Whys & Hows of Hong Kong Incorporation: Factors to Consider
Hong Kong is a cosmopolitan region which is located in Central Asia offering a wide range of business opportunities to the investors. The government of Hong Kong is taking particular interest to guide and support the investors as they can increase the GDP and economy of this region. We at 3E Accounting offer valuable Hong Kong Incorporation services to our clients who are interested in investing here.
Hong Kong has excellent banking facilities with world-class infrastructure. This is important to investors as they are looking for a business-friendly environment. The geographic location of Hong Kong has also contributed to its economic growth as it gives access to the broad market of China. Hong Kong has many lucrative reasons which are continuing to attract foreign investors.
Different Business Entities of Hong Kong
The different business structure which operates in Hong Kong are:
- Limited Liability Company
- Sole proprietorship
- Branch Office
- Subsidiary office
- Representative office
The primary step for Hong Kong incorporation of a company is to decide the business entity. You can choose this through your business goals, the capital investment made, and the size of the business. You will need to understand the types of business entities, and also categorize their advantages and disadvantages. This will help you decide which business entity suits you the best. Avoid choosing the wrong business entity as it can lead to huge losses which nobody wants.
It is very confusing to select the right business entity structure for your business. Hence, we have drafted a list of questions which will help you to decide the proper business form for your company. By answering these questions, you will have a clear idea about the business entity you should choose for Hong Kong incorporation of a company.
List of Questions
- What is the purpose of your business? Is it a conducive business or a particular business structure?
- What is the size of your business – small, medium or large?
- What is the scope of your business?
- Do you want to attract more investors to your business or is it just a profit-generating business?
- How much are you willing to invest in the market?
- What is the startup cost of your business?
- style What are the timelines to start the business?
- Define your business needs for present and future
- What are your business risks?
- How much control do you want to have over the company?
Once you have answers to all these questions, it becomes simple to decide the structure of the business. These answers will help you clearly understand the business entities of Hong Kong and if your business can rightly suit there.
Selecting the right business entity will enable you to achieve your business goals and other business requirements. Let us understand each of these entities separately and weigh their pros and cons.
Limited Liability Company
A limited liability company is the most common form of business entity in Hong Kong. It is best suitable for small and medium-sized enterprise. Hong Kong incorporation of a company under limited liability company requires registration with Company Registry. The company is treated as a separate entity, and hence the assets are protected. Hence, the best part of this business entity is that it offers protection to the assets from debts and liabilities of the business.
A limited liability company operates as a public limited company or as a private limited company. In Hong Kong. Thus, investors opt for a private limited company as the company is a separate entity and thus limits the liability of the investors. The investor is liable to the company’s asset and their asset but not responsible for the company’s debts. Now, let us understand both Private limited company and Public limited company.
Private Limited Company
A private limited company is limited by shares. Due to this, there are many benefits to a private limited company. Hence, most of the small and medium-sized companies operate as a private limited company in Hong Kong. The private limited company has a capital share amount which is divided into a total number of shares, where each share has its share value. These divided shares are distributed amongst the shareholders of the company, and thus they are entitled to receive their profits from stock and are liable for their contribution made in the company. They also receive a dividend of the stock depending on the percentage of the shares bought by them and if there is a loss then they lose their investment in the company.
Pros of Registering as a Private Limited Liability Company:
- Raising funds can be done quickly as banks readily give loans to these business entities.
- The private limited company is treated as a separate entity hence the company has its own debts and assets, unlike other entities.
- The shareholders in the company are liable to the share they own and if there is a business loss then the shareholders will lose their investment.
- Shares can be easily transferred from one member to another in a private limited company even in case of death. This doesn’t affect the company’s existence at all.
- One can transfer his ownership by selling his/her shares entirely or partially transferring the ownership to the existing or new shareholder. This doesn’t affect the activities of the business and also doesn’t complicate any legal documents. The entire transfer process is a lot easier.
- Private limited companies have a better and positive image when compared to sole proprietorship and partnership entities. This thus results in attracting new investors.
- Hong Kong offers tax benefits to a private limited company. The profit tax is 16.5% for assessable profit. There is no VAT, capital tax, withholding tax in Hong Kong
Cons of Private Limited Company:
- The set-up process of this entity is more complex in comparison to the other business entities of Hong Kong.
- There is a large number of on-going statutory compliance which must be adhered to.
- The company has to disclose information such as capital structure, details of the company’s director, shareholders and secretary with Company Registry by filing returns
- Winding up procedure is quite complicated and a time-consuming process compared to other business entities.
Public Limited Company
A public limited company is listed on the stock exchange. It is larger than a private limited company and can have more than 50 shareholders. This type of entity allows the public to buy and sell shares. Thus, they have strict rules as their capital comes from the public. Usually, successful private limited companies transform into the public limited company to increase their shareholder base.
