Every business partnership should establish a partnership agreement. However, the laws that dictate partnership agreements in China are different than they are in the U.S.
Business owners looking to form partnerships in China must ensure they take the time to understand the details they must include in their partnership agreements. Here is a brief overview of some of the essential elements that every partnership agreement between a U.S. company and a Chinese partner must include.
Chinese law requires an agreement
In the U.S., a partnership agreement often exists between the partners. Business owners usually only have to register their partnership if they form an LLP, LLC or a corporation.
However, Chinese business law requires that partners create an agreement to register their business. This agreement must clearly state what type of partnership the company will form. In China, there are three types of partnerships:
- Common partnership: This is a partnership made up of two or more partners who both financially contribute to and benefit from the business. They share joint liability.
- Limited partnership: A limited partnership involves limited and general partners. Limited partners do not usually have much say in how the general partners run the business. And their liability only extends to their investment in the business.
- Special partnership: This partnership involves a general partner and a professional institution that offers specific skills to the business.
Most U.S. businesses establish general or limited partnerships with Chinese partners.
What do business owners need in their partnership agreement?
The factors in each partnership agreement will change depending on the type of partnership. That is why it is critical for business owners to review Chinese partnership law to determine precisely what they will need in their agreement. It might also be helpful to consult an experienced attorney when crafting these agreements.
However, here is a summary of some of the aspects an agreement must have, including, but not limited to:
- The name of the enterprise
- The business plan and purpose
- How the partners will share and distribute profit
- How partners will share the liability for losses
- How partners will resolve disagreements
- The specific powers and authority of each partner
These elements might seem like common sense. However, business owners should not overlook the importance of these written agreements. They may be necessary under Chinese law, but they also help business owners protect their company, manage liability and avoid possible disputes between partners.