Types Of Business Entities In Hong Kong and Which Entity To Choose?

Hong Kong is considered as one the best place to set up a business organization due to its beneficial corporate structure as well as its low tax policies. Hong Kong offers a well-developed infrastructure and freedom of exchange. This is the reason why most of the entrepreneurs from around the world opt for Hong Kong as their business destination. Here are the ways to incorporate in Hong Kong;

  • Set up your own business as a private limited company/sole proprietorship/ partnership.
  • Set up a Branch Office, Representative or Subsidiary Office.

Investors who would like to open a company in Hong Kong must first choose the right type of company as per their business needs.

Image Credits: Pexels

The choice depends on various factors, and investors should be well-acquainted when making this decision. To choose the right structure, it is very important to consider the pros and cons of each business type with your business goals in mind.

Startupr in Hong Kong can help you with specialized counseling so that you can easily decide the right business form. Typically, the resulting factors are taken into consideration when selecting the company type in Hong Kong.

So, here are some important questions you can ask yourself on deciding the entity type of the company.

  • Does your business involve risks?
  • What is the size of your business?
  • What is the scope of your business?
  • Can your business attract outside investors?
  • How much capital is needed to start your own business?
  • What are the future and current needs of your business?
  • What is the amount of control you wish to have over your business?
  • What are the start-up procedures, costs, timeline and other requirements?
  • What are the tax implications of preferring a particular business structure?
  • What is the sole purpose and nature of your business? Is it more favorable to a particular business structure?

Remember that your choice of an individual business structure will depend on the above factors, and how they relate to your overall business model.

You are advised to choose the suitable form of legal entity, the one that is appropriate for the size of your planned business. And for this purpose, it becomes quite essential to know the type of purpose and requirements each type of company serves. Here are the four types of legal entities in Hong Kong;

  1. The Limited Liability Company
  2. The Sole Proprietorship
  3. The Partnership and
  4. The Foreign Company Office

1. Limited Liability Company

This is one of the most common business vehicles in Hong Kong. This type of company offers protection of personal assets from business risks and liabilities and is a separate legal entity.

Private Limited Company

The limited liability company can be a public limited company, a private limited company or a public company limited by guarantee. You can incorporate any company and get detailed info on how each business entity can be good for your business plans with the help of experts.

Advantages Of Limited Liability Company:

  • A private limited company offers a separate legal identity, which enables the company to acquire assets, enter into contracts, go into debt, sue or be sued in its own name.
  • Shareholders liability is limited to the amount of their respective shareholdings.
  • A change in the membership of the company does not affect the company’s continued existence. The shares or the parts of the company can be easily transferred, and changes in shareholders have no bearings on the business operations of the company. It means that the company has perpetual succession notwithstanding the resignation, death or insolvency of directors or shareholders.
  • This entity offers ease of raising capital. It is easier for limited companies to secure bank loans when compared to other business entity types.
  • Private limited companies hold the positive image and are taken more seriously when compared to sole proprietorship and partnerships, and investors are more enthusiastic to contribute their resources to private limited companies.
  • In this type of entity, transfer of ownership can be easily done by selling all or parts of its total shares or through the issue of new shares to additional investors. Moreover, business operations are expected to continue unaffected and also the legal documentation is not implicated.
  • This entity type enjoys several tax benefits and incentives.

Disadvantages of Private Limited Company:

  • It is generally considered more complex and expensive when it comes to establishing.
  • It has some statutory compliance requirement that private limited companies must adhere to.
  • It has a complex winding up procedure meaning closing a company is difficult and time-consuming.
  • A company has to make sure the information available to the public by filing returns with the companies registry.

2. Sole Proprietorship

This legal entity is suitable for small-scale and low-risk business with a single owner. It is easy to set up. However, this is not a counseled business structure for entrepreneurs as it does not constitute a separate legal entity, which means it does not protect the owners’ assets from the business liability.

Advantages of Sole Proprietorships:

  • Sole Proprietorships are simple and easy to set up.
  • Sole Proprietorships offers easy decision making as it takes control of all the business affairs without having to seek approval from others.
  • Sole Proprietorships does not have to share profits derived from the business.
  • Sole Proprietorships has ease of termination.

Disadvantages of Sole Proprietorships:

  • It does not offer a separate legal entity, and due to this the owner and the business are considered the same. The Sole Proprietor is responsible for all liabilities and debts.
  • Sole Proprietorships does not guarantee the protection of personal assets.
  • With limited working capital, the business growth and expansion is deterred because the only source of money is the sole proprietor’s finances and business generated revenues.
  • There is no perpetual succession of Sole Proprietorships, and that results in the limited life of the business.
  • You can transfer the business only to the sale of business assets.

