As one of the most desirable financial market in the world, Hong Kong is especially preferred by business people. In Hong Kong, there are many entity types to adapt different sizes and purposes of the enterprises. The business entities in Hong Kong can be classified into private and public company, limited by shares or guarantees, sole proprietorship, partnership, branch, and representative office.
There are many business entity types in Hong Kong, and the ways of division are also various. This article is concentrating on four main kinds of firms in Hong Kong:
1. Limited Liability Companies in Hong Kong
Main features of LLC
The Limited Liability Companies (LLC) in Hong Kong are categorized to private vs public company and companies limited by shares vs limited by guarantees. The classification of these business entity types is based on the following features:
Hong Kong Limited Liability Companies (LLC)
|Business Entity types||Private Limited by Shares||Public Limited by Shares||Company Limited by Guarantee|
|Business purposes||Preferred by small and medium enterprises (SMEs) to conduct business and trade||Most chosen by large corporations to conduct business and trade||Especially preferred by charities, societies, club or non-profit organizations to raise funds for humanitarian purposes|
|Maximum of 50 shareholders||Can be more than 50 shareholders|
|Shares can be transferred but subject to the company’ refusal to register transfer of shares.|
|Distribution of company profits||The company’s profits can be distributed to its shareholders.||The profits cannot be distributed among the members.|
Advantages of Private Companies
The on-going lines focus mostly on the Private Company Limited by Shares as it is a popular type for Hong Kong incorporation.
- Separate legal entity: A Hong Kong private company can acquire assets, go into debt, enter into contracts, sue or be sued in its own name, due to the distinction from its founders. Its shareholders are not responsible for paying off its debts.
- Limited liability: The shareholders’ liability to the company is limited by their respective investment.
- Company life cycle: Shares can be transferred (according to the company’s AA), so the membership amendment does not affect the entity’s existence.
- Raising capital after incorporation: It is possible for private companies to bring new shareholders and issue more shares to expand its business.
- Transfer of ownership: Complete or partial transfer of ownership can be done by selling all or parts of its total shares or releasing new shares to the new investors.
- Tax benefits: Corporate tax regime in Hong Kong follows the territorial principles, which benefits its private companies with the tax rates from 8.25% to 16.5% for incomes derived from Hong Kong, and tax exemption for profits gained from the outside.
Disadvantages of Private Companies
- Statutory compliance: The Hong Kong private companies must do the compliance obligations annually with the Companies Registry and Inland Revenue Department, which increases the management workload.
- Disclosure to public: The identity of all shareholders and directors is required to publish according to Hong Kong Company Ordinance.
- Complex of incorporation and maintenance: It is more expensive for forming and maintaining a private company than a partnership or sole proprietorship.
- Complex of company dissolution: The closure of a private company is complicated, time-consuming and costly compared to other entities.
Private companies are recommended if you are going to:
- Limit members’ liability in the business operation.
- Utilize the company to conduct the business as a separate legal body.
- Maximize finance support from the bank by using the movable assets of the company as security.
- Delegate your authority to other management personnel to conduct the business on your behalf.
2. Sole Proprietorship in Hong Kong
Main features of sole proprietorships
The sole proprietorship in Hong Kong is a basic business entity type. It is easy to register with the Business Registration Office. Operated by a single owner, this entity is connected fully with its sole investor. The business cessation causes upon the owner’s death. The company can be transferred only by selling the business assets. There is no protection of personal assets from the liabilities, which makes it the riskiest company type.
The sole proprietorships in Hong Kong comply with the marginal tax rate from 7.5% to 15% depending on its income level. Unlike private entities, the reporting requirements are light as the owner is obliged to file only an annual tax return with IRD (form BIR60).
Advantages of sole proprietorships
- Easy registration and maintenance: Within one month after the business commencement, the owner must only apply for a Business Registration Certificate of the sole proprietor with Hong Kong Inland Revenue Department (IRD). Annual tax filing is required but audit task is exempted.
- Direct management: Decisions are made fast and easily as there is no need to discuss with other members.
- Gaining all profits: the proprietor is the sole beneficiary to all business profits, so he should have a good incentive to grow up the business.
Disadvantages of sole proprietorships
- Limited capacity to raise capital: The sole beneficiary’s personal wealth is the major source of capital; therefore, it might cause a difficulty both at the beginning and the continuity stage of the proprietorship.
- No legal separation between personal and business assets: The company’s loss and debts are liable to the owner individually and unlimitedly. This person can be bankrupted by the court for being unable to pay off the debts.
