The first and most important step in starting a business is to decide on an appropriate business structure. It is important to weigh the pros and cons of each business vehicle against your business goals, in order to choose the right structure and steer away from the wrong one.
Your choice of a certain business structure will depend on the following factors:
- What is the nature and purpose of your business? Is it more conducive to a particular business structure?
- What is the size and scope of your business?
- What is the extent of your personal liability in choosing a particular business vehicle?
- How much capital is required for starting your business? Can you raise capital on your own or do you need outside investors?
- Can your business attract outside investors?
- What are the start-up procedures, costs, timeline and other requirements?
- What are the tax implications in choosing a particular business structure?
- What are your current and future business needs?
- What is the extent of control you wish to have over your business?
- Does your business involve risks?
The most common type of business entities in Hong Kong are companies, sole proprietorships and partnerships.
- Limited Liability Company. The most common business vehicle in Hong Kong is a Limited Liability Company. A limited liability company offers protection of personal assets from business risks and liabilities and is a separate legal entity.
- Sole Proprietorship. Suitable for small scale and low risk businesses with a sole owner, sole proprietorships are easy to set up. However, this is not a recommended business structure for entrepreneurs as it does not constitute a separate legal entity and does not protect the owner’s personal assets from business liabilities.
- Partnership. This business structure allows two or more people to share ownership of a single business. Partnerships enable a sharing of responsibility and increases the ability to raise funds. However, partners are jointly and individually liable for the actions of the other partners. The most common form of partnership is a Limited Partnership, as it offers limited liability to limited partners.
- Foreign Company Office. Foreign companies interested in setting up an office in Hong Kong can register a branch office, subsidiary, or a representative office.
This guide provides a comparative overview of the various types of business entities you can set up in Hong Kong.
Entity Type: Limited Liability Company
A limited liability company can be incorporated in Hong Kong by registration with the Companies Registry under the Companies Ordinance. A company is a separate legal entity from its members. Companies can be both limited liability companies as well as unlimited companies. Rarely do investors opt for an unlimited company. A limited liability company can be a private company or a public company and limited by shares or limited by guarantee. 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 and their personal assets are protected from business liabilities.
Private Limited Company
Most small to medium sized companies in Hong Kong are set up as ‘private companies limited by shares’ and are commonly referred to as ‘private limited companies’. It is often chosen over other forms of business entities like sole proprietorships and partnerships owing to its many benefits. A company limited by shares is the most common type of company for conducting business and trade. A company limited by shares has a share capital which is divided into a number of shares of certain value each. These shares are held by shareholders (investors) 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. For detailed information about setting up a private limited company, see Hong Kong Company Registration
- Separate Legal Entity: A private limited company has a legal identity of its own, distinct from its members. This enables the company to acquire assets, go into debt, enter into contracts, sue or be sued in its own name.
- Limited Liability: The liability of the of the shareholders is limited to the amount of their respective shareholdings/investment.
- Perpetual Succession: A change of membership does not affect the company’s continued existence. Shares can be easily transferred and changes in shareholders has no bearing on the business operations of the company. This means the company has perpetual succession notwithstanding the death, resignation or insolvency of shareholders or directors.
- Ease of Raising Capital: Business expansion is facilitated by the ease of raising finances, by bringing in new shareholders or issuing more shares to existing shareholders. It is easier for limited companies to secure bank loans when compared to other business entity types.
- Positive Image: Private limited companies are taken more seriously when compared to sole proprietorships and partnerships and investors are more willing to contribute their resources to private limited companies.
- Easier Transfer of Ownership: Complete or partial transfer of ownership of companies can be done by selling all or part of its total shares, or through the issue of new shares to additional investors. Business operations can continue unaffected and legal documentation is not complicated.
