Type of Hong Kong companies
The most common kind of Hong Kong business entities are limited companies, partnerships, and sole proprietorships.
Many investors are choosing to set their companies overseas, and one of the most popular destinations is Hong Kong. The main reason is for a gateway in entering the international market and for businesses to benefit from Hong Kong’s tax-friendly jurisdiction. Hong Kong, being the world’s 9th largest economy, offers a very efficient and stable environment with the modern telecommunications and infrastructure as well as a sound legal and administrative framework.
Along with the free-enterprise and free-trade economy, Hong Kong also has a trustworthy political environment and a non-intervening government policy. The business-friendly tax approach and legal system have been attracting millions to do business in Hong Kong.
The process is also a very straightforward one. Once you have decided to incorporate a company in Hong Kong, you can choose the name and check if it is available, and incorporate a company in the Hong Kong Companies Registry within 24 hours.
But, the very first step for a person to start a business is to decide on what the appropriate structure is and the type of Hong Kong company that would suit the business idea. It is vital to weigh the pros and cons of the business goals, so that the right structure can be selected.
Types of Hong Kong Companies
The most common kind of Hong Kong business entities are limited companies, partnerships, and sole proprietorships. The companies that a person can open in Hong Kong including a Hong Kong Limited Liability Company.
- Limited Liability Company: Out of all the business entities mentioned above, the Hong Kong Limited Liability Company is the most common business in Hong Kong since it provides protection of the personal assets from the liabilities and the risks of the business and is a separate legal entity.
- Sole Proprietorship: This type of business entity is a small scale and a low-risk business one, which is why the sole proprietorships are straightforward to set up. But this business structure is not something that is recommended for the entrepreneurs as it does not have a separate legal entity and also does not protect the personal assets of the owner from the liabilities of the business.
- Partnership: The business structure permits about two or more people to share the ownership of a single HK Limited company, enabling them to share the responsibility and even increase the ability to raise funds needed by the business. But in this, the partners are individually and jointly liable for the deeds of the other partners.
- Foreign Company Office: Any foreign company that wants to have a Hong Kong office can register a representative office, a subsidiary, or a branch office here.
Here you will learn all about the various types of business entities with a comparative overview so that you can choose the desired type of Hong Kong company structure according to your needs.
Which Entity Type to Choose?
Your selection of a specific type of Hong Kong company would be based entirely on the particular plans and situation. Circumstances like if a person intends to conduct business activities for profit or if the person wishes to raise capital via external investment. Also the company’s business nature, size, structure and future plans should be taken into account. All these would profoundly influence the decision concerning the selection of a business entity. For this, the factors that need to be considered are:
- The incorporations of a private limited company is deemed as the best choice, and the reason is simple – there are many benefits that override the ongoing compliance requirements.
- In case a person wants to build a small-scale business with a low-risk and wants to be the only owner of the company along with having sufficient financial resources on hands, it is simpler and easier for them to register the company as a Sole Proprietorship. But it is also important to note that the liability is unlimited and there isn’t any protection of the personal assets.
- In case a person wishes to share the responsibility of a business that is running well, or in case the person doesn’t have the required financial resources, they can select the Limited Partnership company- different from limited company, the liability is still unlimited.
Limited Liability Company
Being the most popular type of Hong Kong company, a limited liability company can be easily incorporated in Hong Kong by just registering the business with the Companies Registry under the Companies Ordinance. This business is a separate legal entity from the members of the organization. Under the Limited Liability Company, there are two types that exist – public company or a private company.
Out of all these options, the most preferred type of business in Hong Kong is the private limited company. This is due to the fact that the liabilities of the owners is limited to the assets that are in the company. Also, the personal assets are protected from the business liabilities.
Private Limited Company
Almost all of the small to medium-sized companies in Hong Kong are established as a private company limited by shares. Due to its many benefits, this type of Hong Kong company is chosen the most as compared to the limited partnership and the sole proprietorship.
The company limited by shares is famous for conducting trade and business. Also, this company has a share capital that is distributed into a number of shares of a particular value. The shareholders also called the owners (or investors) hold these shares and are entitled to share of the profits of the business.
The shareholders can also obtain a dividend corresponding the respective percentage of the shareholding in the organization. If there is any loss in the business, the shareholders will lose all the investment only up to the amount of shares that they had put in the company.
