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Hong Kong: Converting a Sole Proprietorship to A Limited Liability Company
Growth under a sole proprietorship is limited and there may be sole proprietors who are interested in converting to a limited liability company in Hong Kong. However, a sole proprietorship and a limited company are different types of business structures and it is not possible to convert or ‘transform’ from one form to another.
The only solution to this is to form a completely new and separate limited liability company (LLC) in Hong Kong.
Benefits of Limited Liability Companies
Initially, a business owner might prefer a sole proprietorship because it is easier to incorporate and does not require a large amount of capital. However, when the business grows, it becomes a larger burden as sole proprietors have to take on the full risks and liabilities of the business. A sole proprietor may also start to prefer a limited liability company because they are interested in further expanding the business.
A limited liability company can thus provide the following benefits for the business owner:
Easier to source funds from financial institutions and approach investors who tend to shy away from non-incorporated entities.
- Separate Legal Entity: A limited liability company is a separate legal entity from its founder and thus has the special legal capacity to own assets and sign contracts.
- Limited Liability: The business founder is only liable to the extent of their investments in the company and hence will not be liable for the full losses a company may incur.
- Business Continuity: A company can continue to exist even if its founders or shareholders step down or pass away.
- Better Funding Opportunities: A LLC is considered a more stable business structure and can attract more capital and investment funding from shareholders or banks
- Better Public Perception: A company is seen as a more credible and stable business structure that has a larger influence on the community, thus there is better public perception.
Ceasing Business of Sole Proprietorship
Once a business owner decides to make the move to a limited liability company, they may cease their sole proprietorship by cancelling their Business Registration Certificate (BRC) at Hong Kong’s Inland Revenue Department (IRD).
They may then proceed to incorporate a new Hong Kong limited liability company by applying for a new BRC. The newly incorporated company will not have any connections to previous transactions, assets or liabilities under the sole proprietorship.
Company owners must also note that there is a distinct separation between their personal and business finances. Company owners are not able to use their personal account for the new company and must open a new corporate bank account.