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Hong Kong Business Entity Types: Pros and Cons

Content Team9 minute read17 Feb 2021

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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 to 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.

Introduction

There are many business entity types in Hong Kong, and the ways of division are also various. This article is concentrating on the following kinds of firms in Hong Kong: Limited Liability Company, Sole Proprietorship, Partnership, Branch, and Representative Office.

1. Limited Liability Companies in Hong Kong

Main features of LLC

The Limited Liability Companies (LLC) in Hong Kong are categorized as private vs public companies and companies limited by shares vs limited by guarantees. The classification of these business entity types is based on the following features:

Private Limited by Shares

private-limited-by-shares-llc-hk

  • Preferred by small and medium enterprises (SMEs) to conduct business and trade
  • Company structure:
    • Required at least one shareholder, one natural director, Hong Kong local secretary, and registered office
    • Corporate director is allowed under strict circumstances
    • Maximum of 50 shareholders
  • Share capital:
    • The liability of its members is limited up to the unpaid amount of shares held by each shareholder
    • No requirement of minimum share capital
    • No bearer shares & shares have no pare value
    • Shares can be transferred but subject to the company’ refusal to register transfer of shares
  • The company’s profits can be distributed to its shareholders

For a throughout look into this type of entity, read our blog Private Limited Company in Hong Kong!

Public Limited by Shares

public-limited-by-shares-llc-hk

  • Most chosen by large corporations to conduct business and trade
  • Company structure:
    • Required at least two directors, one member, Hong Kong local secretary, and registered office.
    • Corporate directors are not allowed
    • Can be more than 50 shareholders
  • Share capital:
    • The liability of its members is limited up to the unpaid amount of shares held by each shareholder
    • No requirement of minimum share capital
    • No bearer shares & shares have no pare value
    • Shares can be freely traded.
    • Shares of a public company may or may not be listed on the Hong Kong Stock Exchange.
  • The company’s profits can be distributed to its shareholders

Company Limited by Guarantee

  • Especially preferred by charities, societies, club, or non-profit organizations to raise funds for humanitarian purposes
  • Company structure:
    • Required at least two directors, one member, Hong Kong local secretary, and registered office.
    • Corporate directors are not allowed
    • Can be more than 50 shareholders
  • Share capital:
    • Company limited by guarantee does not have share capital
    • The liability of its members is limited to an amount agreed to contribute in the event of the company’s liquidation
  • 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.

Need an a-to-z guide to doing business in Hong Kong?
This e-book provides you with the latest information about:

  • Incorporation process
  • Annual compliance requirement
  • Hong Kong tax system
  • Hiring issues for Hong Kong Business

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 are 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

sole-proprietorship-hk

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 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 of 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 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 is 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

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According to the Partnership Ordinance in Hong Kong, a partnership is formed when a person joins with other people to do business with a common view of intention for profits. This business entity type involves at least 2 members. There should be a partnership agreement, a mutual agreement 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 comparison table for limited and general partnership.

Limited partnership General partnership
  • Based on an agreement between one or more persons called limited partners and one or more persons called general partners. Must be registered with the Companies Registry under Limited Partnership Ordinance.
  • The limited partner is only liable for the contributed capital.
  • The limited partner may not participate in the partnership management
  • The general partner is personally liable for all debts and obligations of the firm.
  • The general partner has the power to make decision related to the business’s day-to-day operation.
  • Based on an agreement between two or more persons who shall be liable for all the company’s debts and obligations.
  • If a partnership is not registered with the Company Registry, it will take the form of General Partnership by default and be governed by Partnership Ordinance.
  • Individually liable for the personal assets for the company’s debts and obligations.
  • Each partner is liable for the actions of other partners.

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.
  • Utilize 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 the majority of existing members’ approval, which causes lengthy discussions.
  • A partnership is built on trust and belief in each other as each partner is the agent of the partnership and is responsible for the actions of other partners. Disputes can definitely cause disruption to the business.

Partnerships are recommended if you are going to:

  • Have more than one person involved in the business, shared responsibilities among partners is enough to reduce risks, and limited liability is not necessary.
  • Have trustworthy and honest partners that can complement your lack of skills and knowledge to run a business.
  • Have a common goal: 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 ownership rights; subsequently, its parent company has full liability for all the debts and obligations of the branch.

A foreign corporation that wants to establish a branch in Hong Kong must register with the Company Registry to obtain a 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 entity, 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 counterparts 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.

Need to learn more about How To Open A Branch Office In Hong Kong? Check it out!

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.

So, is Hong Kong Representative Office the type you are looking for?

6. Conclusion

In line with 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 about to choose, do not hesitate to reach BBCIncorp Limited for clearance.

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