Chapter 14: Fang Hong's Top-Level Design
Compared to the "Company Law," the "Partnership Enterprise Law" provides partners with much greater flexibility when designing the company's structure. Whether it involves profit distribution, decision-making power, or share division, it is possible to separate financial stakes from voting rights, enabling a unique distribution without splitting the rights.
Through a partnership agreement, the founder can become the General Partner (GP), assuming unlimited joint and several liabilities within the partnership. As a result, the GP enjoys full voting rights within the enterprise, thereby gaining complete control over the company. This allows the GP to have absolute power in the company's decision-making process.
However, the GP does not participate in income distribution. They are entitled only to the "right" to control the company, but not the "money."
On the other hand, senior executives who are Limited Partners (LP) do not have voting rights, but they enjoy the benefits of the partnership. They are involved in the distribution of profits, but they are not involved in the governance of the company.
The key difference between GP and LP is that GPs control the company's voting rights, while LPs contribute capital but have limited involvement in company decisions.
Furthermore, the separation of "money and power" allows GPs to gain a greater degree of control. This is because the voting rights associated with the shares held by LPs are effectively controlled by the GP. As a result, the actual controller or majority shareholder can hold a significant amount of control with a relatively small financial stake.
For Fang Hong's top-level design of Qunxing Capital, he decided to establish the company as a limited partnership structure. However, instead of directly serving as the GP of Qunxing Capital, he set up a more intricate framework to gain absolute control while avoiding the liability risks associated with being a GP.
The reason Fang Hong avoids directly becoming the GP is because the role comes with unlimited joint and several liabilities, which, despite providing control, exposes him to substantial financial risks. He needed a way to hold absolute control without taking on such burdens.
Fang Hong's solution involved not only controlling Qunxing Capital but also sidestepping the unlimited liabilities that come with being the GP. This solution was simple, but effective.
He began by writing "Qunxing Capital" in his notebook, alongside the names of three other companies: Stellar, Zhenxing, and Sanxing.
In order to maintain full control of Qunxing Capital without assuming unlimited joint and several liabilities, Fang Hong needed to establish three additional companies.
In his design framework, Qunxing Capital would be a limited liability company, while "Zhenxing" and "Shenxing" would be limited partnerships, and "Stellar" would be a one-person limited liability company fully owned by Fang Hong.
The strategy involved making his one-person company, Stellar, the GP of both Zhenxing and Shenxing. By doing so, he ensured absolute control over these two companies.
Within "Zhenxing," Fang Hong placed all the senior executives and core talents of Qunxing Capital as limited partners (LPs), where they held equity, but only in Zhenxing, not Qunxing Capital itself. These executives had the necessary shares to represent their stakes but were not direct shareholders of Qunxing Capital.
Meanwhile, external financial investors and resource partners of Qunxing Capital were placed under Sanxing as LPs. These external parties received equity proportional to their investments, but they, too, only held stakes in Sanxing, not in Qunxing Capital itself.
Next, Fang Hong divided the equity of Qunxing Capital into two parts: 25% would be held by "Zhenxing," and 75% by "Shenxing." This created a total of 100% ownership of Qunxing Capital between the two companies.
Fang Hong, as the sole shareholder of Stellar, controlled 100% of that company. Stellar, in turn, held 0.5% of the equity in both Zhenxing and Shenxing, which gave it the GP role in both. The remaining 99.5% of the shares in these two companies belonged to the LPs.
Though Stellar only held a tiny 0.5% of the equity, it had the control of both Zhenxing and Shenxing, meaning that Fang Hong effectively controlled them without needing to hold significant equity himself.
This nested ownership structure allowed Fang Hong to maintain absolute control over Qunxing Capital without directly taking on the responsibilities or liabilities of a GP. In essence, he controlled the companies through a complex web of ownership without risking his personal finances.
Let's imagine a scenario where Qunxing Capital faces a bankruptcy and incurs a debt of 1 billion yuan. The creditors would only be able to pursue the LPs of "Zhenxing" and "Shenxing" for payment, as the GPs bear unlimited liability.
However, the creditors would soon discover that the GPs of both companies were not natural persons but the one-person limited liability company "Stellar," which is controlled by Fang Hong, who owns 100% of its equity.
So, when the creditors come knocking, they would find that Fang Hong is technically the one responsible for the debt. However, since Stellar is a limited liability company with a registered capital of just 500,000 yuan, Fang Hong would only be liable for that amount. The remaining 1 billion yuan of debt would effectively be uncollectible.
This scenario illustrates how, with minimal financial exposure, Fang Hong can control a billion-dollar company without taking on substantial financial risks.
Now, with this setup in place, Fang Hong needs to figure out how to receive the profits from Qunxing Capital. While "Stellar" controls Zhenxing and Shenxing as the GP, it only holds a tiny 0.5% of their equity. The vast majority of the income is directed to the LPs, and Fang Hong does not personally benefit from it unless he owns more equity.
The solution to this issue is simple: Fang Hong needs to establish a fifth company, which would act as the financial investor and become an LP of Shenxing. This would allow him to obtain the income from Shenxing.
Fang Hong's fifth company would be a trust fund, further diluting the risks and ensuring that income flows through this entity.
By carefully navigating this complex structure, Fang Hong ensures he controls Qunxing Capital, enjoys its profits, and minimizes his personal financial risks. As long as extreme situations, such as global economic crises, don't arise, this framework virtually eliminates any substantial risks.
In Fang Hong's worldview, there is no clear-cut notion of right or wrong; there is only the balance between risks and benefits. His strategy represents the actions of a person driven by nearly pure rationality, focused solely on achieving optimal outcomes.
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