- Heavy workload: The only founder of the sole proprietorship has the responsibility for decision making, problem solving, operational duty and business development. This is why the working pressure is higher than the other entity categories.
- Limited business life cycle.
Sole proprietorship are recommended if you are going to:
- Need an extremely simple registration and low cost of setting up &; maintenance.
- Operate a limited and small scale of business scope.
- Have adequate funds to operate the business, without external financial support and expertise.
- Run low-risk (or non-risk) business.
3. Partnership in Hong Kong
Main features of partnerships
According to the Partnership Ordinance in Hong Kong, a partnership is formed when a person joins with other people to do business with common view of intention for profits. This business entity type involves at least 2 members. There should be the partnership agreement, a mutual agreeing among all the partners regulated by the Partnership Ordinance, to state and control their positions, rights and obligations in the business. The firm must apply for a Business Registration Certificate no later than one month of business commencement. Hong Kong partnerships are in charge of the annual tax return by filing form BIR52 and subject to profits tax rate from 7.5% to 15%.
A partnership can be limited or general. Below is the comparision table for limited and general partnership.
|Limited partnership||General partnership|
Advantages of partnerships
- Shared responsibilities and works: All partners should have high motivation to deliver excellent services as they are liable to all the debts and obligations of the firm.
- Procedures and costs for registration and maintenance are relatively low compared to other business entity types i.e private company.
- Flexible business structure: a partnership can easily expand by attracting new relevant people to join the partnership. Moreover, these partners can simply change the legal structure later if conditions change.
- Ultilize relevant expertise of each partner: Operating a business demands broad knowledge in different areas, which can be a hurdle for a business owner alone. Starting a business under a partnership allows you to take advantage of each partner’s proper experience and personal relationship.
Disadvantages of partnerships
- Personally liable for all the firm’s obligations: Jointly liable with other members, the partner’s liability is personally unlimited (except limited partner in the limited partnership).
- Profits sharing: Along with shared responsibility and workload, the interest is apparently divided among the partners.
- Disagreement during the course of business: Any decisions that would have a significant impact on business must be made with majority of existing members’ approval, which causes lengthy discussions.
- A partnership is build on trust and belief to each other as each partner is the agent of the partnership and is responsible for actions of other partners. Disputes can definitely cause discruption to the business.
Partnerships are recommended if you are going to:
- Have more than one person involved in the business, shared responsilibities among partners is enough to reduce risks, and limited liability is not neccessary.
- Have trustworthy and honest partners that can complement your lack of skills and knowledge to run a business.
- Have a common goals: a partnership works best when there is a shared goal among partners.
4. Branch in Hong Kong
A branch office in Hong Kong is not a separate legal entity under the Companies Registry. It is an extension of the parent company. Although a branch can undertake commercial activities, it has no own rights; subsequently, its parent company has full liability for all the debts and obligations of the branch.
A foreign corporate that wants to establish a branch in Hong Kong must register with the Company Registry to obtain certificate of registration as a non-Kong Kong company. A branch must also be registered with Business Registration Office of Hong Kong Inland Revenue Department. Same as any other business entities, a branch office is required to have a local company secretary and registered address.
A branch office is sometimes mistaken with a subsidiary. Investors often choose to have a subsidiary to be apart from their counterpart and to enter the market. It is impossible to incorporate a subsidiary under the Companies Registry, so businesspeople usually set up private limited companies as their subsidiaries in Hong Kong.
5. Representative Office
A representative office, or liaison office is an entity type designated only for companies formed outside of Hong Kong. A representative office must be named the same as its parent company. Only Business Registration Office can handle the liaison office. It is not allowed to conduct businesses in Hong Kong, but an annual tax return with “NIL” filing is required. A liaison office must have local representative to contact for government’s records. This entity type is chosen mostly for the purposes of promotion, advertisement, and marketing research in Hong Kong. It also plays role as the point of contact to reach potential and local customers (Customer Supporting Service Center), and to build up relationship with Hong Kong suppliers.
In line of the above preparation among the Hong Kong business entity types, the regulation for sole proprietorship and partnership are simpler and increasingly most complicated for the public companies. Hong Kong company formation is highly in demand and it is in need to choose an appropriate business entity type for your company. Before following the trend of entering Hong Kong open-oriented market, entrepreneurs should understand their business needs and investigate the pros and cons of each entity type. If you are confused to choose, do not hesitate to reach BBCIncorp Limited for clearance.