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Hong Kong Legal Entities

1. Sole-Proprietorship

Suitable for small scale and low risk businesses with a sole owner; sole proprietorships are easy to set up. However, this is not a recommended business structure for entrepreneurs as it does not constitute a separate legal entity and does not protect the owner’s personal assets from business liabilities.

Sole proprietorship is considered the easiest and simplest form of business. As the name suggests, the business is owned and operated by a sole person and since the business is not a separate legal entity, the owner and the business are considered one. Although this is the simplest form of business it is often considered as the riskiest as there is no protection of personal assets from risks and liabilities that arise from the business. While the sole proprietor accrues all the profits from the business, he is equally responsible (solely and personally) for all the liabilities. This poses a tremendous financial risk and aspiring entrepreneurs are strongly discouraged from adopting this form of business. It is relatively simple and easy to register a sole proprietorship in Hong Kong.

Advantages

  • Simple to establish: Sole Proprietorships are known for simple and easy setting up procedures.
  • Easy decision making: Given the fact that the sole proprietor retains complete control over all business affairs, decision making is fast and efficient, without having to seek approval from others.
  • Sole beneficiary of profits: Sole proprietors do not have to share profits derived from the business.
  • Ease of termination: Terminating a sole proprietorship is easier, less time consuming and less expensive than other business entities.

Disadvantages

  • No separate legal entity: Sole proprietorships are not a separate legal entity and the owner and business are considered one and the same. The sole proprietor is responsible for all debts and liabilities.
  • Unlimited personal liability: In cases of debts incurred, there is no protection of personal assets (including your property).
  • Limited capital: The only source of capital is the sole proprietor’s personal finances and business generated profits. With limited working capital business growth and expansion is deterred.
  • Limited life of the business:
  • Low public perception: Due to the risks posed by this form of business, investors are less confident and sourcing for finance becomes difficult.
  • Sale/transfer of all or part of the business: You can transfer the business only by the sale of business assets.

To read more about company maintenance in H.K. jurisdiction, please click the link here

2. Limited Liability Company (LLC)

By far, the most common legal form in Hong Kong is a limited company, usually private limited. It is very easy to form, maintain, and operate private limited companies in Hong Kong. Bookkeeping is required, but there are many accountants and accounting firms which can do it for you.

The company through which you form your Hong Kong company will most likely have in-house accountants that can do it for you, as well as make all necessary filings—including tax exemption.

The cost of forming a Hong Kong company is around HKD 10,000 to 20,000 (about USD $1,300-$2,600). Annual renewal and the cost of outsourced bookkeeping will vary.

 As of 2012, LLP (limited liability partnership) is available. But it has not seen much usage yet.

2.a. Private Limited Company

Most small to medium sized companies in Hong Kong are set up as ‘private companies limited by shares’ and are commonly referred to as ‘private limited companies’. It is often chosen over other forms of business entities like sole-proprietorships and partnerships owing to its many benefits. A company limited by shares is the most common type of company for conducting business and trade. A company limited by shares has a share capital which is divided into a number of shares of certain value each. These shares are held by shareholders (investors) who are entitled to a share in the profits of the company and receive a dividend corresponding to their respective percentage of shareholding in the company. In case of a loss, the shareholders will lose their investment in the shares of the company.

Advantages

  1. Separate Legal Entity: A private limited company has a legal identity of its own, distinct from its members.
  2. Limited Liability: The liability of the shareholders is limited to the amount of their respective shareholdings/investment.
  3. Perpetual Succession: A change of membership does not affect the company’s continued existence. Shares can be easily transferred and changes in shareholders have no bearing on the business operations of the company.
  4. Ease of raising capital: Business expansion is facilitated by the ease of raising finances, by bringing in new shareholders or issuing more shares to existing shareholders. It is easier for limited companies to secure bank loans when compared to other business entity types.
  5. Positive Image: Private limited companies are taken more seriously when compared to sole proprietorships and partnerships and investors are more willing to contribute their resources to private limited companies.
  6. Easier transfer of Ownership: Complete or partial transfer of ownership of companies can be done by selling all or part of its total shares, or through the issue of new shares to additional investors.
  7. Tax Benefits and Incentives: There are several tax benefits that private limited companies enjoy in Hong Kong. Corporate tax, (or profits tax as it is called), is set at 16.5% of assessable profits for corporations. Hong Kong follows a territorial basis of taxation. Hence, only profits which arise in or derived from Hong Kong are subject to tax in Hong Kong. There is no capital gains tax, withholding tax on dividends and interest and no sales tax or VAT in Hong Kong.

Disadvantages

  1. Complex to set-up: A private limited company is generally considered more complex, expensive and complicated to establish when compared to sole-proprietorships and partnerships.
  2. Ongoing compliance:
  3. Disclosure requirements: A company has to make certain information available (capital structure, personal particulars of shareholders, directors and secretary etc.) to the public by filing returns with the Companies Registry.
  4. Complex winding up procedures: Closing a company is more complex, time consuming and expensive when compared to other business entities.

2.b.  Public Limited Company

Public Limited Companies may be limited either by shares or by guarantee:

2.b.1 A public limited company limited by shares is a locally incorporated company in which the number of shareholders can be more than 50. A public company is one where shares and debentures are offered to the public. Usually, medium to large private companies who have achieved significant growth in the industry decide to take the company public, by expanding their shareholder base. Most public companies are listed on a stock exchange. Public/listed companies are         subject to stringent rules and regulations, as they raise capital from the public.

