Introduction
Having an all-around knowledge about each type of business entity is definitely an advantage when you are about to set up your own. This guide will introduce you to the types of business entities, their definitions, operating advantages, and the scope of liability for your consideration.
Limited Liability Company
A limited liability company offers protection of personal assets from business risks and liabilities and is a separate legal entity. It is the most common business type in Hong Kong. A limited company can be a private limited company or a public limited company, and a company can be limited by shares or by guarantee.
Company Formation and Requirements:
- To register a company, the shareholder(s), whether they are individuals or other corporations, must appoint at least one director, who is a natural person.
- The director(s) may be the same person(s) as the shareholder(s).
- Private companies may even appoint corporate directors, provided that there is at least one natural person director.
- Following the principle of separation of ownership and management, the shareholder(s) may appoint an unrelated director(s).
- Other office bearers appointed to the company are the Company Secretary and Designated Representative, who are required to be ordinarily residing in Hong Kong.
- It is highly recommended to appoint a professional service provider to this office, such as Encore, to ensure statutory compliance and good governance.
- The company name must not be the same or of confusable similarity as a name appearing in the index of company names kept by the Registrar of Companies.
- The registration process can generally be completed within 5 working days.
- Submissions in electronic form are usually processed within the same day, however, the e-incorporation is available to registered users only.
More about a Public Limited Liability Company
In this type of company, the number of shareholders can be more than 50. Shares are offered to the public. Usually medium to large private companies that have achieved significant industry growth go public.
Advantages
- Easy to access capital
- Strong public perception
- Easier for merger & acquisition
Disadvantages
- Public disclosure requirements
- Time-consuming, complex and expensive to establish and operate
- Heightened compliance requirements
- Risk of takeovers
More about a Private Limited Liability Company
A company limited by shares is the most common type of company for conducting business and trade. A company limited by shares has a share capital which is divided into a number of shares at a certain value each. These are held by shareholders who are entitled to share in the profits of the company. In case of loss, shareholders will lose their investment in the shares of the company.
Advantages
- Separate legal entity – This enables the company to acquire assets, go into debt, enter into contracts, sue, or be sued in its own name.
- Limited liability – Loss is limited to investment and shares held.
- Perpetual succession A change of membership does not affect the company’s continued existence. Shares can be easily transferred and have no bearing on business operations. Ease with transferring ownership also.
- Ease to raise capital
- Tax benefits and incentives Corporate tax/profit tax is 16.5% of assessable profits for corporations. Only profits which arise in or are derived from Hong Kong are subject to tax in Hong Kong. No sales tax, VAT, capital gains tax, or withholding tax on dividends and interest in Hong Kong.
Disadvantages
- Relatively more complex to establish
- Ongoing Compliance requirements
- Disclosure requirements The following have to be made available to the public by filing returns with the Companies Registry: Capital structure, Personal particulars of shareholders, directors, and secretaries, etc.
- Complex process to terminating a company
Sole Proprietorship
A sole proprietorship is where the business has a sole owner; this format may be suitable for small-scale and low-risk businesses. While a sole proprietorship is relatively simple and easy to form, it is not usually recommended for entrepreneurs in the long run, as there is no separate protection between the owner’s personal assets from business liabilities.
Advantages
- Simple to establish
- A Sole beneficiary of profits Nobody else to share the profits with so you can take home everything
- Ease of termination As there is nobody else to consider and it is more straightforward.
- Easy decision making As there is only one person in charge.
Disadvantages
- No separate legal entity
- Unlimited personal liability
- Limited capital for growth: The only source is the sole proprietor’s personal finance and business generated profits
- Lower investors’ confidence Higher risk induced by the uncertainty of the nature of the business
- Transfer of ownership Only through the sale of business assets.
Partnership
Partnership refers to two or more people sharing ownership of a single business. This form enables the sharing of responsibility and increases the ability to raise funds. However, the partners are individually and personally liable for the actions of the other partner(s). The most common form of partnership is a limited partnership. Partnerships in Hong Kong are governed by the Partnerships Ordinance and are two types: General Partnership and Limited Partnership.
More about General Partnership
General partnerships make every partner in the firm personally liable for the debts and liabilities of the business.
Advantages
- Ease of raising capital: you don’t need to rely on personal sources, and can include loans from banks, partners, etc.
- Ease of Set up and Maintenance: lesser statutory compliance requirements in comparison to companies
- Combined Expertise: efficiency can be achieved through effective decision making by pooling together all the partners’ resources, skills, knowledge, and expertise
- Attraction to employees: prospective employees may be attracted to the business if given the incentive to become a partner, considering the return and upside potential.
Disadvantages
- Unlimited liability
- No protection of personal assets
- Divided goals and opinions within partners could cause diverse issues
- Profits must be shared amongst all the partners
- Liability for co-partners’ actions
More about Limited Partnership
Limited Partnerships constitute both general and limited partners. The general partner has unlimited liability for the firm’s debts and is responsible for the day-to-day running of the business, while the limited partner(s)’ liability is limited to the amount of their unpaid share capital. Limited partners cannot participate in the management of the partnership.
Advantages
- Limited personal liability for the limited partners
- Ease of raising capital
- Fewer compliance requirements than corporations
Disadvantages
- Unlimited personal liability for the general partners
- Limited role of limited partners as they cannot participate in the management
Foreign Company Office
Foreign companies interested in setting up an office in Hong Kong can register a branch office, subsidiary, or representative office.
For more information, please visit: https://www.guidemehongkong.com/business-guides/starting-a-company/forming-a-company/foreign-company-registration-options-in-hong-kong
Additional Readings:
- Hong Kong Incorporation Entity Types by GuidemeHongKong.com: Hong Kong Incorporation Entity Types
- Hong Kong Business Entity Types: Pros and Cons by BBCIncorp.com: Hong Kong Business Entity Types: Pros and Cons
