Entrepreneurs who wish to start a business have a variety of business entities to choose from, the most common company types being a sole proprietorship or private limited company. While many entrepreneurs are eager to begin their business ventures and incorporate their company, it is important to understand the various advantages and disadvantages associated with each company type. In this article, we look to provide insight regarding the advantages and disadvantages of sole proprietorships and limited companies so that entrepreneurs can understand the most appropriate company type for their business.
What You Will Learn In This Article
Comparisons Between a Limited Company and Sole Proprietorships
1. Legal Indentity
Majority of SMEs in Hong Kong are incorporated as a private limited company as this company type has various advantages that other company types do not have. Private limited companies are commonly utilized by companies who are engaging in trade and business.
As opposed to a sole proprietorship, a private limited company’s share capital is distributed among various shareholders who are each entitled to shares of the company’s profits.
Sole proprietorships are businesses that are owned and operated by a single individual, also known as the sole proprietor. As a single individual is responsible for ownership and operations, there is no legal distinction between the individual and the business entity.
All limited companies provide the reassurance of limited liability. In other words, shareholders will not be personally liable for any financial losses incurred by the company and their liability is limited to the amount of their respective shareholdings / investment.
In the event that a Hong Kong company has outstanding debt obligations to settle, the shareholders will have no responsibility to settle the outstanding debt.
On the other hand, In a sole proprietorship, there is no separation from the Hong Kong company and the sole proprietor who owns and operates it. Therefore, if the sole proprietorship incurs debt, the owner will not be able to enjoy security of their personal assets.
3. Ease of Expansion
The source of capital for sole proprietorships is the personal finances of the sole proprietor. Therefore, the prospects of growth and expansion of the sole proprietorship can possibly be hindered in certain circumstances.
This is where limited companies have an advantage. Limited liability companies can more easily raise capital by bringing in new shareholders, or by issuing more shares to existing shareholders. Furthermore, operating a limited company can help instil confidence in your business. Larger companies with more recognisable names tend to prefer working with limited companies, rather than a sole proprietorship or partnerships.
4. Tax Rate
Sole proprietorships in Hong Kong are taxed at the profits tax rate of 15% of their assessable profits. In contrast, limited companies will have their profits tax subject to a flat profits tax rate of 16.5%.
5. Business Registration (BR) Fees
The incorporation fees for a limited company are considerably higher than that of a sole proprietorship. Specifically, a sole proprietorship only needs to pay the BR fee of HKD 250 to the Hong Kong Inland Revenue Department (“IRD”) to complete the set-up process. In contrast, a limited company must pay a HKD 1,720 fee to the Hong Kong Companies Registry in addition to the HKD 250 BR fee to the IRD to complete their respective process.
6. Annual Filing Requirements
There’s no difference in annual filing requirements between a Hong Kong limited company and a sole proprietorship. This is because all Hong Kong companies must adhere to the same statutory obligations and thus, are required to annually file a full set of audited financial statements. In addition, all Hong Kong companies must file an annual return that details the company’s current directors and shareholders.
7. Perpetual Succession
Succession of a company is much easier for a limited company. This is because 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. As such, the shares of a Hong Kong company can be easily transferred and doing so will not affect the operations of the company.
On the contrary, sole proprietorships have a limited life and no perpetual succession. Unfortunately, this means that business ceases to exist on the death of the sole proprietor.
Private limited companies and sole proprietorships each carry with them their own unique set of advantages and disadvantages. However, it is important to note that one company type is not particularly “better” than the other – each company type has certain situations which make them more appropriate. As a licensed Hong Kong company secretary, the FastLane Group has extensive experience incorporating companies in Hong Kong. Please contact the FastLane Group for assistance!