Advantages

  1. Easy to access the capital.
  2. Strong public perception and ease of implementing mergers and acquisitions.

Disadvantages

  1. Public disclosure requirements.
  2. Time consuming.
  3. Complex and expensive to establish and operate.
  4. Risk of takeovers.
  5. Sharing of profits and ongoing statutory compliance.

2.b.2. Public Company Limited by Guarantee

A company limited by guarantee has no share capital. It has members, rather than shareholders, who guarantee/undertake to contribute a predetermined sum to the liabilities of the company      which becomes due in the event of the company being wound up.

The advantages are that the members enjoy limited liability and retain democratic control over all matters.

The disadvantages are that profits cannot be distributed and there may be a lack of working capital. This form of business entity is meant for non-profit organizations that are interested in Hong Kong incorporation.

If you want to register the LTD company, please visit the LTD requirements page

To read more about company maintenance in HK jurisdiction, please click the link here 

3. Partnership

This business structure allows two or more people to share ownership of a single business. Partnerships enable a sharing of responsibility and increase the ability to raise funds. However, partners are jointly and individually liable for the actions of the other partners. The most common form of partnership is a Limited Partnership, as it offers limited liability to limited partners.

 Partnerships are defined as businesses that are established and co-owned by two or more people who join together to carry on the business with a view of sharing profits. Partnerships in Hong Kong are governed by the Partnership Ordinance and are of two types: General Partnership and Limited Partnership.

(a) General Partnership

Similar to sole-proprietorships, general partnerships make every partner in the firm personally liable for the debts and liabilities of the business. Additionally, each partner can be responsible for the actions of another partner (as long as these acts were done in the course of the partnership business).

Advantages

  1. Ease of raising capital: Partners need not rely on personal sources for raising capital. Sources of finance include loans from partners and bank loans extended on the basis of combined assets of all the partners.
  2. Ease of set up and maintenance: Partnerships are considered easier to establish, with less compliances and statutory requirements when compared to companies.
  3. Combined expertise: Efficiency can be achieved through effective decision making by pooling together all the partners’ resources, skills, knowledge and expertise.
  4. Attracts employees: Prospective employees may be attracted to the business if given the incentive to become a partner.
  5. Unlimited liability: All the partners are personally liable for the business debts and liabilities.
  6. No protection of personal assets: Like sole-proprietorship, partners are personally accountable for business debts and losses. There is no protection of personal assets (e.g. house, car, shares, etc.) which can be used to pay off debts and losses.
  7. Divided goals and opinions: Partnerships could be broken if partners who disagree on business goals, management plans, and operational procedures.
  8. Sharing profits: Any profit from the business must be shared among all the partners.
  9. Liability for co-partners actions: Each partner is bound by the other partners and can be responsible for the wrongful acts or debts of co-partners.

Disadvantages

(b) Limited Partnership

Limited Partnerships constitute both general and limited partners. A general partner has unlimited liability for the firm’s debts and is responsible for the day-to-day running of the business, while limited partners’ liability is limited to the amount of their unpaid share capital. Limited partners cannot participate in the management of the partnership.

Advantages

  1. Limited personal liability of limited partners:
  2. Ease of raising capital:
  3. Greater efficiency: Greater efficiency can be achieved as the general partner has the freedom to run the business without interference and is responsible for decision making and the day-to-day business affairs.
  4. Less compliance: Limited partnerships have fewer compliance requirements when compared to companies.
  5. Limited partners can leave or be replaced without dissolving the Partnership.
  6. Unlimited personal liability of general partners: Since general partners have unlimited personal liability, it may be difficult to find suitable partners who are willing to take on this risk.
  7. Limited role of limited partners: Since limited partners cannot become involved in the day-to-day operation of the business, they have no choice but to remain passive investors.
  8. Expensive to set-up: Limited partnerships are generally more expensive to set-up when compared to general partnerships.

Disadvantages

  1. Unlimited personal liability of general partners: Since general partners have unlimited personal liability, it may be difficult to find suitable partners who are willing to take on this risk.
  2. Limited role of limited partners: Since limited partners cannot become involved in the day-to-day operation of the business, they have no choice but to remain passive investors.
  3. Expensive to set-up: Limited partnerships are generally more expensive to set-up when compared to general partnerships.

WHICH LEGAL ENTITY TYPE TO CHOOSE?

Your choice of a particular type of business vehicle will depend on your particular situation and plans. You can take into account the following factors before making a decision:

  • If you want to establish a low-risk small-scale business where you will be the only owner and have sufficient financial resources on hand, it might be easier and simpler for you to register your business as a Sole-Proprietorship. However, bear in mind that your liability is unlimited and there is no protection of your personal assets.
  • If you want to share the responsibilities of running a business or if you do not have adequate financial resources, you can choose a Partnership. However, note that partners are generally jointly and severally liable for certain acts of the partnership, unless you choose a limited partnership. Moreover, it is difficult to find suitable partners and there could be a possible development of conflict between partners.
  • Incorporating a private limited company is considered the best choice.

Contact us to get more information about Hong Kong as a Jurisdiction and we can help you to choose the right legal entity for your business.

Why Hong Kong?

  1. Hong Kong is a highly reputable low-tax jurisdiction.
  2. A Hong Kong company can be owned, managed, and operated entirely from abroad.
  3. Hong Kong has16.5% corporate tax rate.
  4. There is no sales tax (VAT) in Hong Kong.
  5. Hong Kong is one of the best banking jurisdictions in the world.
  6. Hong Kong is a large city with influences from all over the world, though mainly China and UK.
  7. Income tax is charged on a sliding scale from 2% to 17%. There is no capital gains tax, inheritance tax, wealth tax, or sales tax.