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Hong Kong Sole Proprietorship – Everything You Should Know

Hong Kong is considered one of the best places to start a business in Asia since it is called the World’s Freest Economy. This city is a financial powerhouse with a highly developed market and business-friendly environment. Due to all these factors, Hong Kong is a very attractive destination for many businesses. Opening a Hong Kong sole proprietorship would be a great choice. So, if you are planning to start a business in Hong Kong as a self-employed individual, then this article is for you. It outlines everything you need to know about the characteristics, benefits, and registration requirements for a sole proprietorship. Let’s dive in.

Hong Kong Sole Proprietorship - Everything You Should Know

Sole proprietorship in Hong Kong 

Setting up a sole proprietorship is very straightforward and involves the least number of steps as compared to setting up any other business type. You should choose this type of business type only if you want to work by yourself. This is because a sole proprietorship is a kind of business that works well for the person who wants to run a business on their own, where they are the owner and the employee in the business. This person will be liable for everything in the business since this person is the business. Let us understand this better.

What is a sole proprietorship? 

A sole proprietorship or a sole trader is one of the most common types of business structure in the world. It is when a person goes into business for themselves and becomes the business. Basically, a sole proprietorship is a person who sets up a business, where he/she is the owner and operator and is the same legal entity as the business. Due to its simplicity and the fact that it does not require a working visa, it is very popular amongst individuals and freelancers in Hong Kong

However, despite its great simplicity and popularity, there are some reasons that need to be considered before selecting this business type. A Hong Kong sole proprietorship exposes the sole proprietor to liabilities that the business can face. Moreover, it is not considered to be a trustworthy form of business, where you might not be able to get easy loans. Nonetheless, it will be a great option for some people who will benefit from the multiple advantages that it has to offer.

Key characteristics and benefits of a sole proprietorship

To understand if a sole proprietorship is the best choice for you, it is important to have a deeper look into the characteristics of a Hong Kong sole proprietorship:

  • Full ownership: Being the sole proprietorship owner means the owner will have complete control over the company. The owner will be the one in charge of making all the business decisions. They will have the freedom to direct and steer their business in the direction they want without needing approval from anyone.
  • No separate legal entity: Since a sole proprietorship is just one owner who is also an employee in the company, it is not considered to be a separate legal entity. This means that the owner and the business are considered one and the same. So, if the business undergoes any debts, financial risks, or errors, the owner will personally be responsible for it.
  • Limited funding options: Both the owner and the business are considered to be the same. And due to this, the owner’s personal finances are considered to be the same as the company’s finances. This makes it very tough to prove the trading history and transactions that take place in the business. Due to this, lending institutions and banks might consider the business as a high-risk business and refuse to provide any funding.
  • Tax consequences: A positive point about a sole proprietorship is that the owners do not have to pay any corporate tax. Since all the profits go into the owner’s personal account, the owner will have to pay the tax rate of 15% on the profits earned through their personal income tax return. This return has to be filed with the Inland Revenue Department every year. 
  • Ease of operation and formation: Setting up a Hong Kong sole proprietorship is inexpensive and easy. It just needs to be registered with the Hong Kong government, and then you can start your business. Moreover, there are no filing requirements. You won’t need to file for the annual returns or conduct any shareholder meetings and record the minutes. Nonetheless, you need to ensure that the registration is completed properly. 
  • Ease of expansion: Since it is difficult for a sole proprietorship to raise capital, it becomes challenging for them to expand as well. However, expansion means increasing the size of the company. So, if you decide to expand, it is better to change the business structure to an LLC. This will offer you the benefits needed for expansion so that the business can keep moving smoothly. 

