Looking to set up your business in Hong Kong and wondering which type of business structure to consider?
Then you are at the right place. This article will take you through the types of business structures available in Hong Kong. It will also provide detailed guidance on the characteristics of various company types and the unique traits associated with each one.
It is important to note that the process of setting up a new business does not only involve proper research on the business activities or preparing the business plan.
Business owners must understand the different company structures available, and decide which will be most suitable to male the long-term plans of the business.
|TLDR: There are different types of business structures in Hong Kong for entrepreneurs to choose from, ranging from a sole proprietorship, limited partnership, private and public limited company, branches, and representative offices. In order to decide on the preferred company structure, there are a couple of qualities you should look out for, such as the leadership and business management style, the need for capital funding and investment, capability to manage liabilities as well as the vision for the company.|
What you will learn:
1. Factors to Consider before Choosing a Business Structure
2. Types of Business Entities in Hong Kong, these are the common business structures for entrepreneurs to consider when looking to establish a company
4. Partnership (General & Limited)
5. Limited Company (by Shares, by Guarantee, Public Listed)
8. Profit Tax and Reporting Requirement for Different Business Structures
Factors to Consider before Choosing a Business Structure
- Immediate and Long term plans to raise capital
- Degree of Complexity of Company Formation Process
- Limited or unlimited liability
- Degree of Risk and Return on Income and Liabilities.
- Tax rate applicable for different structures
- Annual compliance and company maintenance cost
- The need to employ an overseas talent or application of work visas for the director(s) of the company.
We will further discuss the details on these factors in the following article based on different company structures.
Types of Business Entities in Hong Kong, these are the common business structures for entrepreneurs to consider when looking to establish a company :
The sole proprietorship is the simplest business structure in Hong Kong. It can also be called an unlimited company. This type of business entity basically suggests that the business activities are conducted by one person. As the sole owner of the business, he/she needs to bear all the risks and liabilities that will arise from the entity. While at the same time, can take all the profits to be derived from the business.
- Simple registration process: To register an unlimited company in Hong Kong, prospective owners only need to submit the application for a Business Registration Certificate to the Business Registration department in the Inland Revenue. The business registration license should be applied for within 1 month after the owner begins the business.
- No Audit Requirement: Sole proprietorship business entities are not required to conduct a yearly audit for their business, but they must submit their financial statement annually to the authorities for tax assessment.
- No Profit Sharing Required: Since there are no other partners or shareholders, business owners can take all the profit that may arise from the business.
- Full Control of the business and decision making: With no other extra stakeholders in the business, the owner of an unlimited company takes full control of every decision-making process required during business operation.
- Lower tax rate compared to a limited company: There is a 2-tier profit tax rate for a sole proprietorship, which is 7.5% for the first 2 million profits, the remaining are 15% which is lower than a limited company (8.25%, 16.5%)
- Unlimited Risks: As the sole proprietor is the only decision-maker, he/she is required to bear all the risks that would arise from the business.
- Bear all liabilities and debt: The owner of a sole proprietorship has the legal obligation to take up any debt and other business liabilities that may arise during business liquidation. The sole proprietor has the responsibility to use his/her personal assets to cover any unpaid liabilities.
- Difficult to raise capital: Sole proprietors mostly rely on personal assets and capital to fund their business. The probability of raising business capital as an unlimited company is low.
Who should choose a sole proprietorship business structure?
- Those looking to have a limited or smaller scale of business (one-man)
- Those looking for a quick and simple company formation process with a lower formation and maintenance cost.
- Those who are not looking to consider financial support from external third parties.
- Those who do not want to share profits with partners or shareholders
- Those who do not mind incurring extra liabilities from business operation and liquidation.
Documents required to set up
- Completed business application form from the relevant authorities, including proposed business name
- Identity Document: Hong Kong identity card or International Passport
- Utility bill not older than 3 months
Partnerships are businesses that are incorporated and owned by two or more individuals. These individuals work together to carry on the operations of the business and share profits. Hong Kong partnerships can have 2-20 partners and are structured as either a General Partnership or a Limited Partnership. Once a partnership exceeds 20 partners, the partnership must be registered as a company.
Differences between a General Partnership and a Limited Partnership
Unlike a company structure that is limited by guarantee or shares, individuals involved in a partnership are required to be jointly, or individually liable for all the debts and liabilities incurred by the company.
General Partnerships require that each partner of the company is held personally liable for the debts and liabilities incurred by the company. They will be responsible for the running of the business and have unlimited liability. In addition, to the extent that a partner acts in the course of the company’s business, each other partner may be held responsible for the actions of that individual.
In a Limited Partnership, the possible liabilities and business debt that each partner can be exposed to are limited to the amount of capital they contribute to the company and are usually not involved in making business decisions.
A limited partnership is usually made up of at least one or more limited partners and one general partner.