Public Limited Company
The public company limited by shares is an incorporated locally in which the count of shareholders can be higher than 50. The reason it is called a public company is since the debentures and the shares are offered to the public. Mostly, the medium or large private Hong Kong limited liability company who have achieved significant growth in the market can choose to take their company public. This is done by expanding the shareholder base that they have.
Many of the public companies are placed on a public stock exchange. The listed or the public organizations are subjected to stringent regulations as the capital is raised from the public. The perks of this company are the ease of implementing acquisitions and mergers, strong public perception, and easy access to capital. And the disadvantages of the public Hong Kong limited company are the ongoing statutory compliance, sharing of profits; expensive, complicated, and time-consuming to operate and establish and public disclosure requirements.
There are a lot of advantages of a limited liability company that have been shared below:
- Tax Benefits and Incentives: Several tax benefits are available in the private limited company that is enjoyed by those who opt for this Hong Kong company. The profit tax, also called the corporate tax, is 16.5% of the assessable profits for corporations. And since Hong Kong follows the territorial basis of taxation, only the profits that are derived from Hong Kong are subjected to the tax. Other than this, there isn’t any VAT or sales tax, withholding tax on the interest and dividends, and capital gains tax.
- Easier Transfer of Ownership: The complete or partial transfer of the ownership of the companies can be done by selling a part or all of its shares, or can even be done via the issuance of the new shares to additional investors. The operations in the business can continue during this process while the legal documentation is not complex at all.
- Positive Image: The private limited company is taken positively as compared to the partnership and the sole proprietorship. Along with this, the investors are happily willing to offer their resources to private HK Limited businesses.
- Ease of Raising Capital: Business enlargement is assisted by the ease of raising finances, and this can be by drawing in new shareholders or distributing more shares to the subsisting shareholders. Along with this, it is way easier for the Hong Kong limited liability company to achieve bank loans as compared to the other business entity types.
- Perpetual Succession: The company would continue to exist even if there is a change in the memberships. The same is the case where the shares can be transferred, and the shareholders can change, but there wouldn’t be any effect of it on the business operations. It tells that the company has continuous sequence notwithstanding the insolvency, expiration, or resignation of the directors or shareholders.
- Separate Legal Entity: The private limited company has its own identity that is distinct from its members that enables limited liability companies to acquire assets, sue or be sued in its own name, enter into contracts, and even go into debts. The accountability of the shareholders is confined to the number of their individual shareholdings or investment.
Nothing is perfect in the world, and that is how this type of Hong Kong company also has its drawbacks that have been shared below
- Disclosure Requirements: The company would have to share some information that would be available to the public. The information like the personal particulars of shareholders, secretary, directors, and other members, and the capital structure that would be filled in the Companies Registry.
- Ongoing Compliance: There are some statutory compliance obligations that the private limited company must adhere to.
- Complex Winding-up Procedures: Closing this company is much more expensive, regulated and complicated as compared to the other type of company: sole proprietorship or partnership.
The sole proprietorship is deemed as the simplest and the most accessible form of business. From the name, it is known that the company is owned and operated by one person alone. Even though the simplest form of business is the sole proprietorship, it is usually deemed as the riskiest business since there is no security of the personal assets from the liabilities and the risks that arise from the company. While the sole proprietor accumulates all the profits from the organization, he is equally solely and personally responsible for all the liabilities.
Due to this, there is a tremendous financial risk which is why the aspiring entrepreneurs are strictly discouraged from taking up this type of Hong Kong company. In all this, the registration of the sole proprietorship in Hong Kong is relatively easy and simple as compared to the other type of Hong Kong company.
As mentioned above, the sole proprietorship has a few advantages that stand out and they are mentioned below in brief:
- Ease of Termination: To terminate the sole proprietorship is much easy, less expensive, and less time-consuming as compared to the other business types.
- Sole Beneficiary of Profits: The sole proprietors don’t need to share profits derived from the company.
- Easy Decision Making: Since the sole proprietor holds the complete control for the entire business affairs, the decision making is efficient and fast since there is no need to seek the approval from any other member in the team.
- Simple to Establish: This type of Hong Kong company is very easy and simple to setup due to the straightforward procedures.
Like the good points in something, there are bad points in it as well. Below are the disadvantages of the sole proprietorship type of Hong Kong business:
- Sale/Transfer of All or Part of the Business: The business can be transferred by selling the business assets only.
