Everything About Hong Kong Sole Proprietorship – A Foreign Entrepreneurs Guide

Hong Kong, which has been named the “World’s Freest Economy” for over a decade, is a financial powerhouse with a developed market. These factors make Hong Kong an attractive destination for global businesses looking to set up operations in Asia.

It’s also one of the best cities for a sole proprietorship, with supportive governance regimes that provide business freedom, as well as maximum ease and flexibility for operation.

If you’re thinking about leaping into the world of self-employment and running your business as an individual, incorporating as a sole proprietorship in Hong Kong might be the best option for you. In this article, let’s discover everything about Sole Proprietorship, as well as how to start one in Hong Kong.

Overview of Hong Kong sole proprietorship

As the term suggests, a sole proprietorship refers to the exclusive owner of a business, entitled to keep all profits and liable for all losses.

It’s one of the most common types of business in Hong Kong, especially for SMEs, startups, and freelancers, due to the relative ease of setting up and the comparatively small administrative burden involved, and lower costs.

The key features of a sole proprietorship encompass:

No separate legal entity

A sole proprietorship establishes no separate legal distinction between the owner and the business, meaning you’ll take full liability for any debts, errors, or financial risks.

Full ownership

As an owner of a sole proprietorship, you’ll have complete control over the business and take responsibility for all important decisions. You’ll also have the freedom to direct and steer your business the way you want without getting approval from anyone.

Limited funding options

Since there is no separation between a sole proprietor and our personal finances, it can be difficult to prove your trading history and transactions. Thus, banks and lending institutions will likely perceive your business as high-risk and may refuse to provide funding.

Keynotes to the registration procedure of Hong Kong sole proprietorship

A sole proprietorship is easy and inexpensive to set up, and there is no need to file annual returns or hold shareholder meetings. However, there are crucial considerations that you need to keep in mind to ensure a smooth registration.

Document required for a sole proprietorship

When setting up a Hong Kong sole proprietorship, you have to prepare and file the necessary paperwork with the IRD. This includes an application form, which can be obtained from the IRD website. Your application must include:

• A copy of the owner’s identity card or passport
• Business registration form
• Description of business activity
• Names and addresses of the owner
• Personal bank statements for the last three months
• Business plan (if any)
• Latest audited accounts (if any)

Once you have gathered all the required documents, you can proceed to apply online or via paper submission.

Registration fees for a sole trader

You must submit the prescribed fee along with your application to the IRD to register as a sole trader.

The registration fee will vary depending on the annual government funding scheme & support, as well as the years of valid registration (1 or 3 years).

Update: For the term on or after April 1, 2023, the total fee for sole trader registration (including levy) is HK$2150 (1-year renewal) and HK$5650 (3-year renewal). You might check out the government fee details at this link.

Processed time for application

The processing time for in-person applications is normally within 30 minutes of receipt.

For online applications or posting, it can take up to 2 working days of receipt and you will be notified of the outcome via mail.

If the application is successfully processed, you’ll receive a Business Registration Certificate. Note that this certificate must be displayed at your place of business and failing to display may lead to a fine or penalty.

On-going requirements for a sole proprietorship

To operate smoothly after registration, you’ll need to satisfy the following requirements:

• Have a physical presence in Hong Kong – this can be achieved by renting office space or setting up a virtual office.
• Have a local bank account or open a bank account if you don’t have one.
• Obtain a valid Hong Kong work visa if you’re a Hong Kong non-resident. For Hong Kong citizens, only an ID card is needed.
• File tax returns with the Inland Revenue Department (IRD), including tax returns for individuals (BIR60); property tax returns (BIR57 or BIR58), and profits tax returns (BIR51, BIR52, or BIR54)
• Renew your business registration annually

Get to know the compliance of sole proprietorship

Opening a bank account

Having a local bank account is a legal requirement when you’re a sole trader in Hong Kong, and it’s also an important criterion that helps you claim sole trader business expenses.

As a sole owner of a business, you can claim a deduction for expenses through the submission of records. Thus, having a separate business bank account prevents you from mixing up business costs with personal spending and increases your chances of getting claim approval.

Opening a Hong Kong business bank account is fairly straightforward, you’ll be required to provide the bank with a business registration certificate and your proof of identity documents. Along with that, you need to sign a declaration confirming that you’re the sole owner of the business.

Complying with taxation

In Hong Kong tax system, a sole trader is taxed as an unincorporated business under the two-tiered tax rates, which are correspondingly set at 7.5% and 15%. You will need to declare your business income on personal tax returns.

4 types of taxes that matter for individuals and businesses in Hong Kong

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Accounting & auditing

As a sole proprietor, you are personally responsible for your company’s debts and liabilities. This means that if your business can’t pay its bills, creditors can come after your assets, including your home or savings.

That’s why maintaining proper accounting records and financial statements is vital because it ensures your business is transparently managed and protects you in the event of disputes. You might take the reference of Hong Kong accounting standards to get an overview of this point.

While the requirements may seem daunting, there are many resources available to help sole proprietors in Hong Kong comply with the law. Professional accounting and auditing firms can provide valuable guidance. Need more advice on accounting and auditing matters for your Hong Kong companies? Don’t hesitate to get in touch with us for support via service@bbcincorp.com.

Conclusion

Overall, while there are some challenges to setting up a Hong Kong Sole Proprietorship business, understanding the requirements and having a solid plan can help make the process much smoother. With the right preparation and support, any business owner can succeed in Hong Kong.

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