The general partner carries the ultimate liability for all the business debts and obligations. The daily obligation of running the business and making decisions lie on the general partner(s). The Limited partner generally funds the business and meets most of the financial needs of the business.
Advantages of a Partnership Business
- Easier to raise capital compared to Sole proprietorship: Compared to a sole proprietorship entity, more partners enable access to more sources of funding when businesses are in need.
- Collective wisdom in managing the business: As the saying goes, two good heads are better than one. Running a business with talented individuals with vast educational and professional experience increases the chances of business success. Partners can contribute diverse perspectives, enabling business development and growth.
- Share workload: Partnership promotes division of labor. More human resources can definitely drive output for the firm compared to a one-man band, given that they have the right incentives and motivation to contribute their best to the business.
Disadvantages of a Partnership Business
- Share profits: With more people involved in a partnership, and given that they have contributed to the capital of the business, profit also needs to be distributed accordingly among the members of the partnership.
- More communication is required for business decisions: Unlike a sole proprietor, Partnerships require the contribution of partners to make business decisions. Since there are more than 1 persons involved in this process, this will require more time and effort in the communication process.
- Unlimited liability: Similar to a sole proprietorship, when a company faces a financial difficulty or liquidation, partners need to meet the business’s liability obligation with their personal assets.
Who should choose partnership business structure?
- Those looking to partner with a third party to share ideas, workloads, and responsibilities.
- Those who need extra financial resources from partners
- Those who share the same vision and work well together and a team. If they would like to start a project or business without a lot of 3rd party interference, a Partnership business entity would be an ideal business structure.
Documents required to set up a Partnership Business
- Obtain the registration forms and deliver them to the Shroff of the Companies Registry on the 14th floor of the Queensway Government Offices
- Identity Documents of the member partners: Hong Kong identity card or International Passport.
- Utility bill not older than 3 months.
- Official forms and fees include–
- (a) Form 1 – Application for registration of a limited partnership;
- (b) a registration fee of HK$340; and
- (c) for every HK$1,000 or part of HK$1,000 of the sum contributed by each limited partner, a fee of HK$8.
A limited liability company is the most common company type in Hong Kong. Also known as a limited company, this business structure offers shareholders protection of their personal assets from business risks and liabilities. This is because the company is recognized as a separate legal entity from its shareholders.
Limited liability companies can be divided into 3 categories: those limited by shares, those limited by a guarantee, and the public limited companies.
Advantages of Limited Companies
- A separate legal entity from business owners and the firm: For sole proprietorship and partnership entities, the legal identity of the company is tied to the business owners. As a result of this, the life span of the company does not go beyond that of the business owners. However, for a limited company, the legal identities of all parties are separated. This means the company can have a perpetual and separate life from its founders or owners.
- Limited liability: Owners of limited companies enjoy a limited amount of liability when the company encounters liquidation. The shareholders do not need to further take out their personal assets to cover any losses incurred during the course of running the business. The liability of the company is limited to the capital invested in the company.
- Much broader sources of capital: Limited companies enjoy more flexibility when it comes to raising capital for the business. Funding opportunities for Limited companies range from financial institutions and venture capitals to private equity.
Disadvantages of Limited Companies
- More documentation and Regulatory requirements to Set up the company: The Steps to setting up a limited company in Hong Kong is more hectic compared to the first two business structures. Although Hong Kong’s company formation process is said to be less demanding compared to its counterparts, it still takes more time, documentation, and costs compared to the sole proprietorship and partnership entity types.
- On-going compliance requirement: For a limited company in Hong Kong, one of the most common annual compliant obligations is an annual audit before profit tax filing. The audit can get a bit complicated if there is no proper preparation prior to it.
- Disclosure requirement: Limited companies need to disclose their capital structure and the personal particulars of shareholders to the public.
Companies Limited by shares and Companies Limited by Guarantee
Company Limited by Shares
Most SMEs in Hong Kong are incorporated as “limited by shares” due to the relatively minimal risk associated with operating a company structured in such a way.
This company type provides extra protection for its shareholders as the company will exist as a separate legal entity from the individual. In case a company limited by shares encounters financial difficulties, the liabilities of the owners are limited to the assets within the company, and therefore this can protect their personal financial assets.
Who should consider setting up a limited company by shares?
- SMEs who do not want to bear unlimited liability
- Business owners looking to raise capital from cost-effective sources of capital
- Company structure:
- At least one shareholder, one director, a Hong Kong local company secretary, and a registered office
- Maximum of 50 shareholders
- Share capital:
- No minimum share capital
- Shares can be transferred to new and existing shareholders as long as all the shares transfer documents are prepared to meet IRD’s requirement.
Company Limited by Guarantee
A company limited by guarantee is often used by non-profit organizations that require a legal entity. These kinds of companies are limited by guarantee, rather than shares– meaning that parties involved are considered as guarantee members, not shareholders.
Companies incorporated under this structure require member guarantors to agree to invest a predetermined amount to cover the company’s liabilities in the event of the company winding up.
