Business Entity Types in Hong Kong — Guide

Many investors choose to start their companies overseas; one of the popular places to start one is in Hong Kong. Hong Kong has tax-friendly jurisdictions with the world’s 9th largest economy offering a sound infrastructure and a stable environment. They also have free trade and a free-enterprise economy.

Once you have decided that you want to start your company in Hong Kong, the process is straightforward. You have to choose a company name and verify if it is available, then you can incorporate a business in the Hong Kong companies registry. Before you go ahead and start the company, the first step you have to take when you decide to start a business is to determine the business structure.

You will have to choose an appropriate structure that will benefit the business idea. It is essential that you check all the pros and cons of the different structures before you choose. This article will tell you about the types of Hong Kong company structures and which one you should choose.

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Different Business Entity Types in Hong Kong

Here, you will learn about the different types of entities and get the overview to help you decide the best choice for you. There are four main types of entities in Hong Kong, they are:

#1 LLC (Limited Liability Company)

The most used type of business entity is a Limited Liability Company. This is so because it provides the owner personal assets protection from the risks and liabilities of the entity as it is a separate legal entity. Under an LLC, there are two types of companies that exist:

1. Public Company
2. Private Company

In Hong Kong, the most preferred type of business out of the two is the private limited company. This is because, in a private limited, the owner’s liabilities are restricted only to the business’s assets. Therefore protecting the personal assets of the owner. There are several advantages to this form of business structure:

• Ease of raising Capital
• It is a separate legal entity from the owner
• Tax Benefits
• Easy transfer of ownership
• Incentives

There are also disadvantages to the structure:

• The business has to disclose some information to the public
• It has a complex procedure to close the company
• There are statutory obligations that the business should comply to

#2 Sole Proprietorship

A sole proprietorship is a business entity that is for small scale and businesses that have low risk. This type of entity is easy to set up. This is only meant for small businesses and not for entrepreneurs as it is not a separate legal entity and does not shield the owner’s assets from the liabilities of the business. The advantages to this type of entity are:

• One beneficiary for profits
• Easy to close up
• Since the owner holds complete control, it makes decision making easier
• Simple to form

The disadvantages are:

• The business has a limited life
• Restricted capital
• Not a separate legal entity
• The company can only be transferred by selling the assets
• Unlimited personal liability of the owner

#3 Partnership

In a partnership, two or more individuals can share the ownership of a single Hong Kong company. This allows them to share the responsibility and enhances the chances of raising funds. In a partnership, the partners are jointly and individually liable for the actions of other partners. This entity structure has its advantages. Some of them are:

• Combined skills and expertise
• Easy to raise capital as the other sources to raise funds are available
• Higher efficiency

There are also some disadvantages to this structure:

• The partners will have to share the profits
• There may be divided opinions to procedures and also different goals
• There is no protection of the owner’s personal assets

#4 Limited by Guarantee

It is a type of Hong Kong limited business that has no share capital. There are no shareholders; instead, the members of the business donate a decided amount to the business accounts. This is a business structure that is usually used for charity, association, or a non-profit organization. In this business type, there are advantages such as:

• Members enjoy Limited liability and have democratic control over the business
• There are no shareholders
• The business is a clear separate legal entity
• Such organizations have a much more stable structure due to the democratic control

The disadvantages of the entity structure are:

• There are standard ongoing requirements in the business. They have to notify the companies registry if any alterations are made.

Which Entity Type to Choose?

You need to base the selection of the right type of Hong Kong entity for you on the situation and plans of the business. Certain situations will play a role in determining the structure you choose, such as if the owner wants to raise funds through eternal investments and if the owner wants to do business for the sole purpose of profits.

Other factors such as the nature of the business, the plans, and the size should be taken into consideration while deciding. All of these factors will have an active role in influencing your choice of a business structure. Some other things to consider are:

A private limited company is deemed the best choice when it comes to incorporating a business as the benefits outweigh the disadvantages, and the incentives override the compliance requirements.

Suppose you are looking to build a small business in Hong Kong and want low risks as the only owner of the company. Then a sole proprietor is the way to go for you. You will have enough financial resources in control. Also, it is easier to register. But one thing to keep in mind here is that there is unlimited liability. This means that the owner’s personal assets will not be protected from the company’s risks.

In a situation where you want to share the responsibility of running a company, or you have a business idea, and your partner has the funds, you can choose to start a Limited partnership business. Here both of you will have control over the business. In a partnership, the owner’s liability is still unlimited.

Conclusion

Choosing the right business entity structure is not a complex task. All you need to do is compare your goals and the business idea and see how they will work out with each of the structures. The entity structure that compliments your business idea the best and you are satisfied with is the right choice for you. Startupr helps you incorporate your business in Hong Kong. You can also hire us as your company secretary to help you audit the company and ensure legal and regulatory compliance.