Partnership & Companies

Vehicles for Doing Business in Hong

Kong
 The most common types of business structure are:
 Sole proprietorship (good for small individual or family
business)
E.g. a boutique, a cafe
 Partnership (required for certain professional business)

E.g. a law firm

 Company (the most popular form of business)

E.g. HSBC

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Partnerships -- Introduction
 Legal framework
 Common law
 Partnership Ordinance (Cap. 38)

 Definition of “partnership”
 “A partnership is the relation which subsists between
persons carrying on business in common with a view of
profit.” – s. 3(1)
 Formation of partnership
 By agreement (i.e. contract) between two or more
persons. (Note: not by registration)

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Meaning of a partnership firm
 All the partners, with the business they operate
together, can be collectively called a “firm”.
 A partnership firm is not a legal entity.
 The firm has no legal capacity, cannot own any assets
and cannot be liable to any debts.
 If a person sues a firm, he is actually suing all the
partners jointly and severally.
 For convenience sake, HK courts allow partners to sue or
be sued in the name of a firm. (Order 81 of the Rules of
the High Court)

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Rules to decide whether a partnership exists
 No formality is required for the formation of a partnership
 Contractual relationship – oral or in writing
 Rules under s. 4
 Co-ownership of property?
 X and Y jointly own a flat and share the rent?
 Sharing of gross returns?
 X and Y jointly operate a business, they share the gross income
equally, but X alone pays all the expenditures?
 Sharing of net returns?
 Prima facie evidence of the existence of a partnership [see
next slide for exceptions]

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Sharing net profit in any of the following situation
does not create a partnership:
 the money is a debt being repaid by fixed installments
 A bank provides a loan to a business and receives a share of the profits
of that business as installment.
 the payments were made by way of interest on a loan made to the
business
 Sharing a portion of the profits of a business with the lender as a
means to pay the interest on the loan provided by that lender
 part of the money was remuneration paid to an employee of the
business
 A business gives one employee a share of the profits of that business as
his remuneration.
 the payments were being made to the previous owner of the
business who has sold it
 The seller of a business receives a share of the profits of that business
in consideration of the sale of the goodwill of the business.

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Companies -- Introduction
 Legal Framework
 Companies Ordinance (Cap.622)
 Common law cases
 Formation
 By registration with the Companies Registry
 Certificate of Incorporation
 Two most important concepts of company law
 Separate legal entity: limited liability of shareholders
 The theory of separation of ownership and management

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Types of Companies
Limited by Shares
Limited Company
Limited by Guarantee

Unlimited Company

Private Company

Unlisted Company

Public Company

Listed Company

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Incorporation procedure

Issue of the
Certificate of
Incorporation
Submission of
the registration
documents

Incorporation
Form

Preparation of
the Articles
Checking of the
proposed name

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Articles of Association (AA)
 AA is the company’s constitutional document.
 It sets out the internal rules of the company, such as powers
of directors, procedure of directors’ meeting, procedure of
shareholders’ meeting, dividend policy, etc.
 Companies (Model Articles) Notice sets out model articles
for different types of companies. In particular, Schedule 2
of the Notice is for private companies limited by shares.
 A company may adopt the Model Articles in whole, or in
part, or exclude Model Articles entirely and adopt its own
regulations.

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Provisions in AA
 Taking the Model Articles as an example, AA may
include provisions in respect of the following matter:
 Directors’ powers and responsibilities
 Decision making by directors’
 Appointment and retirement of directors
 Appointment and removal of company secretary
 Decision-making by members
 Shares and dividends
 Communication to and by the company
 Administrative arrangements

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Consequences of incorporation (1)
 A company is a legal entity distinct from its members
 Salomon v. Salomon (1879)
 Salomon had for many years carried on business as a
boot manufacturer.
 He registered a company and sold his business to the
company for £39,000 and the company paid him the
consideration by:
i. 20,000 shares of £1.oo each issued to him and his family
members, credited as fully paid;
ii. £9,000 cash paid to him; and
iii. £10,000 treated as a loan by him to the company, secured by
a charge on all the assets of the company.

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 After an economic depression, the company went into
liquidation. The assets were sufficient to satisfy the
secured debt (Salomon’s debt) but the unsecured
creditors received nothing.
 The unsecured creditors claimed that the formation of
the company was a fraud on other creditors to protect
Salomon and his family.
 Held: the secured debenture was valid and Salomon was
entitled to be paid before the unsecured creditors. As
the company was lawfully registered and was a separate
legal entity to Salomon, Salomon could contract with
the company and be a secured creditor of the company.
Debts of the company were separate to those of Salomon.

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Consequences of incorporation (2)
 A company has it own name and legal personality
 Own assets, enter into contracts, sue and being sued in
its own name
 A company has perpetual succession
 A company will exist until it is wound up and dissolved.
 A company is capable of exercising all the
functions that an individual could exercise

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Advantages of companies(1)
 Limited liability
 Shareholder or directors are not liable for the debts incurred by the
company (Salomon v. Salomon)
 Partners bear unlimited liability
 Ability to raise finance
 Companies can issue shares to raise fund / issue debentures to
borrow money
 Perpetual succession
 Death of shareholder does not affect the existence of the company.
 Unless agree otherwise, a partnership will be dissolved if any
partner is dead.
 Transfer of ownership
 Company is operated by directors, not shareholders. Change of
shareholders theoretically will not affect the business of a company.
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Disadvantages of companies
 Formation and maintenance cost
 Cost of complying with various regulations of the
Companies Ordinance.
 Tax: 16.5% for company / 15% for partnership (subject
to change)

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Sole Proprietorship

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Partnership

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Company

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