission, retirement and expulsion provisions give partners what Cap. 38 withholds. Under section 27 no majority can expel a partner unless that power was expressly agreed in advance, and section 28 lets any partner in a partnership at will dissolve the firm by notice. The template substitutes a notice period, a buy out mechanism and a valuation method.
• The confidentiality and non-compete clause builds on sections 30, 31 and 32, which require partners to render true accounts and account for private profits and for the proceeds of a competing business. The drafted version adds a defined restricted period and a client non-solicitation covenant.
• The dissolution and continuation clause is the one partners regret omitting. Section 35(1) dissolves the whole partnership on the death or bankruptcy of any partner, so the template adds a continuation mechanism, a settlement order consistent with section 46, and a process for realising partnership property under section 41.

Business registration comes first in practice. The Inland Revenue Department issues the certificate under Cap. 310, and the particulars must be kept current: a change of partners, firm name or business address is notifiable within one month. The certificate is displayed at the place of business and renewed on its cycle. The Companies Ordinance (Cap. 622) also caps a partnership carrying on business for gain at twenty partners, and a venture pursuing charitable aims falls outside section 3(1) of Cap. 38 altogether, which is why societies and guarantee companies sit in our Hong Kong non-profit and association documents.

Profits tax follows a distinctive route. Under section 22 of the Inland Revenue Ordinance (Cap. 112) the firm is assessed in one lump sum rather than partner by partner, the precedent partner files the return on Form BIR52, and the first tranche of assessable profits is charged at half the standard unincorporated rate under the two tiered regime. All partners are jointly and severally liable for the firm's tax, so the partner who never touched the books is still exposed if the precedent partner disappears. The agreement should say who prepares the accounts, who signs the return and how an assessment is funded.

Licensed trades need extra care. A restaurant licence from the Food and Environmental Hygiene Department or a licence under the Money Lenders Ordinance (Cap. 163) is issued to named holders, so a change of partner can require a fresh application. Where the aim is passive investment, the limited partnership under Cap. 37 may fit better, since a limited partner keeps limited liability only while staying out of management. Contributions of property carry their own trap: transferring Hong Kong immovable property into the firm can trigger duty under the Stamp Duty Ordinance (Cap. 117), and succession to a deceased partner's share belongs with the will drafted from our Hong Kong personal and family document templates.

You begin by choosing whether the partnership runs for a fixed term, for a single venture, or at will with no end date, because that one choice changes the dissolution mechanics under section 34. The form then asks for each partner's details and, where a company joins, its Hong Kong company number and signatory. Capital contributions come next, split between cash, assets and services, with a separate field for money advanced as a loan so the 8 per cent statutory interest never applies by accident.

The questionnaire then moves to economics: profit percentages, loss percentages, drawings and any management salary. Governance follows, with thresholds for trading decisions, capital expenditure, borrowing and admission of a partner. The exit section covers notice periods for retirement, expulsion grounds, the valuation formula for an outgoing share and whether the survivors continue after a death. You review the assembled draft, adjust the wording, then download it in Word to keep editing or in PDF for signature. Each partner signs, and the original stays at the firm's principal place of business, where section 26(i) says the partnership books belong.

The most expensive mistake is lifting a precedent from another jurisdiction. English and Singapore partnership statutes descend from the same 1890 Act, so the drafting looks familiar, but the numbering differs: the default rules sitting at section 24 there sit at section 26 in Hong Kong. An agreement cross referring to the wrong provision is not void, though it invites argument about what the partners intended. The second recurring error is treating capital and loans as one thing, which hands the funding partner 8 per cent statutory interest under section 26(c) and reorders the payout queue under section 46. The third is silence on expulsion: partners assume a majority can remove a defaulting colleague, and section 27 says the opposite unless the power was agreed in advance.

Two more mistakes surface at the end of the relationship. Partners forget that section 35(1) dissolves the firm automatically on a death or bankruptcy, which can strand a lease, a licence or a half finished contract at the worst moment. And retiring partners walk away without notifying the Inland Revenue Department and the firm's regular counterparties. A retiring partner who lets the market keep treating him as a partner can be fixed with liability for debts incurred after he left, and the cure is simple: update the business registration particulars and write to every supplier and bank.