Setting Up a Business in Hong Kong: First Considerations
Okay, so you’ve got a great idea for a business and now you need to put it into practice. But what kind of business structure is best for you? Limited Liability Company, Sole Proprietorship or Partnership?
LIMITED LIABILITY COMPANY
A Limited Liability Company is a separate legal entity from its shareholders, so the liability of the shareholders is limited to the assets in the company, and NOT their personal assets which are protected from business liabilities. A company has a share capital which is divided into a number of shares, which are held by the shareholders, who are entitled to a share of the profits and receive a dividend corresponding to their respective percentage.
Most companies in Hong Kong are set up as Private Limited Companies.
WHAT ARE THE ADVANTAGES OF SETTING UP A PRIVATE LIMITED COMPANY?
- Separate Legal Entity – A private limited company has a legal identity of its own, distinct from its shareholders. This enables the company to acquire assets, go into debt, enter into contracts, sue or be sued in its own name.
- Limited Liability: The liability of the shareholders is limited to the amount of their respective shareholdings/investment.
- Perpetual Succession: A change of membership does not affect the company’s continued existence.
- Ease of raising capital: Business expansion is facilitated by the ease of raising finances, by bringing in new shareholders or issuing more shares to existing shareholders. Furthermore, it is easier for limited companies to secure bank loans when compared to other business entity types.
- Positive image: Private limited companies are taken more seriously when compared to sole proprietorships and partnerships, and investors are more willing to contribute their resources to private limited companies.
- Easier transfer of ownership: Complete or partial transfer of ownership of companies can be done by selling all or part of its total shares, or through the issue of new shares to additional investors.
- Tax Benefits and Incentives: There are several tax benefits that private limited companies enjoy in Hong Kong.
WHAT ARE THE DISADVANTAGES OF SETTING UP A PRIVATE LIMITED COMPANY?
- Complex to set-up: A private limited company is generally considered more complex, expensive and complicated to establish when compared to sole proprietorships and partnerships.
- Ongoing compliance: There are a number of statutory compliance requirements that private limited companies must adhere to.
- Disclosure requirements: A company has to make certain information available (capital structure, personal particulars of shareholders, directors and the company secretary etc.) to the public by filing returns with the Companies Registry.
- Complex winding up procedures: Closing a company is more complex, time consuming and expensive when compared to other business entities.
Sole proprietorship is considered the easiest and simplest form of business. As the name suggests, the business is owned and operated by a sole person and since the business is not a separate legal entity, the owner and the business are considered as one.
Although this is the simplest form of business it is often considered as the riskiest as there is no protection of personal assets from risks and liabilities that arise from the business. While the sole proprietor accrues all the profits from the business, he or she is equally responsible (solely and personally) for all the liabilities.
WHAT ARE THE ADVANTAGES OF SETTING UP A SOLE PROPRIETORSHIP?
- Simple to establish: Sole Proprietorships are known for simple and easy setting up procedures.
- Easy decision making: Given the fact that the sole proprietor retains complete control over all business affairs, decision making is fast and efficient.
- Sole beneficiary of profits: Sole proprietors do not have to share profits derived from the business.
- Ease of termination: Terminating a sole proprietorship is easier, less time consuming and less expensive than other business entities.
WHAT ARE THE DISADVANTAGES OF SETTING UP A SOLE PROPRIETORSHIP?
- No separate legal entity: A Sole proprietorships is not a separate legal entity and the owner and business are considered one and the same.
- Unlimited personal liability: In cases of debts incurred, there is no protection of personal assets – including your property!
- Limited capital: The only source of capital is the sole proprietor’s personal finances and business generated profits.
- Limited life of the business: A sole proprietorship ceases to exist on the death of the sole proprietor.
- Low public perception: Due to the risks posed by this form of business, investors are less confident and sourcing for finance becomes difficult.
- Sale/transfer of all or part of the business: You can transfer the business only by the sale of business assets.
Partnerships are established and co-owned by two or more people who join together to carry on the business with a view of sharing profits. There are two types in Hong Kong: General Partnership and Limited Partnership.
Similar to sole proprietorships, general partnerships make every partner in the business personally liable for the debts and liabilities of the business. Additionally, each partner can be held responsible for the actions of another partner.
WHAT ARE THE ADVANTAGES OF SETTING UP A GENERAL PARTNERSHIP?
- Ease of raising capital: Partners need not rely on personal sources for raising capital. Sources of finance include loans from partners and bank loans secured on the combined assets of all the partners.
- Ease of set up and maintenance: Partnerships are considered easier to establish, with less statutory requirements than companies.
- Combined expertise: Efficiency can be achieved through effective decision making by pooling together all the partners’ resources and expertise.
WHAT ARE THE DISADVANTAGES OF SETTING UP A GENERAL PARTNERSHIP?
- Unlimited liability: All the partners are personally liable for the business debts and liabilities.
- No protection of personal assets: Like sole-proprietorships, partners are personally accountable for business debts and losses.
- Divided goals and opinions: Divisions can arise if partners disagree on business goals, management plans, or operational procedures.
- Sharing profits: Any profits that accrue from the business must be shared amongst all the partners.
- Liability for co-partners actions: Each partner is bound by the other partners and can be held responsible for the wrongful acts or debts of co-partners.
Limited Partnerships constitute both general and limited partners. A general partner has unlimited liability for the firm’s debts and is responsible for the day-to-day running of the business, while limited partners’ liability is limited to the amount of their unpaid share capital. Limited partners cannot participate in the management of the partnership.