There is no doubt that Hong Kong is a global leader in open economics — its inherent focus on free trade has elevated it to be the world’s freest economy for 25 of the last 26 years. Most people will know about Hong Kong’s low corporate tax rates, and the fact they have no capital gains tax, sales tax, or withholding tax on dividends or interest.
Beneath those obviously appealing characteristics, however, are the different types of business entities one can incorporate to operate in Hong Kong. While straightforward and free of red tape as is typical of operating out of Hong Kong, there are some basic differences in each entity (as well as a few nuances) to be aware of.
Let’s take a look at the different types of business entities in Hong Kong so you can find what will best serve your needs.
Sole Proprietorship in Hong Kong
The most basic and entry-level of business to create in Hong Kong is a sole proprietorship. A single owner is fully liable for all profits and losses made by the business. The ownership of the business may be transferred by selling the assets.
Advantages of Establishing a Sole Proprietorship in Hong Kong
- Simple to register — The easiest of all business entities to register with the Business Registration Office
- Low income tax — Income is taxed at only 15% as opposed to 16.5% for corporate income.
- Minimal tax reporting — Just one annual tax return to be filed with the Inland Revenue Department.
Disadvantages of Establishing a Sole Proprietorship in Hong Kong
- Liability — a sole proprietorship has the highest degree of personal liability. There is no distinction between the business and the owner as a legal entity.
Business Partnership in Hong Kong
A partnership is the natural expansion of a sole proprietorship, where two or more people join forces to grow a business and share the profits. There can be from two to a maximum of 20 partners in a partnership, and they will all usually have equal rights in the business. If it grows above 20 partners, it must register as a company in Hong Kong.
There are two kinds of business partnerships in Hong Kong — a general partnership and a limited partnership.
A general partnership means the partners are personally liable for profits and debts. Partners can also be held liable for the actions of other partners.
A limited partnership has both limited and general partners, where the limited partners are only liable to the amount of their capital contribution, where the general partners have unlimited liability. The general partners cannot have a say in the operation of the business however, while general partners do.
Related Read: Check out 9 benefits of doing a business in Hong Kong
Advantages of Establishing a General Partnership in Hong Kong
- Simplicity — Much easier to set up as opposed to a company.
- Flexibility — The arrangement of partners can be extremely flexible.
- Minimal reporting — Because there are fewer statutory controls compared to companies, there is no need to audit or publish business accounts to the public, except for income tax.
- Employee retention — Since you can offer partnership as an incentive to employees, they are more likely to be productive staff members.
- Easier capital — A general partnership can raise capital from outside sources, e.g. banks.
Disadvantages of Establishing a General Partnership in Hong Kong
- Unlimited liability — All partners are liable for profits and debts of the partnership
- Liability to other partners — All partners can be held liable for the actions of a fellow partner.
- Profit splitting — As opposed to a sole proprietorship, you must share the profits with your partners.
Advantages of Establishing a Limited Partnership in Hong Kong
- Limited liability — Limited partners are not personally liable for the debts of the business.
- Limited liability to other partners — Limited partners cannot be held liable for the actions of a fellow partner.
- Flexibility — Limited partners can be replaced without dissolving the business.
- Investment vs. Management — Capital can be raised without affecting business management, due to the separation of general partners and limited partners.
Disadvantages of Establishing a Limited Partnership in Hong Kong
- Unlimited liability for general partners — General partners are still personally liable to debts of the business.
- Restrictions for limited partners — Limited partners can only be passive investors and have no say in the running of the business.
Private Limited Company in Hong Kong
A Hong Kong Private Limited Company is the most common entity for small to medium businesses operating in Hong Kong. The main benefit of a Private Limited Company, as the name suggests, is limited liability due to it being a separate legal entity from its owners/shareholders. This limited liability applies in Hong Kong as well as Mainland China.
By incorporating a private limited company, it is able to receive all of the tax benefits due to any other incorporated Hong Kong business. A benefit of note is being able to partake in Hong Kong’s free trade agreement with Mainland China.
The rules for incorporating a Private Limited Company in Hong Kong are:
- Maximum number of shareholders no more than 50 (employees etc. are counted separately).
- No minimum share capital.
- Shares or debentures cannot be offered to the public.
- Shareholders can be either individuals or corporations from any country.
- There can be one sole director, or as many directors as needed.
- Must have one Hong Kong resident as company secretary.
- A sole director cannot also be the company secretary.
- If the company secretary is a body corporate, its office must be registered in Hong Kong.
- Board meetings do not need to be held in person, or in Hong Kong. Electronic/phone meetings are permitted, as are written resolutions by directors.
Advantages of Establishing a Private Limited Company in Hong Kong
- Fast incorporation — a private limited company can be incorporated in Hong Kong as soon as one day.
- Limited liability — Any shareholder liability is limited to their investment. Personal assets are not at risk.
- No restrictions on Capital — Capital can be generated by issuing more shares to existing shareholders, or bringing in new shareholders.