Note: This type of legal entity or business type is not recommended for people residing outside of Hong Kong as there are further difficulties in incorporation.

3. Partnership

This business entity allows two or more people to share ownership of a single business. The partnership enables a sharing of responsibility and increases the ability to raise funds. However, the partners are jointly and individually liable for the actions of the other partners. Limited Partnership is the most common form of partnership as it offers limited liability to limited partners.

Advantages of Partnership:

  • There is an ease of raising capital in this type of entity since partners do not have to rely on personal sources for raising capital.
  • It’s easy to set up and maintain since it requires lesser compliances and statutory requirements when to compared to other entities.
  • It involves a combined level of expertise. All the partners are taken into consideration while making a decision. Partners resources, knowledge, skills and expertise leads to strong decision making.

Disadvantages of Partnership:

  • Partnership offers unlimited liability meaning all the partners are personally liable for all the business liabilities and debts.
  • The partnership gives zero or no protection to personal assets. Personal assets like car, house or shares can be used to pay off bills and losses.
  • Partnerships could disagree on management plans, business goals, and other operational procedures. Personal conflicts that may arise in the course of the firm could hurt the business as a whole.
  • Any profits that accumulate from the business must be shared amongst all the partners.
  • Each partner is obliged by the other partners and can be held culpable for the wrongful acts or debts of co-partners.

Note: This type of legal entity or business type is not recommended for people residing outside of Hong Kong as there are further difficulties in incorporation.

4. Foreign Company office

Foreign organizations that are interested in setting up an office in Hong Kong can register a branch office, representative office or a subsidiary office. Moreover, corporations can also open a representative office in Hong Kong. But, this business entity does not support legal capacity and might be used for a limited scope of business, such as promotional activities or market research.

Advantages Of Establishing The Company’s Own Subsidiary Overseas:

  • It offers an operational and a strategic control that a parent company can exercise over its subsidiary.
  • It is easier to build common operating processes, especially when a parent company sets its executives to manage its subsidiaries.
  • There is a limited risk of losing intellectual property to competitors because the parent can implement universal data access and security protocols.
  • Cost synergies are possible because a parent and its subsidiaries could use common financial systems, share administrative services and develop joint marketing programs.
  • A parent company can also control the assets of its subsidiaries and can invest these assets as it sees fit.

Disadvantages Of Foreign/Overseas Company Office

  • Establishing a subsidiary is an expensive undertaking.
  • Acquiring a local company facilitate market entry and the parent company overpays for the company’s assets, primarily if there is a bidding war.
  • Acquiring a local company with built-in networks could speed up the process because it takes time to make relationships with suppliers and customers. Also, it is difficult to find skilled employees to work and manage subsidiaries. And, cultural barriers may prevent the integration of parent and subsidiary operations.
  • Parent company handles all of the risks of its subsidiaries.

For instance, A lawsuit aimed at a subsidiary could lead to financial and economic losses for the parent company.

Which Entity To Choose?

Your choice of business depends on your particular situations and plans. Numerous factors lead to whether you intend to carry on business activities for profit or you want to raise capital through external investment or establish a non-profit company.

Such factors will influence your decision regarding your choice of a business entity. So, take into account the following factors for consideration;

  • The Private Limited Company and Limited Liability Company are the only types of business entities that allow FDI (Foreign Direct Investment) of up to 100% through the automatic route. It means that any foreigner or foreign entity can invest in a company without any prior government approval. Other business entities require prior approval from the government to accept investments from foreign entities. Therefore if you are aspiring to go international, then Private Limited Company should be your preferred choice.
  • If you need to establish a low-risk and small-scale business where you will be the only owner and have enough financial resources on hand, it might be easier for you to register your business as Sole Proprietorship. However, keep in mind that your liability is unlimited and there is zero protection of your personal assets.
  • If you want to share the responsibility of running a business or if you don’t possess enough financial resources, you can opt for a Partnership. However, please note that partners are generally, severally and jointly liable for certain acts of the Partnership, unless you go for a limited partnership.

So, incorporating a private limited company is considered one of the best choices. There are unlimited benefits and override the ongoing compliance requirements.

Do you have further questions? Want to know more about business entities in Hong Kong? Refer to our Startupr Guides.

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