Who should consider setting up a Company limited by guarantee?
- Charities or Non-profit organizations
- Have no concerns about profit sharing and shares.
- Company structure of Limited company by Guarantee:
- At least two directors, one member, a Hong Kong local company secretary, and a registered office.
- Corporate directors are not allowed
- Can be more than 50 shareholders
- No share capital
- The profits cannot be distributed among the members
Documents required to set up a Limited Company in Hong Kong
Deliver the following documents with the correct fees to the Shroff on the 14th floor of the Queensway Government Offices:
- Incorporation Form (Form NNC1 or Form NNC1G)
- A copy of the company’s articles of association (samples are available for use at e-Registry); and
- A Notice to the Business Registration Office (IRBR1)
What is the difference between Public and private limited companies?
|Private Limited Company||Public Limited Company|
|Number of Shareholders allowed||<50||>50|
|Sources of capital||Narrower||Wider, can raise capital from the general public|
|Compliance and disclosure requirement||Looser||Stricter, need to disclose financial statements to the public|
|Company Set up Process||Simpler||More complicated, need to involve several parties|
A representative office is a registration option for foreign companies to have an administrative office in Hong Kong. This company type can only conduct specific activities and are not able to perform profit-generating activities. Despite those limitations, it is a popular choice for overseas companies because of its unique characteristics.
- Easy to set up: Representative companies only need to register a Business Registration certificate from IRD within one month of starting their business. Compared to a limited company, the company formation process is much easier.
- An affordable way to test the Hong Kong market: Since there are only minimal costs in setting up a liaison office in Hong Kong, it serves as a good way for foreign businesses to test the Hong Kong market before they really start penetration. The overseas company uses its identity to do market research as well as customer services.
- It is not allowed to raise funding: When there are internal cash Flow issues for the company, the representative office cannot help with raising funds for the company because of its nature.
- No profit-making activities are allowed: Even if there is a good market reaction to the goods from its related foreign entity, with this business structure, the representative office cannot engage in profit-making activities. It may be required to register another business entity in order to start a business.
Who should choose the representative office business structure?
- Foreign companies that hope to have an administrative office in Hong Kong
- Companies looking to test the Hong Kong market before investing or engaging in business activities.
- Companies that hope to build relationships with local customers
Documents required to set up
- A complete application form (IRBR56 – Form 1(b))
- A business address in Hong Kong
- Identification documents regarding the local representative of the representative office
For foreign companies, another option for easy entrance to the Hong Kong market is forming a Branch office. This business entity is an extension of the parent company. Unlike the representative office and subsidiary structure, the Parent company takes full liability for all debts and obligations of the branch.
- Easy to set up: In general, the establishment of branch offices is much easier than a limited company. However, companies should still pay attention to the name selected as well as document submission.
- Enjoy tax benefits: Since Hong Kong adopts a territorial tax regime, only income that arises or is derived from Hong Kong is taxable. This limits any opportunity for double taxation and allows branch offices to enjoy the low tax rate in Hong Kong.
- Parent company bears all the risks and responsibilities: Branches are under the parent company. So the responsibility or poor management of subsidiaries lies on their parent company.
Documents required to set up
- A complete application form
- A certified copy of documents from the parent company, like memorandum and articles of association
- A certified copy of the company’s certificate of incorporation (or its equivalent)
- A certified copy of the company’s latest accounts from the parent company
- Identification documents regarding the local representative of the branch
Profit Tax and Reporting Requirement for Different Business Structures
|Business Structure||Profit Tax Rate||Reporting Requirement|
|Sole Proprietorship||7.5% for the first 2 million profits, the remaining are 15%||– Audit is not required but financial statements are required to be submitted to the IRD.
– Annual Profit tax filing – BIR60
|Partnership||7.5% for the first 2 million profits, the remaining are 15%||– Audit is not required but financial statements are required to be submitted to the IRD
– Annual Profit tax filing – BIR52
|Limited Company||8.25% for the first 2 million profits, the remaining are 16.5%||– Annual Audit must be prepared by A CPA Hong Kong|
|Public listed Company||8.25% for the first 2 million profits, the remaining are 16.5%||– Annual Audit must be prepared by A CPA Hong Kong
– Annual Profit tax filing – BIR54
|Representative Office||Not applicable (Since they are not allowed to perform profit-generating activities)||No requirement|
|Branch Office||Same as corporations, 8.25% for the first 2 million profits, the remaining are 16.5%||– Annual Audit must be prepared by A CPA Hong Kong|
You are required to choose a business entity when you start a business. A business entity is an organization formed to conduct business in a specified jurisdiction. The type of entity that you choose determines how your business is taxed and its liability.
As a registered Hong Kong company secretary, the FastLane Group has extensive experience advising and assisting our clients to incorporate their Hong Kong companies. Please contact the FastLane Group for assistance!
Click here for further information on Hong Kong company formation.