Venturing into a Sole Proprietorship in Hong Kong Has its Pros and Cons
The most popular and easiest kind of business incorporation is a sole proprietorship. A lot of small businesses operate this way because the owner can continue with any decision as soon as they think of it. The owner is responsible for managing the business alone and all transactions in the business. The owner also has a personal responsibility for the debts and liabilities the business incurs. Sole proprietors can have the business for as long as they want and he or she can sell it whenever. In addition, a sole proprietorship in Hong Kong allows the owner to even pass down the business to any heir/s.
You Can Easily Set it Up and Has a Low Cost
Since a sole proprietorship is a structure of the business that is informal, there isn’t any filing or loads of paperwork before you can start. You just have to start operating without having to pay any fees for filing or incorporation. Depending on which industry you belong to, you might have to get a special permit, license, business insurance policy or surety bond. Although, it is not necessary for you to complete any state filings.
This simplicity of setting up and low administration/management cost only makes it awesome for seasonal businesses and cottage industries. If you will be starting out as a sole proprietorship, this is a great idea because you still do not have a lot of liability yet. Once you see that your business is growing big, you can consider other business structures.
Sole proprietorships can be set up easily because owners are not taking any formal incorporation steps that will give protection against liability and other advantages.
Taxes are Easier
When it comes to taxes, there is no separation between an individual and a sole proprietor. This means that any income your business earns is part of your personal income. For reporting taxes, you only have to monitor all of your business expenses and income, and file this with your personal tax return. This is obviously an advantage if you only have to file 1 tax return for your personal and business. In case your business experiences a loss during that year, it can be used for offsetting the other income you have as part of your personal return. The common scenario here is if you are still employed, but choose to launch a business or a startup at the same time. There is a possibility of you lessening the total tax you pay every year.
Changing Your Mind is Easier
A lot of people are taking a risk whenever they run a business and will choose to do this as a sole business owner. Since they are waiting to become more confident before they decide if a limited company is right for them. When you become a sole proprietor, you always have the option to start a limited company later on.
Even if being a sole proprietor is easier, it also has some serious disadvantages. The main concern is there is no division between the business and the individual who has sole proprietorship. Therefore, if something happens to the business, the owner is personally liable. For instance, if the sole prop of your business gets sued or encounters financial trouble, you will be personally tied to the creditors and lawsuits.
You probably do not want to get sued or are unable to take care of bills but this could happen. Maybe your business is risky like catering or consumer products. Any client can have the option to sue a consultant for breach of contract.
Business Management View is Limited
As a sole proprietor, you make all of the decisions, and whatever you say is what will be followed. There are bigger chances of you going through an objectivity impairment since you are the only person who makes the decisions. If you have partners, you can throw ideas with them and you can have people to brainstorm and collaborate with.
Therefore, being the only person to make decisions is difficult. When the business fails, it is all on you. Although, if your grit and confidence are strong and can handle a failure like this, you can go for a sole proprietorship. Otherwise, look for business partners.
The Room for Expansion is Close to Zero
There are more limitations to being a sole proprietor aside from liability matters. If you are planning for expansion like having investors, getting a business loan, or having a partner, a formal business structure is needed. You will have a hard time acquiring these because you are the only owner and no room for others to be part of your business.
Business Life is Uncertain
Corporations are thought to last for a lifetime even if the first people in the business already died. The same goes for a partnership, wherein if one partner withdraws, it does not mean the business will stop. The ones who remain can think of a revised partnership agreement without affecting the business operations.
The business continuity becomes a concern when there is only one owner. It is a known fact that the business and owner are a united entity. Therefore, the owner’s death or retirement and other impairment would automatically make the business stop.
These are the pros and cons of being a sole proprietorship in Hong Kong. If you decide to have partners, it will not be hard because there is a pretty big network of entrepreneurs in Hong Kong.