- Low to Zero Corporate Tax — Tax on profits is 16.5% for business within Hong Kong. There is no tax on profits for business outside Hong Kong. Structured correctly, a private limited company in Hong Kong could pay no tax at all if they can prove they are not doing any business in Hong Kong.
- Succession — Changes to shareholders or stakes do not negatively impact a company as a legal entity.
Disadvantages of Establishing a Private Limited Company in Hong Kong
- Disclosure of shareholders — One shareholder’s details must be on the public register. Corporate shareholders, however, can get around this by using nominee shareholders.
- Disclosure of directors — There needs to be at least one director, and their details must be on the public register.
- Cost — If you are expanding from a sole proprietorship or partnership, overall costs will generally be higher.
- Office registration — The company office must be registered in Hong Kong.
- Company Secretary — The company must have one resident company secretary.
Public Limited Company in Hong Kong
A Public Limited Company in Hong Kong is most suited to large enterprises that want to be publicly listed in order to raise capital. A public limited company is distinguished from a private limited company primarily due to it allowing more than 50 shareholders, and that shares can be sold to the public.
Public Limited Companies in Hong Kong are listed and traded on the Stock Exchange of Hong Kong Limited (SEHK). Rules of the SEHK, governed by the Hong Kong Securities and Futures Commission (SFC) must be adhered to.
Advantages of Establishing a Public Limited Company in Hong Kong
- Enhanced capital — Since the company is publicly listed, there is better exposure for investment.
- Perception of strength — Being publicly listed helps improve the public’s perception of the company.
Disadvantages of Establishing a Public Limited Company in Hong Kong
- Disclosure — More information about a public limited company must be made available to the public, reducing privacy.
- Stringency — A public limited company is subject to stricter rules and regulations.
Company Limited by Guarantee in Hong Kong
Companies limited by guarantee in Hong Kong are generally best suited for charities and other non-profit organisations. It differs from a public limited company in that the members are only required to guarantee to contribute an agreed upon sum if the company winds up, as opposed to being shareholders that invest capital.
Members however still benefit from limited liability.
Advantages of Establishing a Company Limited by Guarantee in Hong Kong
- Limited liability for members — After agreeing on a fixed sum, members have limited liability based on that sum.
Disadvantages of Establishing a Company Limited by Guarantee in Hong Kong
- Non-profit — When it is an NGO, there is no distribution of profits allowed.
- Lack of capital— There is likely to be a limited amount of working capital available due to the nature of the organisation.
Branch, Representative, or Subsidiary Offices in Hong Kong
Branch offices in Hong Kong can act as an extension of an overseas company and can undertake commercial activities to derive profit from Hong Kong. It is not its own legal entity and is liable to its parent company.
Representative offices in Hong Kong can also act as an extension of an overseas company, but cannot undertake commercial activities to derive a profit. For this reason, a representative office is best suited for non-commercial operations, like marketing or HR departments. It is also not its own legal entity and is liable to its parent company.
Subsidiary offices are for overseas companies that want an operationally independent counterpart in Hong Kong. A subsidiary office will need, in most cases, to incorporate as a private limited company, so it can become its own legal entity in Hong Kong.
Conclusion — What’s Next for Setting up Your Business in Hong Kong?
Hong Kong remains one of the world’s most attractive destinations to set up business for the reasons we’ve listed above and more.
As relatively simple and straightforward Hong Kong makes it to set up a business, there are of course some aspects that will require expertise.
If you’d like help bypassing any possible business hurdles, HKCR has an expert team of qualified accountants, bankers and insurance brokers to help you ensure your successful expansion into Hong Kong.
If you have any questions about how your business can be a success in Hong Kong, please do contact us — it’s both our job and pleasure to assist
- What is a sole proprietorship? What are some benefits of owning a sole proprietorship in Hong Kong?
- In a sole proprietorship, a single owner is fully liable for all profits and losses made by the business. The ownership of the business may be transferred by selling the assets. Some benefits of having a sole proprietorship in Hong Kong are:
1. Simple to register
2. Low income tax
3. Minimal tax reporting
- What are the various types of business partnerships in Hong Kong?
- There are two types of business partnerships in Hong Kong:
1. General Partnership- Partners can also be held liable for actions of other partners
2. Limited Partnership- Can have both limited and general partners. Limited partners are only liable upto the amount of their capital contribution.
- What is a Private Limited Company in Hong Kong? What are some benefits of a Private Limited Company?
- A Private Limited Company is a separate legal entity from its owners/shareholders, and has limited liablity on them. Some benefits of this structure are fast incorporation, no restrictions on capital, low to zero tax rate etc.
- What are the commom business structures available in Hong Kong?
- The common business structures that are available in Hong Kong are:
- Sole Proprietorship
- Business Partnerships
- Private Limited Company
- Public Limited Company
- Company Limited by Guarantee
- Branch, Subsidiary, or Representative Offices
Let us help you successfully set up your business in Hong Kong
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