- Tax Benefits and Incentives: There are several tax benefits that private limited companies enjoy in Hong Kong. Corporate tax, (or profits tax as it is called), is set at 16.5% of assessable profits for corporations. Hong Kong follows a territorial basis of taxation. Hence, only profits which arise in or derived from Hong Kong are subject to tax in Hong Kong. There is no capital gains tax, withholding tax on dividends and interest and no sales tax or VAT in Hong Kong. For more details, refer to Hong Kong Corporate Tax guide.
- Complex to Set Up: A private limited company is generally considered more complex, expensive and complicated to establish when compared to sole proprietorships and partnerships.
- On-going Compliance: There are a number of statutory compliance requirements that private limited companies must adhere to.
- Disclosure Requirements: A company has to make certain information available (capital structure, personal particulars of shareholders, directors and secretary etc.) to the public by filing returns with the Companies Registry.
- Complex Winding-up Procedures: Closing a company is more complex, time consuming and expensive when compared to other business entities.
Public Limited Company
A public company limited by shares is a locally incorporated company in which the number of shareholders can be more than 50. A public company is one where shares and debentures are offered to the public. Usually, medium to large private companies who have achieved significant growth in the industry decide to take the company public, by expanding their shareholder base. Most public companies are listed on a stock exchange. Public/listed companies are subject to stringent rules and regulations, as they raise capital from the public. The advantages of a public company are easy access to capital, strong public perception and ease of implementing mergers and acquisitions. The disadvantages include: public disclosure requirements; time consuming, complex and expensive to establish and operate; risk of takeovers; sharing of profits and ongoing statutory compliance.
Public Company Limited by Guarantee
A company limited by guarantee has no share capital. It has members, rather than shareholders, who guarantee/undertake to contribute a predetermined sum to the liabilities of the company which becomes due in the event of the company being wound up. The advantages are that the members enjoy limited liability and retain democratic control over all matters. The disadvantages are that profits cannot be distributed and there may be a lack of working capital. This form of business entity is meant for non-profit organizations, that are interested in Hong Kong incorporation.
Entity Type: Sole Proprietorship
Sole proprietorship is considered the easiest and simplest form of business. As the name suggests, the business is owned and operated by a sole person and since the business is not a separate legal entity, the owner and the business are considered one. Although this is the simplest form of business it is often considered as the riskiest as there is no protection of personal assets from risks and liabilities that arise from the business. While the sole proprietor accrues all the profits from the business, he is equally responsible (solely and personally) for all the liabilities. This poses a tremendous financial risk and aspiring entrepreneurs are strongly discouraged from adopting this form of business. It is relatively simple and easy to register a sole proprietorship in Hong Kong. For more details refer to Hong Kong Sole Proprietorship Registration guide
- Simple to Establish: Sole Proprietorships are known for simple and easy setting up procedures.
- Easy Decision Making: Given the fact that the sole proprietor retains complete control over all business affairs, decision making is fast and efficient, without having to seek approval from others.
- Sole Beneficiary of Profits: Sole proprietors do not have to share profits derived from the business.
- Ease of Termination: Terminating a sole proprietorship is easier, less time consuming and less expensive than other business entities.
- No Separate Legal Entity: Sole proprietorships are not a separate legal entity and the owner and business are considered one and the same. The sole proprietor is responsible for all debts and liabilities.
- Unlimited Personal Liability: In cases of debts incurred, there is no protection of personal assets (including your property).
- Limited Capital: The only source of capital is the sole proprietor’s personal finances and business generated profits. With limited working capital business growth and expansion is deterred.
- Limited Life of the Business: There is no perpetual succession of sole proprietorships, which cease to exist on the death of the sole proprietor.
- Low public perception: Due to the risks posed by this form of business, investors are less confident and sourcing for finance becomes difficult.
- Sale/Transfer of All or Part of the Business: You can transfer the business only by the sale of business assets.
Entity Type: Partnership
Partnerships are defined as businesses that are established and co-owned by two or more people who join together to carry on the business with a view of sharing profits. Partnerships in Hong Kong are governed by the Partnership Ordinance and are of two types: General Partnership and Limited Partnership.