- Limited Life of the Business: Since there isn’t any perpetual succession of the sole proprietorship, if the owner expires, this company would cease to exist.
- Limited Capital: Since the only source of capital in this business is from the personal finances of the sole proprietor, and the company generated profits, the limited working in the company makes the growth and expansion hindered.
- Unlimited Personal Liability: If there are debts in the business, there is no security of the personal assets that includes the owner’s property.
- No Separate Legal Entity: This company is not a separate legal entity, and hence the business and the owner is deemed as one where the owner is liable to all the debts and the liabilities.
Note: Startupr does not recommend this company type for non-Hong Kong resident as there are further difficulties in incorporation for people residing outside of Hong Kong.
The partnerships are defined as the company that is co-owned and built by two or more people who get together to operate a business with a plan of sharing the profits amid themselves. Governed by the Partnership Ordinance, the partnership have been explained briefly.
The advantages of this type of Hong Kong company has been shared below:
- Combined Expertise: Productivity can be accomplished through powerful decision making by joining together all the expertise, knowledge, skills, and resources of the partners.
- Greater Efficiency: A much better efficiency can be obtained since the general partner has the complete freedom to operate the company without any interruption and is liable for the day-to-day business affairs and the decision making of the business. This is a great perk for the limited partners who have enough to invest but don’t have any time or expertise needed for the company.
- Ease of Raising Capital: The partners do not only depend on the personal sources for raising the capital. The other sources of the finance involve loans from the banks and the partners extended by combined assets of all the partners.
The disadvantages of the this type of Hong Kong company have been explained precisely below:
- Sharing Profits: Any profits that come in the business has to be shared amound the partners.
- Divided Goals and Opinions: The partnerships could split by those partners who oppose the operational procedures, business goals, and management strategies. The many personal controversies that have chances of arising during the progression of the business could hurt the company as a whole.
- No protection of personal assets: Just like the sole-proprietorships, the partners in this type of Hong Kong company can be personally accountable for the company losses and debts. Along with this, there is no protection of the personal assets that can be used to pay off the losses and liabilities of the business. The assets can be the partners’ shares, car, house, etc.
Note: Startupr does not recommend this company type for non-Hong Kong resident as there are further difficulties in incorporation for people residing outside of Hong Kong.
Limited by Guarantee
The limited by guarantee type of Hong Kong limited liability company has no share capital. Rather than the shareholders, the members of the company undertake the duty to donate a predetermined amount to the accounts of the business that grows due in the case of the firm being wound up. This type of business has some excellent advantages such as the members can enjoy the limited liability and preserve the democratic control on all the matters. Usually for association, charity , or other kind of a nonprofit organization.
The perks that make this company a good choice for business in Hong Kong are:
- No Shareholders: The reason this is a good point is that the company can have guarantors rather than the shareholders, making this fitting for the voluntary type of organizations. These people would agree to donate a fixed amount as a guarantee that would be used for the company debts for the insolvency of the firm.
- Separate & Clear Legal Entity: This type of Hong Kong company is a separate entity that is not joint with the members, which means that the business can employ people, enter into leases and other contracts, hold property, etc., with its own name. Also, the directors can change without affecting the business and its operations, since the company uses its name everywhere and not the director’s name.
- Stable Structure: Usually, a company is considered by the public agencies and the funding bodies as a much more ‘stable’ structure than a voluntary association.
Along with the good points, there are some drawbacks in this type of Hong Kong company that have been shared below in brief:
- Time-Consuming Registration Procedures: This company type has formal registration procedures that have to be followed along with the creation of the company and applying to be acknowledged as a charity.
- Expensive Setup: Just like the limited partnership, this type of Hong Kong company has much higher costs as compared to the voluntary association or trust. Along with this, the annual prices are also high, especially in case, there is an external company secretary and/or in case a formal audit is needed.
- Standard Ongoing Requirements: It has to be notified to the Companies Registry if there are any alterations in the registered office, directors or even the company secretary. Likewise, annual returns and annual accounts have to be filed.
Startupr can provide assistance in the company types, with our years of experience and expertise in the field of company formation. We provide services in forming a limited liability company, due to its numerous benefits and availability in incorporation for any nationality.
Feel free to contact us online or order your company formation today!