Types of Companies in Hong Kong - All You Need to Know
25 October, 2018
Many multi-millionaire investors are choosing to operate their startups overseas, and one of the most popular destinations for them is Hong Kong. The main reason behind this trend is for the purpose of entering the international market and to benefit from Hong Kong's tax-friendly jurisdiction.
Being the world's 9th largest economy, Hong Kong offers a very stable and efficient environment with modern telecommunications, infrastructure, as well as an administrative framework. Besides the free-trade economy, Hong Kong also has a stable political environment and a laissez-faire government policy. The process for the incorporation and registration of your business is also very straightforward.
Once you have decided to incorporate your company in Hong Kong, you can select the most suitable form of legal classification according to your business requirements. It is always advisable to weigh the pros and cons of each business entity concerning your business goals in order to select the right structure and steer away from any wrong decisions.
For the incorporation of your business, Hong Kong has several types of business entities, and every business entity has different characteristics, suited for both small and large companies. The most common form of business entities in Hong Kong are limited liability companies, sole proprietorships, and partnerships. So, your choice of a particular business structure would depend on the following factors:
- What is the size and scope of your business?
- How much capital is required for starting your business? Can you raise money on your own or do you need outside investors?
- What is the nature and purpose of your business? Is it more conducive to a specific form of the industry?
- What are the tax implications in choosing a particular business structure?
- Does your business involve risks?
- What are the start-up procedures, costs, timeline, and other requirements?
- What is the extent of control you wish to have over your business?
- What is the extent of your personal liability in choosing a particular business vehicle?
- Can your business attract outside investors?
Once you figure out the answers to these questions, the next step is to select the type of business entity that would suit the business idea. Below are the different types of business entities that you should know before setting up your business structure in Hong Kong.
Types of Business Entities in Hong Kong
Several types of business entities are available for incorporation in Hong Kong. Your selection of a specific kind of Hong Kong Company would be based entirely on the particular plans and situation. Let's dig in.
Entity Type: Limited Liability Company
Being the most popular type of business entity in Hong Kong, a limited liability company can be easily incorporated in Hong Kong by registering with the Companies Registry under the Companies Ordinance. It is a separate legal entity from its members or shareholders. In fact, this type of business entity can be incorporated as limited liability companies and unlimited companies.
But very rarely do investors opt for an unlimited company in Hong Kong. According to this type of business entity, a limited liability company can be a private limited company or a public company, and limited by guarantee or limited by shares. The preferred choice for most investors in Hong Kong is to set up a private limited company, where the liabilities of the owners is limited to the assets in the company.
- Private Limited Company
Almost all of the small to medium-sized companies are established as a private company limited by shares in Hong Kong and are commonly referred to as 'private limited companies.' It is often chosen over other forms of business entities like partnerships and sole proprietorships, owing to its many benefits. This type of the company is famous for conducting business and trade.
There are no requirements regarding the minimum share capital, and the maximum number of shareholders is fifty. Their share capital is divided among the shareholders 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. Unlike the sole proprietorship or the partnerships, the assets of the shareholders are protected in case of bankruptcy.
- Public Company Limited by Guarantee
The limited by guarantee type of Hong Kong limited liability company has no shareholders. In short, this type of Hong Kong company has members rather than the shareholders, who undertake to contribute a predetermined sum to the liabilities of the company, which becomes due in the event of the company being wound up. It's a form of business chosen by a charitable organization in order to raise funds for humanitarian purposes.
In fact, the members enjoy the limited liability and preserve the democratic control on all matters. As everything has some disadvantages associated with it, the same is true for this type of business structure, as the profits of the company cannot be distributed among the members and there may be a lack of working capital.
- Public Limited Company In Hong Kong
As soon as you understand the business structure of a limited company by guarantee in Hong Kong, the next form that all entrepreneurs and would-be entrepreneurs are required to know is the public limited company in Hong Kong. Well, it is a locally incorporated company by more than fifty members.
This type of business entity has the share capital divided into shares which is received by the shareholders and registered in the stock market to make it public. Frequently, medium to large sized private companies choose to incorporate their business as a public limited company in order to take the company public by expanding their shareholder base.
The public limited company has strong public perception, are easy to access to capital, and has the ease of implementing mergers and acquisitions. On the flip side of it, the business form has some disadvantages that include federal disclosure requirements, high expenses to operate and establish, time-consuming, complicated company structure, risk of takeovers, ongoing statutory compliance, and sharing of profits.
Entity Type: Sole Proprietorship in Hong Kong
The sole proprietorship is considered as the most basic and more accessible form of business in Hong Kong. As the name suggests, the company is owned and operated by a single owner, whereas the company and the owner is considered as one. Even though it is the simplest form of a business entity, it is often deemed as the riskiest as there is no protection of personal assets from the liabilities and the risk that arises from the company.
As a matter of fact, as the sole proprietor accumulates all the profits from the company, they are also equally and personally responsible for all the liabilities. This poses a tremendous financial risk and aspiring entrepreneurs are strongly discouraged from taking up this type of business entity. Instead of this enormous risk factor, it is relatively simple and easy to register a private limited company in Hong Kong.
Entity Type: Partnership
The next type of business entity in Hong Kong is a partnership, which is defined as businesses that are co-owned and built by two or more people who joined together to carry on the organization with a perspective of sharing profits. A partnership may be general or limited and are governed by the Partnership Ordinance. It is divided into two categories-
- General Partnership
A general partnership is regulated and formed under the Partnership Ordinance, as it is neither a body corporate nor a joint company. It is based on the agreement between two or more people who are personally liable for their assets for the company and which are allowed to split the profits among them.
Moreover, each partner is legally responsible for the actions and risks of the other business partners. In fact, at the time of registration for this type of partnership in Hong Kong, there is no requirement for fixed share capital.
- Limited Partnership
The next type of business entity is a limited partnership which is regulated and formed under the Ordinance of Limited Partnership and registered under The Companies Registry. All partnerships are considered as a general partnership, unless it can complete its registration under the Companies Registry and comply with its ongoing requirement to become a limited partnership.
A limited partnership consists of both the limited and general partners. General partners have unlimited liability for the debts of the organization and are solely responsible for the day-to-day running of the organization.
However, the limited partners cannot participate in the management of the partnership and are limited to the amount of their unpaid share capital.
Entity Type: Foreign Company Office
Last but not the least, this type of business entity is considered as a branch or overseas companies. For the 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.
Every business entity has its own requirements and complies with different levels of financial reporting. Your choice of a specific type of organization will depend on your business goals and objectives. Whether you intend to carry your business activities for the profit of your organization, you are willing to raise the capital through external investment, or you aspire to establish a non-profit startup, these will influence your decision for your selection of your business entity.
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