Similar to sole proprietorships, general partnerships make every partner in the firm personally liable for the debts and liabilities of the business. Additionally, each partner can be held responsible for the actions of another partner (as long as these acts were done in the course of the partnership business).
- Ease of Raising Capital: Partners need not rely on personal sources for raising capital. Sources of finance include loans from partners and bank loans extended on the basis of combined assets of all the partners.
- Ease of Set Up and Maintenance: Partnerships are considered easier to establish, with lesser compliances and statutory requirements when compared to companies.
- Combined Expertise: Efficiency can be achieved through effective decision making by pooling together all the partners’ resources, skills, knowledge and expertise.
- Attracts Employees: Prospective employees may be attracted to the business if given the incentive to become a partner.
- Unlimited Liability: All the partners are personally liable for the business debts and liabilities.
- No protection of personal assets: Like sole-proprietorships, partners are personally accountable for business debts and losses. There is no protection of personal assets (e.g. house, car, shares, etc.) which can be used to pay off debts and losses.
- Divided Goals and Opinions: Partnerships could be fissured by partners who disagree on business goals, management plans, operational procedures. Personal disputes that may arise in the course of the business could have an adverse effect on the business as a whole.
- Sharing Profits: Any profits that accrue from the business must be shared amongst all the partners.
- Liability for co-partners actions: Each partner is bound by the other partners and can be held responsible for the wrongful acts or debts of co-partners.
Limited Partnerships constitute both general and limited partners. A general partner has unlimited liability for the firm’s debts and is responsible for the day-to-day running of the business, while limited partners’ liability is limited to the amount of their unpaid share capital. Limited partners cannot participate in the management of the partnership.
- Limited Personal Liability of Limited Partners: The limited partners of a limited partnership are not personally liable for any business debts incurred by the firm or the wrongful acts of another partner.
- Ease of Raising Capital: Since the liability of limited partners is limited to their investment, it is easier to raise capital as this form of business entity is preferred over sole – proprietorships by investors.
- Greater Efficiency: Greater efficiency can be achieved as the the general partner has the freedom to run the business without interference and is responsible for decision making and the day-to-day business affairs. This benefits limited partners who can invest money but do not possess the time nor expertise required for the business.
- Lesser Compliances: Limited partnerships have fewer compliance requirements when compared to companies.
- Limited partners can leave or be replaced without dissolving the Partnership.
- Unlimited Personal Liability of General Partners: Since general partners have unlimited personal liability, it may be difficult to find suitable partners who are willing to take on this risk.
- Limited Role of Limited Partners: Since limited partners cannot become involved in the day to day operation of the business, they have no choice but to remain passive investors.
- Expensive to Set Up: Limited partnerships are generally more expensive to set-up when compared to general partnerships.
Entity Type: Foreign/Overseas Company Office
Foreign/overseas companies who wish to establish a business presence in Hong Kong can do so by setting up a branch office, subsidiary or a representative office in Hong Kong. For more information refer to Foreign Company Registration in Hong Kong.
Which Entity Type to Choose?
Your choice of a particular type of business vehicle will depend on your particular situation and plans. Factors such as whether you intend to carry on business activities for profit or wanting to raise capital through external investment or wishing to establish a non-profit company will influence your decision regarding your choice of a business entity. You must take into account the following factors of consideration:
- If you want to establish a low-risk small-scale business where you will be the only owner and have sufficient financial resources on hand, it might be easier and simpler for you to register your business as a Sole Proprietorship. However, bear in mind that your liability is unlimited and there is no protection of your personal assets.
- If you want to share the responsibilities of running a business or if you do not have adequate financial resources, you can opt for a Partnership. However, note that partners are generally jointly and severally liable for certain acts of the partnership, unless you opt for a limited partnership. Moreover, it is difficult to find suitable partners and there could be a possible development of conflict between partners.
- Incorporating a private limited company is considered the best choice. The benefits are many and override the ongoing compliance requirements.
For further information, refer to side-by-side comparison of Hong Kong entity types.