Considered a very attractive investment location, Hong-Kong is an important recipient of foreign direct investments.
Investors enjoy a low taxation regime, an easy company setup procedure as well as a welcoming business climate, with a particularly developed financial business sector.
Entrepreneurs should choose the most suitable form of legal entity based on the size of the planned business, future plans for expansion, the applicable taxation regime and the accounting and reporting requirements which can differ from one legal entity to the other. In order to make an informed decision, and one that will reflect the business needs and purpose, it is essential to know the requirements of each type of company.
In Hong-Kong, entrepreneurs can choose between several types of business entities. These have different characteristics and may be suited for small or large companies. The list below highlights the types of business structures, with detailed information, about each one in separate sections of this article:
- - the sole trader: the simplest type, suited to small businesses that are run by a single individual.
- - the partnership: formed by two or more people who agree to share the profits and the liability for the business.
- - the limited liability company: the most popular business form, preferred by foreign investors in Hong Kong.
- - the branch: suitable for foreign companies to expand on the Hong Kong market.
Choosing the right type of company is one of the first essential steps for opening a business. It is important to understand their particularities and determine which one suits your requirements as well as the budget for incorporation. Our team of agents who specialize in company formation in Hong Kong can help you choose the type of company based on your specific business needs.
Some of the important aspects to consider before choosing the right type of company include the following:
- the nature and size of the business;
- future expansion plans;
- required capital;
- tax requirements;
- current and future business needs.
Our company registration representatives invite you to watch a short video about the types of companies in Hong Kong:
The sole proprietorship in Hong Kong
The sole proprietorship is a basic type of business, very easy to register. It is operated by a single owner, fully liable with his own assets for the losses and profits of the business. The business ceases to exist upon the owner’s death. It may be transferred only by selling the business’ assets. This business form presents a unique characteristic that needs to be thoroughly considered by all investors: it is considered to have the highest degree of liability for entrepreneurs because there is no distinction between the legal entity and the investor like in the case of the limited liability company.
The advantage of the sole trader is that it is easy to register with the Business Registration Office. Moreover, the income derived by this business form is taxable at 15%, unlike the corporate income tax
of 16.5%. the tax reporting requirements are light, as the owner is required to file an annual tax return with the Inland Revenue Department.
The corporations in Hong Kong
The companies may be private limited by shares or public limited by shares.
The private limited liability company is the most popular form of business in Hong-Kong. Unlike the sole proprietorship, it is a separate business entity from the founder. They are incorporated by at least one shareholder, one director, and it must have a secretary (who needs to be a Hong-Kong resident). The maximum number of shareholders is fifty. There are no requirements regarding the minimum share capital. The company’s share capital is divided into equal shares, distributed among the company’s members. Their liability depends on the number of owned shares and unlike the sole proprietorship or the partnerships, the assets of the members are protected in case the company is liquidated. However, during the liquidation procedure, the primary concern will be to satisfy the claims of the creditors and only after this step is complete, distribute the remaining assets of the company among its shareholders (if any remain). The shares are not freely transferable and cannot be delivered to the public. Usually, the Memorandum of Association is stipulating the way these shares may be transferred.
A public limited company may be formed by more than fifty members and have the share capital divided into shares, received by the shareholders and registered at the Stock Market in order to make it public. The increase of capital is possible after incorporation. It’s a form of business preferred especially by large corporations. The liability of the company’s shareholders depends on the number of owned shares and this is considered an advantage in case the company is liquidated. This type of company is subject to more stringent rules, particularly because it is listed and raises capital by selling shares to the public. An important advantage of the public limited company is that it can gather capital more effectively, particularly because of its public listing. However, this means that the company has to deal with an ongoing statutory compliance and more complex accounting and reporting procedures.
A company limited by guarantees
is not based on share capital only on guarantees received from its members. It’s a form of business
chosen by a charitable organization in order to raise funds for humanitarian reasons. Its members also benefit from limited liability. Its members also benefit from limited liability and they can control the matters concerning the business in a democratic manner.
The private limited liability company remains the most popular type of corporation and we detail below the list of documents that are usually required for registration with the Companies Registry
- a copy of the Articles of Incorporation;
- the filled in incorporation form including the name of the company, the registered address, the business activity description, details about the members and the share capital as well as types of shares.
- copies of the founder’s identification documents.
A company in Hong Kong needs to have a unique name and a prior company name check can be easily performed before registering the company. The company must also have a bank account opened in Hong Kong, a common seal and stamp, share register and share certificate and statutory books.
The partnerships in Hong Kong
The partnerships may be general or limited.
A general partnership
is based on an agreement between two or more partners, personally liable with their personal assets for the company’s losses and which are allowed to split the profits among them. The death of a general partner may dissolve the partnership. No share capital is requested at registration
. The partners are also liable for the actions of the other partners – this is one of the most important issues to take into consideration when opening this type of company, just like in the case of the sole trader. The main advantages of the partnership include the ease of set up and maintenance, the ease of raising capital, the possibility to attract employees by also making them partners and the fact that the business can grow based on the partner’s combined experience.
A limited partnership is formed by a limited partner, liable to the extent of his contribution to the company’s capital and a general partner fully liable for the company’s losses but who also have the decisional powers. Only the death of the general partner may cause the partnership dissolution. Partnership owners in Hong Kong must observe the provisions of the Partnership Ordinance. Unlike the general partnership, the limited partnership is a more advantageous business form for the entrepreneur who acts as the limited partner. The general partner must still be well aware of his unlimited liability, like in the case of the general partnership and the sole trader. This type of legal entity is generally perceived as more advantageous compared to the corporation because it has to deal with fewer compliance requirements.
The branch in Hong Kong
Foreign companies may open businesses
in Hong Kong that will act as an extension of the company abroad. These are the branch
and the representative office
. Out of these two, the branch is the only one that can undertake commercial activities and derive profit in Hong Kong while the representative office is only used for marketing purposes.
is an option suited for foreign companies that want to be separate from their counterpart in the city. It is the alternative to the branch for foreign companies that wish to enter the market and it means incorporating a private limited company (in most cases) by following the same steps as if opening a new legal entity in Hong Kong.
Each of the business types described is required to comply with different levels of financial reporting. The requirements are less complex for partnerships and increasingly more demanding for companies, especially the public company.
All of the different characteristics of the business forms presented by our agents need to be taken into consideration before starting a business in Hong Kong. Issues like liability, the complexity of the incorporation process, the annual taxes for the company and many others need to be discussed and understood before registering the new business entity.