Sole proprietorship vs. LLC in Hong Kong

A Hong Kong sole proprietorship and an LLC are very different from each other. Here is a table to look into the differences between the both:

Sole ProprietorshipLLC
A single owner runs a single unit of business.A member/members run a Limited Liability Company.
The owner and the business are considered the same, which means that a sole proprietorship is not a separate entity. An LLC is a separate entity from its members. It is like a person on its own and has its own responsibilities that do not affect the members.
To start a sole proprietorship, the owner will have to register the business with the Hong Kong Business Registration Office. For an LLC to be formed, the members will have to first register the business and have it incorporated as per the State’s regulations.
It is very easy to set up a sole proprietorship, and it costs just a little for its registration. In short, there are no legal formalities like annual reporting, operating agreements, etc. It is a bit complex to set up an LLC, and it costs a bit more to create it. An LLC has multiple formalities to follow, like the operating agreement, annual reporting, shareholder meetings, etc.
The profits and losses of a sole proprietorship are reported in the owner’s personal income tax return, and the taxes are paid on the personal level. An LLC pays taxes on a corporate level and on a territorial basis. The members do not have to pay anything on their personal income tax return for the LLC, excluding their salary from the LLC.
A sole proprietorship’s owner is liable for the whole business. There is no difference between their personal assets and business assets when it comes to the company’s liabilities. The members of an LLC enjoy limited liability protection, where they are liable to the extent of their investments in the LLC.

Each of them has its own benefits and disadvantages. Choose the business entity that best fits your current plan, and you can change the business entity later on as well. So, if you want to run the company independently and work for yourself, register a sole proprietorship in Hong Kong

How to register your sole proprietorship in Hong Kong?

The only requirement for a Hong Kong sole proprietorship is registering their business with the Business Registration Office of the Inland Revenue Department. With this, the business will get a Business Registration Certificate. The business needs to be done within one month from the time the business started, although it is advised to have it done before you start your business activities to avoid any trouble. 

The business certificate comes with a Business Registration Number (BRN) that is used for profit tax filing. Here are some things that you need to keep in mind and follow accordingly for a sole proprietorship:

Set up the registration process

The first thing you need to do is set up the registration process. All you need to do is choose a unique name for your business, which can be in Chinese, English, or both languages. It is important to ensure that the name does not include any word that is connected to the government or other public bodies when there is no connection between them. Once you have your name ready, move to the next part. Prepare the documents that will be needed for the registration process.  

Required documents

After you have selected a name, you need to gather and prepare the documents needed to file for the registration of your Hong Kong sole proprietorship with the IRD. To do this, you need to get the application form from the IRD website and add the following:

  • Business name, address, and other details
  • Name of the owner, address, and other details
  • Description of the business and the activities that will be conducted by the business

Fill in the form according to the instructions on it and then gather the following documents that will be sent with the form:

  • ID card of the owner (local ID or passport)
  • Business plan, if you have one
  • Personal bank account statements of the last three months
  • Latest audited accounts, if any

Once you have all this ready, move ahead and apply for the registration online or submit the form and other documents via mail to the BRO. 

Registration fees

When submitting the application, you will also have to submit the business registration fee to the IRD as well. The fee and the registration’s validity will depend on the annual government funding scheme & support. As per the recent scheme, and the term April 1st, 2022, to March 31st, 2023, the total fee is:

  • 1-year renewal: HK$ 250
  • 3-year renewal: HK$ 3,950

If you are filing online, pay online. And if you are filing offline, then remember to send a cheque or follow the instructions on the form regarding the payment. 

Application process time

If you go in person and submit the application, it will take about 30 minutes before your company is registered, provided that the business name is available and follows the necessary rules. For online applications, it normally takes about 2 working days before your Hong Kong sole proprietorship is registered. You will receive an email regarding the same, and the registration certificate will be sent to the registered address accordingly. It is a good thing to display your Business registration certificate in your workplace. This adds to the credibility and gives proof to your clients that you are trustworthy. 

How to register a sole proprietorship for foreigners?

Hong Kong is a very welcoming city where foreigners are also allowed the opportunity to also start their own businesses here. This means that a foreigner can also register as a sole proprietorship in Hong Kong. However, a few registration requirements for a sole proprietorship cannot be ignored, especially if you are a foreigner. 

