Under PRC business organizations law, the partnership entity is meant to supersede the prior non-entity civil law partnerships. The original concept in Chinese law referred to an agreement where partners contribute capital, operate the business, and share profit and loss together, while also having unlimited liability. Nowadays, it generally refers to a business entity formed under the China Partnership Act, whether by natural persons or other entities, in which two or more persons make joint capital contributions and share profits and losses.
According to the legislative history, the Chinese limited partnership entity was modeled on the 1997 US Revised Uniform Partnership Act (RUPA), introduced in 2006, it was used alongside pre-RUPA style non-entity partnerships until those were sunsetted by the PRC Civil Code. Originally, China’s partnership entities had a unique approach that rejected the LLC general partner structure. The business community in China, rich in international experience, lobbied for use of US-style limited partnerships with an LLC general partner.
Partnerships in China lack corporate personhood and are also pass-through entities where individuals pay their own taxes. China recognizes three kinds of partnerships: the General Partnership, Limited Partnership, and Limited Liability Partnership, which are described in more detail below.
Membership in a Limited Liability Partnership is closed to state-owned corporations, state-owned enterprises, public companies, and public benefit organizations.
A partnership can be managed without the involvement of some partners.
Types of Partnerships in China
Partnerships are classified as General Partnerships and Limited Partnerships, while the Limited Liability Partnership is considered a variant of the General Partnership in China, and not a kind of Limited Partnership.
- A General Partnership must have two or more partners, and general partners have unlimited joint and several liability. In a Limited Liability Partnership, unlimited joint and several liability for intentional harm or gross negligence is limited to the partner or partners who participated in the underlying acts and other partners’ liability is limited to the value of their shares of the firm.
- A Limited Partnership is comprised of a mix of general and limited partners with a maximum of 50 total, and there must be at least one general partner and at least one limited partner. If limited partners withdraw leaving only general partners, the partnership must be converted to a general partnership. However, if the general partners withdraw leaving only limited partners, the limited partnership must be wound up. General partners have unlimited liability for the partnership, whereas limited partner liability is limited to their contributed capital.
- The China Limited Liability partnership was adopted from the Texas Limited Liability Partnership Act according to the legislative history, and is intended for use by professional firms such as law firms and accounting firms. The statute uses the words teshu putong (特殊普通), which the legislature history says is intended to express the same meaning as “LLP” in other jurisdictions, and apply similar professional limited liability rules as used globally.
Tax Treatment
The new sole proprietorship entities and partnership entities are pass through-entities that do not pay corporate tax. Instead, only the taxpayer’s personal gains are taxed individually. Taxpayers using the gross receipts approach calculate tax based on the rate paid by a family proprietorship in tax brackets ranging from 5% to 35%. Taxpayers using the estimated tax approach should calculate the taxable income for the individual and then apply the appropriate tax bracket, ranging from 5% to 35%.
Qualified Foreign Limited Partnerships
While not necessarily a partnership at all, lawyers having difficulty explaining Chinese law gave a sham name “Qualified Foreign Limited Partnerships” (QFLP) to an investment fund program. You can learn more about QFLPs at our article here.
Comparative Law
The China business organizations academic literature and legislative history indicates that China’s experts were very familiar with US law and chose to use it as a model for their own legislation. Initially, a variety of culturally Chinese-style rules were imposed into a limited partnership. For example, the general partner had to be an individual, not an entity. The intention was that start-up founders would have unlimited personal liability and, in the absence of a personal bankruptcy law, be unable to discharge their debts and be forced to pay off failed business debts for the rest of their lives.
Unsurprisingly, the legislative history and academic commentary say that businesspeople were largely unwilling to use a business structure with these kinds of rules, and later amendments eliminated most of the “Chinese style” partnership rules.
A key difference between the jurisdictions today is semantics. China appends a word defined by the law here to mean “business entity” (企业), because China allowed civil law non-entity partnerships to co-exist with RUPA entity approach partnerships for about 15 years during a transition period. Secondly, legislators realized that the business community would find putting “limited liability” in the name of the “limited liability partnership” statute, therefore simply used
Further Reading
See our comprehensive resources on China’s Foreign Investment Law. and an overview of FDI regulation in our Foreign Investment Law FAQ.
Translation Guide
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