Pros of a Public Limited Company:
- Fundraising is raising – as it comes from public
- Better perception by the public
- Easy to merge and acquire compared to other firms
- The shareholder base is larger in comparison to other entities
Cons of a Public Limited Company:
- Time-consuming business set up process
- Expensive to operate
- Complex activities as it is a public limited company
- Strict rules and regulations
- The common public raises capital
- Public disclosure of information, hence there is no confidential information
- Profit sharing with the public
- High risk
This is the easiest and simplest way for Hong Kong incorporation of a company. Company and the owner function as a single entity. Thus, the owner is entirely responsible for the funds. This type of business entity is also the riskiest form to do business as the owner is entirely liable for his contributions and he is also solely responsible for the company’s risk. One thing to note is that the owner is the only one who enjoys the profit of this business. Many investors don’t opt for this type of business entity as it involves huge costs.
Pros of a Sole Proprietorship:
- It is easy to set up and operate this type of entity
- The owner has full control over the business activities, and thus he doesn’t need approval from anyone.
- He enjoys all profits from this business
- Winding up this entity is easy, simple and less expensive
Cons of a Sole Proprietorship:
- The owner and the company do not operate as separate entities. Thus the owner is responsible for all the liabilities and debts of the company
- No protection to personal asset
- The capital of the business is the owner’s finance and profits of the market.
- There is no succession to the business as the owner is the sole owner.
- Outside investors are not ready to invest in a sole proprietorship
- To transfer ownership, you need to sell all of your business assets to a new investor.
The partnership is an establishment of two or more partners who are willing to do business to share profits among each other. Further, the Partnership Ordinance governs partnership firms in Hong Kong.
There are two types of partnership firms:
Every partner in the company is equally responsible for the company’s liabilities and debts, irrespective of any partner actions or decision.
Pros of General Partnership:
- Fundraising for capital is easy as you can rely on bank loans and take loans from a partner.
- It is easy to set-up partnership, and the process is not at all complex
- Different partners can increase the efficiency of the business as they are experts from various fields.
- Partnership firms can hire talented employees as they can give him an incentive to become a partner in the company
Cons of General Partnership:
- All the partners are equally liable for the business debts and liabilities
- There is no protection to the personal asset just like a sole proprietorship
- If there is no agreement on a decision/business operation, then it can affect the entire business
- Equal sharing of profits are amongst the partners
- Every partner is liable to their co-partner, and thus they will have to pay for wrong decisions or acts.
This is established when there is a general partner and a limited partner. The general partner is completely responsible for all the debts and liabilities of the firm, and he has full control of the company’s operation and day-to-day activities. Meanwhile, the limited partner is a silent partner who is liable to his contribution made in the company and cannot interfere in any of the business activities.
Pros of a Limited Partnership:
- The limited partner is limited to his contribution made and isn’t liable to any other business debt
- It is easy to raise capital under this entity unlike a sole proprietorship
- The company operates with greater efficiency as the general partner is solely responsible for carrying out business activities without any interference of the limited partner.
- Fewer compliance requirements when compared to other entities
- A limited partner can leave the company without any dispute
Cons of a Limited Partnership:
- The general partner is entirely liable for the company’s debt and liabilities
- The role of a limited partner is very limited. Thus, they cannot take part in the day to day activities of the company.
- This entity is expensive to set-up compared to the other entities.
A branch office is under the parent company in Hong Kong. It functions to check the sales and assist the parent company. They also make contacts with the suppliers in order to purchase them at a cheaper rate, to do the quality check of the imported and exported products. Moreover, the parent company is completely liable for the liabilities of the branch office.
A subsidiary office is similar to a branch office but it is responsible for its own debts and liabilities unlike the latter. The activities of the subsidiary office will fall under the supervision of the parent company.
Many companies want to establish a representative office in Hong Kong in order to understand market conditions, develop local contacts, find local suppliers and distributors. Legally, a representative office cannot involve itself in any profit-generating activities.
Which Entity to Choose for Hong Kong Incorporation of a Company?
Now that you have understood the pros and cons of each entity, it is easier for you to decide which business entity to select. To choose the right business structure, you need to have a concrete business plan for Hong Kong Incorporation of a company. Further, some key factors which will help you decide about the right business structure are if you are looking for profit generation, raising capital.
We have described some situations which will help you in deciding the business entity form for Hong Kong incorporation:
If you are looking to set up a small-sized and low-risk type of firm where you will be the owner of the company with your finance resource, then it is that you will have to register a sole proprietorship. But you must take into account that you are entirely liable for your company and there is no protection to your asset which includes your property.
If you want to invest in a company and share the responsibilities of the company, then you must go ahead with a Partnership firm. But you must be aware of the fact that your liable to the company irrespective of the partner’s decision or act. If you don’t want to take that risk, then you must go ahead with the limited partnership first.
We Understand Your Needs
Above all, incorporating a public limited company is the best choice for Hong Kong Incorporation of a company. There are plenty of benefits, and you don’t have to worry about the liabilities of the company. With plenty of benefits offered by this entity, you can override the cons of serving the compliance requirement.
3E Accounting has been into Hong Kong incorporation services for more than a decade and we have helped the start-ups, the new businesses in Hong Kong to select the right business entity. Our experience has helped us gained a complete insight into each business entity of Hong Kong.
Get in touch with us via an email or call us. Our consultant will discuss in detail about your business scope, business goals, business size and other business needs which will help our team decide about the right business entity.