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Types of Business Entities to Register in Hong Kong

Types of Business Entities to Set Up in Hong KongStarting a new business venture in Hong Kong can be a very exciting time for any entrepreneur. But then comes the next question, what type of business entity should you set up in Hong Kong?

There are several types of business entities to set up in Hong Kong that you can consider, and choosing the appropriate one to fit your business structure is a very important step of the process. You should spend a considerable amount of time carefully weighing the pros and cons of each business entity option. Is the entity going to meet your goals? Is it going to meet the needs and requirements for your business activities? Some other factors you should consider asking before deciding on a type of entity include:

  • If your business has any risks involve
  • The nature of your business activities
  • The size and type of your business
  • How much control you wish to have over your business
  • What will the current and future needs of your business be
  • The liabilities which may involved with your chosen business structure
  • The amount of capital you require to start your business
  • The tax implications of your chosen business entity
  • The start-up procedures, time required and the cost of setting up this business entity

 

Common Types of Business Entities to Set Up in Hong Kong

Entrepreneurs and foreign investors have the option of choosing from several business entity types, which include the following:

Sole Proprietorship – Which is suitable for small scale businesses, and businesses which have lower risks involved. As the name implies, this business involves only a single owner and because of that, it is an easy entity to set up in Hong Kong. However, the risks involved here would be that sole proprietorships are not considered separate legal entities, which means your personal assets are a liability because they are linked to your business. The advantages of this business option are that:

  • It is easy to establish
  • The decision making process is easier
  • The sole beneficiary gets all the process
  • It is easy to terminate

The disadvantages however, are that:

  • It is not a separate legal entity
  • There is limited capital
  • The personal liability is unlimited
  • There is limited life expectancy with this business
  • Generally low public perception associated with it
  • Sale or transfer of all or part of the business

Limited Liability Company – This structure is the most common business entity set up in Hong Kong. Companies are incorporated as Limited Liability Companies. The assets of the business owner are protected from businesses risks, because this entity is considered a separate legal entity. To register this business entity in Hong Kong, you would need to register with the Companies Registry under the Companies Ordinance.

This business entity option can either be a private company or a public company, and the company can be limited by shares or by guarantee. The advantages of a private limited company are:

  • It is considered a separate legal entity
  • There is perpetual succession
  • It is easy to raise capital
  • It has a more positive and professional image associated with it
  • Transferring ownership is easier
  • There are tax incentives and benefits

However, the disadvantages of this option are that:

  • It can be complex to set up
  • The compliance is on-going
  • The winding-up procedures are complicated
  • There are disclosure requirements

Partnership Entity – Which is a business entity structure allowing for two or more people to share in the ownership of the business. The share structure of this entity allows the individuals involved a greater ability to raise the funds they need to start this business. In a partnership, both or all parties involved will be liable for the actions of other partners in the business. In Hong Kong, Limited Partnerships are the most common option because it offers limited liability to the limited partners. There are two types of partnerships associated with this option, one being general partnerships and the other is limited partnerships. Both options have their advantages and disadvantages associated with it.

Foreign Company Office – Investors and entrepreneurs who already own companies of their own, but are keen on setting up a base in Hong Kong, have the option of doing so by registering as a branch office. With this business entity, the office is considered a subsidiary, or a representative office.

Company Partnership Sole Proprietorship
Entity Name
Appearances		 Company name ended with the word “Limited” or “Ltd” Choice of Name subjected to CR approval Choice of Name subjected to CR approval
Capital Contribution Share capital Partners contribution Own contribution
Owner(s) of the business Company(members / shareholders own ‘shares’ in the company that give them certain rights in relation to the Company) partners have a share in the capital and profits of the Partnership Sole Proprietor
Legal Status Separate legal entity Not a separate legal entity Not a separate legal entity
Party that is liable for debts of the business Company Partners Sole Proprietor
Responsibility for management of business Board of Directors Partners Sole Proprietor
Personal liability No personal liability of individual director or shareholder Liabilities borne by the directors or shareholders are to the extent of unpaid shares only Limited liability of Limited Partners. Unlimited liability for General Partners (jointly and severally liable with the partnership) Unlimited liability which can extend to personal assets of the sole proprietor
No. Of Shareholders/Partners Minimum 1 and maximum 50 in private company Minimum 1 and maximum 20 Sole proprietor only
Company Secretary / Compliance officer Qualified Company Secretary Compliance Officer or partner of the LLP N/A
Statutory Audit Requirement Required to be Audit No compulsory unless it is provided in the partnership agreement No Audit required
Annual Compliance Must file annual return, file income tax return and prepare financial statements every year. Must file income tax return every year. Must file income tax return every year.
Transfer of ownership Easy Difficult Difficult
Income Tax Status / Income Tax Rate Tax at 16.5% Tax at 15% Tax at 15%
Rules & Regulations Companies Ordinance Limited Partnership Ordinance Business Registration Ordinance
Advantages & Disadvantages
  • More paperwork & more expensive
  • Limited Liability
  • Complexity in Administration (statutory audit, AGM, board resolution and etc)
  • Higher Compliance Cost
  • Suitable for business affordable to maintain business with higher operation cost
  • public will have access to financial affairs of the company.
  • Less paperwork & additional formalities (registration is easy, fast and fewer documents are needed)
  • Unlimited Liability,
  • Simple Administration (Not compulsory for statutory audit),
  • Lower Compliance Cost
  • Suitable for newly start-up business with low entry cost
  • Not required to disclose financial statements to the public.
  • Less paperwork & additional formalities (registration is easy, fast and fewer documents are needed)
  • Unlimited Liability
  • Simple Administration(Not compulsory for statutory audit),,
  • Lower Compliance Cost
  • Suitable for newly start-up business with low entry cost
  • Not required to disclose financial statements to the public.

 

In conclusion, a private limited liability company is preferred over business entities which offers limited liability feature to the business owners.