  • A Hong Kong sole proprietorship is only available for people who will be operating in Hong Kong. Being a foreigner, you will have to share a lot of information and documents to convince the IRD that your sole proprietorship is operating in Hong Kong.
  • Foreigners need to appoint a Hong Kong professional agent who will manage all the affairs with the BRO for them. The professional agent/responsible person hired will also have to share an appointment letter that states that they are acting as a representative. It should include their residential address and their Hong Kong ID card. 
  • If a foreigner wants to relocate to Hong Kong, they need to apply for an investment visa before they register their business. However, the eligibility criteria for this visa are very strict, where the person has to prove that they will be making a substantial contribution to Hong Kong’s economy. This can be done by proving that the investment will create jobs or services for local companies. 

Other than these requirements, all the other requirements are the same. Moreover, foreigners who already live in Hong Kong, have a dependent visa or have permanent residency do not have to go through these steps. They can easily register a sole proprietorship in Hong Kong just like any local person would. 

Requirements after registering the sole proprietorship in Hong Kong

For you to operate smoothly in Hong Kong once you have registered your business, you will have to ensure that you adhere to the sole proprietorship compliances and satisfy the requirements, including:

  • Get a business licence or permit: After you register your sole proprietorship with the IRD, you need to get the required business licence or permits based on the kind of business activities you will be conducting. For example, if you are opening a restaurant, you will need a licence for it. The same goes for educational institutions, import/export, financial services, travel agencies and so on. Get help from your professional agent regarding the same. 
  • Open a business bank account: The next thing you need to do is open a business bank account in any of the top banks in Hong Kong. Some banks require you to visit the bank personally for the due diligence process, while there are some who do not need you to visit at all. Take help from your hired professional services firm in choosing the right bank account as per your business requirements. 

Sole proprietorship compliances to follow in Hong Kong

Additional things you need to keep in mind when it comes to adhering to the Hong Kong sole proprietorship compliances. These include:

  • Filing for changes in the business details: If there is any change in the business particulars including the nature of the business, the business type, the address, or the name, the IRD needs to be intimated about the same within 1 month of the change. Moreover, you will have to notify the IRD regarding the cessation of the business as well. 
  • File for the taxes: In Hong Kong, sole proprietorships have to file their profits tax return every year. The IRD notifies you to file for the first tax return 18 months after you start your business. You need to file within one month from the date of the notification. Businesses with less than HK$2 million do not have to add their financial statements with the tax return. When the amount exceeds HK$2 million, the following documents have to be submitted along with the tax return:
    • A tax computation displaying how the profits or losses incurred. 
    • A certified copy of the balance sheet along with the profit & loss account for the said period.
  • Renew business registration certificate: Every Business Registration Certificate has a validity period of a year or three years, depending on the plan you choose. You will have to renew it one month before its expiry date accordingly. 

Why Should you choose a third-party service to register your sole proprietorship? 

Foreigners who want to set up their Hong Kong sole proprietorship will need to take help from a professional firm like Startupr. This firm will act as the professional agent and will register the business on the business’s behalf. In fact, foreigners will always need a third-party service if they want to open any type of business structure in Hong Kong. It is a major requirement by the government, without which the business cannot commence. The professional agent handles everything for you, from registering the business to taking care of all the additional requirements that come along the way. 

How can Startupr help register your sole proprietorship in Hong Kong?

A Hong Kong sole proprietorship is one of the least expensive and easiest business structures to set up. With minimal formalities and documentation, you can register a sole proprietorship in Hong Kong within a day. The only main disadvantage is that this business structure does not offer any liability protection. However, if you are smart enough to handle everything, it can turn out to be the best choice for you. You can, later on, change the business structure as well. So, if you are interested in starting your sole proprietorship, we at Startupr can help you with the process. Contact us to discuss further and take your business to the next step!