By Vlad Cuc, specialist in company formation matters 

Considered a very attractive investment location, Hong-Kong is an important recipient of foreign direct investments. An attractive taxation regime, simple company setup and a welcoming business climate, together with a particularly developed financial business sector are among the top advantages for investors.

 

Entrepreneurs are advised to compare the available business forms and choose one that is suitable for 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.

 

The accounting principles differ in Hong Kong according to the chosen type of company. although both private and public companies need to keep proper books of accounts, only public companies need to file annual financial statements with the registry and have these audited. Our Hong Kong CPA can give you more details about the simplified principles for other business forms.

 

• - 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.

One of the first important steps for opening a business is to select the right type of business form. 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.

 

 

 

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 shares of equal value that are divided between the company’s members. The members are liable according to the value of the 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 can be incorporated more than fifty members and it's capital is 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. This business form is suitable for 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 a number of demanding rules, due to the fact that it is listed and raises capital by selling shares to the public. A particular advantage of the public limited company is that it can round up capital more effectively, particularly because of its public listing. At the same time, this means that the company has to observe different statutory compliance requirements 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 that is largely selected by those who open a charitable organization used to raise funds for humanitarian reasons. The members also have 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:

 

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.

 

 

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.

 

A subsidiary 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. Foreigners who are interested in setting up a company in Hong Kong, can receive specialized assistance from our team of incorporation agents.

 

How to choose the right type of company in Hong Kong

1. the start-up costs: a sole trader or a partnership will have lower start-up costs compared to a corporation (especially a public limited liability company); if the start-up budget is an issue, estimating the overall start-up costs is the first step;
2. the level of control: full foreign ownership is permitted in Hong Kong, thus foreign investors have no issue in terms of whether or not they are allowed to control company;
3. the level of liability: this is an important issue to consider because business forms like the sole trader have the highest level of liability, meaning that the founder is liable with his own assets for the business; this is not an issue in case of the private limited company which has separate assets from those of the founder;
4. taxation: Hong Kong has a low taxation regime; corporations and branches are taxed using the same corporate income tax rate; the personal income tax that may apply in case of the sole trader is different; our team of agents who specialize in company formation in Hong Kong can provide you with more details;
5. transferability and continuation: how or if the business will move on in case the founder retires or after its death; corporations allow for adequate continuity and shares can be transferred or purchased accordingly (depending on company particulars and whether or not it is a private or a public one).

 

 

 

Companies in Hong Kong

• - January 2020: there were 831 public companies, 1,359,704 private companies and 14,830 guarantee companies;
• - March 2020: 851 public companies, 1,369320 private companies and 14,911 guarantee companies;
• - July 2020: 852 public companies, 1,367,302 private companies and 15,151 guarantee companies.

 

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.

 

Our company formation specialists in Hong Kong will be more than happy to provide you with full information regarding all types of companies and business opportunities in this country. Please contact us for further information.

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