Updated: Jul 2
Hong Kong is considered a very attractive investment location and is an important recipient of foreign direct investment. An attractive tax regime, simple company setup, a welcoming business environment and a particularly well-developed financial business sector are the primary advantages for investors.
Entrepreneurs are advised to compare the available business forms and select one that suits their planned business size, future expansion plans, applicable tax regimes, and accounting and reporting requirements, which may vary from one legal entity to the other. In order to make an informed decision, and one that reflect business needs and objectives, it is crucial to understand the requirements of each type of business form.
Both private and public companies are required to keep proper books of accounts, and only public companies are required to have them audited and file annual financial statements with the Registry. Our Hong Kong CPAs can provide you with more details on the simplified principles for other business forms.
In Hong Kong, there are several types of business entities that entrepreneurs can choose from when setting up a business in Hong Kong. They have different characteristics and may be suitable for small or large companies. The list below highlights the types of business structures, with details on each type provided in the various sections of this article:
Sole Proprietorship: The simplest type, suitable for small businesses run by an individual.
Partnership: Formed by two or more persons who agree to share the profits and liabilities of the business.
Limited Liability Company: The most popular form of business, favored by foreign investors in Hong Kong.
Branch Office: Suitable for foreign companies to expand the Hong Kong market.
One of the first important steps in starting a business is choosing the right type of business form. It is important to understand their particularities and determine which one suits your requirements and budget. Our team of consultants specializing in Hong Kong company formation can help you choose a company type based on your specific business needs.
Some important aspects to consider before choosing the right business type include:
- the nature and size of the business;
- future expansion plans;
- capital required;
- tax requirements;
- current and future business needs.
Hong Kong Sole Proprietorship
A sole proprietorship is a basic type of business that is very easy to register. It is managed by only one owner who, with his own assets, is solely responsible for the losses and profits of the business. After the death of the owner, the business ceases to exist. It can only be transferred through the sale of business assets. Investors interested in this form of business need to be aware of one important feature: it is considered to have the highest degree of liability to the entrepreneur, as there is no distinction between the legal entity and the investor as there is with a limited liability company.
The advantage of a sole proprietor is that it is easy to register with the Commercial Register. In addition, income derived from this form of business is taxed at a rate of 15%, while corporate income tax is 16.5%. Tax filing requirements are light. The owners needs to file annual tax returns with the Inland Revenue Department.
Corporations in Hong Kong
A company may be a private company limited by shares or a public company limited by shares.
A private limited liability company is the most popular business form in Hong Kong. Unlike a sole proprietorship, it is a business entity separate from the founder. They consist of at least one shareholder, one director and must have a secretary (who must be a Hong Kong resident). The maximum number of shareholders is fifty. There is no requirement for a minimum share capital. The company's share capital is divided into shares of equal value and distributed among the company's members. Members are liable based on the value of the shares they own, and unlike sole proprietorships or partnerships, members' assets are protected in the event of company liquidation. However, in the liquidation process, the primary concern is to satisfy the claims of creditors, and only after that step is completed, the remaining assets of the company (if any) are distributed to shareholders. Shares are not freely transferable and cannot be delivered to the public. Typically, the Articles of Association dictate how these shares are transferred.
A public limited company can consist of more than fifty members and its capital is divided into shares, which are received by shareholders and registered on the stock market for public disclosure. Capital can be increased after the company is established. This business form is suitable for large companies. The liability of shareholders of a company depends on the number of shares held, which is considered an advantage when the company is liquidated. Because such companies are listed companies and raise capital by selling shares to the public, they must follow many strict rules. A particular advantage of a public limited company is that it can raise capital more efficiently, especially since it is publicly listed. At the same time, this means that companies must comply with different statutory compliance requirements and more complex accounting and reporting procedures.
A company limited by guarantee is not based on share capital but only on guarantees obtained from its members. It is a form of business chosen mainly by those who start charitable organizations to raise funds for humanitarian causes. Members also have limited liability and they can control matters related to the business in a democratic manner.
Private limited liability companies remain the most popular company type, and we have detailed below the list of documents typically required for registration with the Companies Registry:
A copy of the Articles of Association;
A completed company registration form, including details of the company name, registered address, description of business activities, members and share capital, and type of shares.
A copy of the founder's identification document.
Hong Kong companies are required to have a unique name, and company name prior checks can be easily done before registering a company. Opening a business bank account in Hong Kong is a mandatory step, other steps include having a common seal and stamp, share register and share certificates, and statutory books. Another way to do business in this jurisdiction is to buy a Hong Kong shell company, i.e. a company that is already registered. The main advantage of a company (private or public limited company) over the other business forms is that it is a separate legal entity with its own legal identity. This completely separates it from its founders, and the business can enter into agreements, acquire assets, apply for corporate credit, get into debt, and sue or be sued in its own name rather than that of its founders'. The liability of the founders is limited to the amount of their investment in the company (equity value).
A private limited company in Hong Kong is a preferred business form as it helps investors maintain a positive business image compared to a sole proprietorship or a partnership (where the founder has significant liabilities). Business partners may be more willing to contribute to or be part of a company than a partnership, especially because of limited liability.
Important Regulations for Hong Kong Companies
When choosing a business form, it is important to note that there are many different requirements that companies need to comply with than sole proprietships. One of these is choosing a unique company name for the new venture – in fact, this is the first step in formation, which takes place as soon as possible after the investor decides to open a limited company.
Our consultants who specialize in Hong Kong company formation list the general requirements for a company name:
Language selection: the name can be registered in English or Chinese, and the combination of English words or letters and Chinese characters is not allowed;
Company type: name, no matter in English or Chinese, ends with the Chinese characters of "有限公司" or "有限公司"; the Chinese name will contain characters from the ISO 10646 international coding standard and two recognized dictionaries;
Where the name may give the impression of being connected in any way with the Hong Kong government or any other government, the name requires special approval; for this purpose, words such as "department", "bureau", "committee", "council" or " Words such as "authorities" are generally not approved;
Certain terms may be governed by other laws, such as the Banking Ordinance; this means that the word "bank" cannot be used in a company name without the consent of the Hong Kong Monetary Authority.
The general requirements for the company name are listed below by our consultants specializing in company formation in Hong Kong:
language choice: the name can be registered in either English or Chinese and a combination of English words or letters and Chinese characters is not permitted;
the company type: the name, irrespective of whether it is in English or Chinese, will end with the word “Limited” or the Chinese characters for the same word; the Chinese name will include the characters in the ISO 10646 international coding standard and also in two approved dictionaries;
the name requires special approval when it can give the impression that the company is in any way connected with the Hong Kong Government or any other government; for this purpose, words like “Department”, “Bureau”, “Commission”, “Council” or “Authority”, among others, are not usually approved;
certain words can be covered by other laws, such as the Banking Ordinance; this means that the word “bank” may nor be used in a company name without the consent of the Hong Kong Monetary Authority.
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