Looking to start a business in Hong Kong and wondering what do you need to know? First, you need to decide on what types of business entities you would like to set up in Hong Kong. The most common entities are limited liability companies, sole proprietorships, and partnerships.
Limited Liability Company
A limited liability company can be incorporated by registering under the Companies Ordinance with the Companies Registry. Private limited companies (also refers to a private company) are the most common business types in Hong Kong.
The diagram below shows the different types of companies.
Company Limited by Shares
Most SMEs in Hong Kong are set up as a company limited by shares. A company limited by shares is very popular in Hong Kong because with this structure, the company can exist as a separate legal entity from the individual and therefore, there is relatively little risk in operating a company limited by shares. In the case that the company limited by shares encounters financial problems, the liabilities of the owners are limited to the assets within the company, and therefore this can protect their personal financial assets.
Company Limited by Guarantee
A company limited by guarantee is commonly used for non-profit organisations. The parties involved in a company limited by guarantee agree to invest a predetermined amount to cover its liabilities if the company winds up. This type of company is not common in Hong Kong.
Private Limited Company vs Public Limited Company
A private limited company is normally set up for a small business. A private limited company (also known as a private company) must:
– restricts its right to transfer its shares;
– limits the number of members to 50, excluding employees of the company;
– prohibits any invitation to the public to subscribe for any shares or debentures in the company.
A public company is typically locally incorporated, medium to large scale businesses that decides to take the company public. The company can have over 50 shareholders. The company’s shares and debentures are offered to the public. Public companies will face strict rules and regulations, and are required to file their annual accounts and put on public record for inspection.
Advantages of Setting Up a Private Limited Company
Limited personal liability
You will have the reassurance of limited liability, which means that you will not be personally liable for any financial losses made by your business. Therefore, your personal finances will be protected should things go wrong with your company. If you run a business and are self-employed, you do not enjoy such protection from the financial claim.
Operating a limited company can help instil confidence in your business. Bigger scale companies tend to prefer working with limited companies in comparison to sole traders or partnerships.
Any change of shareholders will not affect the existence of the business as the company is owned by shareholders and managed by directors of the company. The shares of the company can be easily transferred.
A company can own property in its own name and it can enter contracts using the company’s name. Any changes in the shareholders does not affect the validity of the contract.
Tax benefits and incentives
Corporate tax (also known as profit tax) is at 16.5% of assessable profits for corporations and only profits made in or derived from Hong Kong are subjected to tax in Hong Kong. There is no tax on capital gains or dividends.
Efficiency in company setup:
Private limited companies can be established in around one to two working days.
Disadvantages of Setting Up a Private Limited Company
Regular audits and compliance
Hong Kong companies are required to file full audited accounts. Small private companies may apply for a “reporting exemption” and prepare simplified accounts and directors’ reports.
All companies in Hong Kong must file an annual return providing details of current directors and shareholders.
Registered office required
A private limited company in Hong Kong must have a registered office address in Hong Kong and have a company secretary who is a Hong Kong resident. The secretary cannot be the sole director of the company.
Director and shareholder disclosure
At least one shareholder and one director is required to be disclosed and the details must be filed on the public register. At least one natural person must be appointed as the director.
The company is also required to disclose the following information on public records: capital structure, personal particulars of shareholders, directors and company secretary.
Tedious winding-up procedures
Closing up a private limited office in Hong Kong can be a tedious and costly procedure compared to partnership and sole proprietorship.
Sole Proprietorship is the simplest form of business. The business is conducted by one person without sharing their business with anyone. They take up all the profits and risks of the business.
Advantages of Setting Up Sole Proprietorship
Easy to set up
To register for a sole proprietorship, you only need to apply for a business license from the Business Registration Office within 1 month of the business commencement.
Efficiency in decision making
A business decision can be made quickly as sole proprietorship does not involve other people when making decisions.
As the sole owner of the business, profits of the business will be owned by the sole trader.
Ease of termination
Winding up a sole proprietorship is easier and less expensive compared to other business entities.
Disadvantage of Setting Up Sole Proprietorship
Unlimited personal liability
Unlike setting up a private limited company, sole proprietorship business only has one person responsible for all liabilities of the business. In the case that the company finances go wrong, the sole trader will be responsible to pay off the debts using up his personal assets
Partnerships are businesses owned by more than one person, and they will run the business sharing the profits and responsibilities. The partners are jointly and individually liable for the debts and liabilities of the business.
Partnerships can have 2-20 partners but once the business exceeds 20 partners, it must be registered as a company.
Governed by the Hong Kong Partnership Ordinance, Partnerships can be divided into the General Partnership and Limited Partnership.
With a general partnership, each partner is responsible for the debts and liabilities of the business. Whereas with the limited partnership, general partners will be responsible to run the business and have unlimited liability for the business’s debts, limited partners’ liability will be limited by the amount of capital they contribute to the company, and they will not be involved in making business decisions.
Advantage of partnership
Ease of raising capital
Unlike a sole proprietorship, partners will contribute to the capital for operating the business.
Ease of Set Up
Compared with limited companies, partnerships are easier to set up as the internal structure can be very flexible.
Ease of Maintenance
Partnerships will face less compliance and statutory controls than companies. It is not required to audit accounts or to register the Partnership Agreement.
Disadvantage of partnership
Unlimited personal liability
All partners in a general partnership and general partners in a limited partnership are personally liable for the business debts and liabilities. Similar with sole proprietorships, there are no protections of personal assets as they are responsible for business debts and losses. In the event that the company’s finances go wrong, personal assets can be used to pay off debts and losses to creditors.
Liability for partners actions
For all partners in a general partnership and general partners in a limited partnership, each partner is bound by the other partners, and can be held responsible for the acts of other partners.
To give you a clear comparison between the 3 types of entities mentioned in this article, we have put together the chart below for your reference.
|Type of Entities||Sole Proprietorship||Partnership||Company|
|Structure||An individual owning the business||2-20 people doing business||A legal entity separate from its member with no more than 50 members|
|Membership||Only one person is allowed||No more than 20 people are allowed||For a private limited company, it cannot exceed 50 members. For a public limited company, there’s no maximum number.|
|Management||The sole proprietor owns and runs the business||General partnership: All partners are entitled to manage the business’s day-to-day operation.
Limited partnership: only general partners are entitled
|Separate ownership and management|
|Liability||Unlimited liability for the business debts||Unlimited liability for the business debts for all partners in a general partnership and general partners in a limited partnership||Liability limited to the assets within the company.|
|Entities Set Up||Simple||Easy||More complicated than sole proprietorship and partnership|
Each type of entity has its advantages and disadvantages and you can choose to incorporate a specific type of entity depending on your situation and plan. FastLane offers services including company setup, company secretary, registered company address, audit, tax computation and filing.