Hong Kong Business Entity Types and Characteristics
24 November, 2018
With the rise of globalization, many business owners are moving to Hong Kong in order to set up their company. Being the record-holder for the world's most liberal economy for the past two decades, Hong Kong is an excellent gateway to establish your business in China or other Asian countries. Hong Kong is considered the best place for its simple tax structure, excellent government support, advisory offices, and its international economy.
Are you ready to establish your business entity in Hong Kong? If so, the first and foremost step of forming the business entity is to decide on what the appropriate structure is and the type of Hong Kong company that would suit the business idea. It is always better to measure the pros and cons of your business goals so that you can choose the right business structure for your company.
Types of Business Entity
Every business entity has its own requirements that may be suited for large or small companies. But the basics are sole proprietorships, limited companies, and partnerships. You are also required to consider the essential aspects of your business before choosing the right type of company, including the following:
- Required capital
- The nature and size of the business
- Tax requirements
- Current and future business needs.
- Future expansion plans
In Hong Kong, there are various forms of business entities which you can choose as per your business requirements, start-up procedures, costs, timeline and tax implications. The 4 classes of business entities are-
- Limited Companies
- Sole Proprietorship
- Representative Office
Before taking a plunge towards launching your business, let's dig into the characteristics of each business entity for you to enjoy the maximum benefits of each company.
#1 Limited Liability Company
Being one of the most popular types of Hong Kong companies, a limited liability company can be easily incorporated. All you need to do is register the business with the Companies Registry under the Companies Ordinance. This business is a separate legal entity from the members of the organization. Under the Limited Liability Company, two types exist â€“ private company or public company.
A private limited company is normally chosen from other limited company because of the benefits associated with it. The liabilities of the owners is limited to the assets in the company, and their personal assets are protected from business liabilities.
- Public Limited Company
A public limited company is the best choice for large-scale businesses, other than business entities, as the number of shareholders can be more than 50. These businesses are usually listed on the stock exchange in Hong Kong. So, if you are thinking to establish a public limited company, then you have to observe different regulations for public disclosure of information.
And there are chances that you need to increase the capital for your business after incorporation. In regards to the debts, losses, and the liability of the companyâ€™s shareholders depends on the number of owned shares, this is considered as the benefit of owning this kind of entity.
- Public Company Limited By Guarantee
A public company limited by guarantee has no share capital. It has members, rather than shareholders, who are responsible for undertaking the predetermined sum to the liabilities of the business. This is a type of company that has the highest degree of liability for its shareholders, and it might be suited for clubs, societies or charity businesses.
- Private Limited Company
The private limited company is the most popular form of business in Hong Kong especially for trade. It is a separate business entity from the founder, unlike the sole proprietorship. Many small to medium sized companies in Hong Kong are established as the private companies limited by shares.
A company limited by shares has a share capital which is divided into many shares of specific value. The business is incorporated by at least one director, a secretary and one shareholder. The secretary must be a Hong-Kong resident.
Ease of Raising Capital - It is more convenient for limited companies to secure bank loans as compared to other types of business entity.
To expand the business in the competitive world, the ease of raising finances and bringing in new shareholders or issuing more shares to existing shareholders, plays an important role.
Positive Image - This type of business entity is taken as more serious when compared to partnerships and sole proprietorships. Investors are more willing to contribute their resources to private limited companies.
Perpetual Succession - Private limited companies have perpetual succession notwithstanding the resignation or insolvency of directors or shareholders.
In short, any change in membership doesn't affect the companyâ€™s continued existence. Shares can be transferred quickly, and changes in shareholders have no bearing on the business operations of the company.
On-going Compliance - In order to establish a private limited company, you need to comply with several statutory compliance requirements.
Complicated to Set Up - The setup of this business entity is considered to be more complicated and expensive when compared to partnership and sole proprietorships.
#2 Sole Proprietorship
Sole proprietorship is considered as the simplest and easiest form of the business. As per the name, it is operated by a single owner, who is fully liable for his assets, profits and losses of the business. This business structure can be riskier because there is no distinction between the individual and the sole proprietorship. But it also has advantages of complete ownership.
Simple to Establish - Sole Proprietorships are considered for easy and straightforward setup procedures. The income is taxable at 15%, rather than 16.5% for corporate income tax.
Ease of Termination - The process of de-registration is quiet more accessible, less expensive, and less time consuming than other business entities.
Simple Decision Making - The sole proprietor has full control over all the business assets, affairs, and decision making is efficient and fast, without having to seek approval from others.
Limited Capital - In this type of business entity, the only source of capital is the finances of sole proprietors and the profits generated with the business.
No Separate Legal Entity - Since the business is not a separate legal entity, the owner and the company are considered one. The sole proprietor is solely responsible for all the liabilities and debts.
Low public perception - The investors may be less confident, and sourcing for the finances becomes more complicated due to the risks posed by this form of business. The business ceases to exist at the death of the owner.
In the sole proprietorship, there is a tremendous financial risk which is why aspiring entrepreneurs are discouraged from taking up this type of Hong Kong company.
The next type of business structure is a partnership in Hong Kong. It is defined as the businesses which are incorporated and co-owned by two or more people who can join together to carry on the company with the perspective of sharing profits. In Hong Kong, partnerships are governed by the Partnership Ordinance and are of two types- Limited Partnership and General Partnership.
- Limited Partnership
Limited Partners form a limited partnership, and are liable to the extent of their contributions towards the capital of the company. And general partnerships are fully liable for the company's losses and are responsible for the day-to-day running of the business. Partnership owners in Hong Kong must observe the provisions of the Partnership Ordinance.
Ease of Raising Capital - The liability of the limited partners is restricted to their investment value. Being preferred over sole-proprietorships by investors, it is easier to raise the capital in this form of business entity.
Limited Personal Liability of Limited Partners - Limited partners will not be personally liable for any business debts incurred by the wrongful acts of another partner or firm.
Limited Role of Limited Partners - Limited partners are not responsible for day to day operation of the business, they have no choice but to remain passive investors.
Expensive to Set Up - Limited partnerships are generally more costly to set-up as compared to general partnerships.
- General Partnership
General partnerships are established between individuals who become liable for the debts of the partnership. This business entity is quite convenient to set up in Hong Kong, and has the advantage of the experience brought together by the founding partners.
Ease of Raising Capital - If you are setting up a company as a general partnership, then you don't need to rely on personal sources for raising capital. You can source funding from banks and partners extended from combined assets of all the partners.
Maintenance and Ease of Set Up - Partnerships are considered more convenient to be established with less statutory requirements and compliances when compared to companies.
Unlimited Liability - All the partners are personally liable for the business debts and liabilities.
Liability for Actions of co-partners - Every partner of the company will be responsible for the wrongful acts or debts of co-partners.
#4 Foreign Company Office
The next type of business entity is overseas companies or branch offices. For entrepreneurs who are willing to establish their business presence in Hong Kong, this type of business entity could be their best choice. It is the best option for foreign companies that want to be separate from their counterpart.
By now, you have a better understanding of the various type of business entities in Hong Kong. Every business entity has its own statutory requirements and complies with different levels of financial reporting. So, your choice of a specific type of the company would depend on the nature, goals, and objectives of your business.
With this information in mind, you can now decide which type of business entity you want to incorporate in Hong Kong. For more information about choosing your business structure, hire a professional like Startupr and set up your dream company.
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