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.
Main business form choices
In Hong-Kong, entrepreneurs can choose between several types of business entities when setting up a company in Hong Kong. These have different characteristics and may be suited for small or large companies. The list below highlights the types of business structures, with detailed information, about each one in separate sections of this article:
- 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 to 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.
Some of the important aspects to consider before choosing the right type of company include the following:
- the nature and size of the business;
- future expansion plans;
- required capital;
- tax requirements;
- current and future business needs.
The sole proprietorship in Hong Kong
The sole proprietorship is a basic type of business, very easy to register. It is managed by only one owner, who is fully liable with his own assets for the losses and profits of the business. The business ceases to exist upon the owner’s death. It may be transferred only by selling the business’ assets. Investors who are interested in this business form need to pay attention to an important characteristic: it is considered to have the highest degree of liability for entrepreneurs because there is no distinction between the legal entity and the investor like in the case of the limited liability company.
The advantage of the sole trader is that it is easy to register with the Business Registration Office. Moreover, the income derived by this business form is taxable at 15%, unlike the corporate income tax of 16.5%. The tax reporting requirements are light, as the owner is required to file an annual tax return with the Inland Revenue Department.
The corporations in Hong Kong
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 stipulates the way these shares may be transferred.
A public limited company can be incorporated with 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. An 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 but 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:
- a copy of the Articles of Incorporation;
- the filled-in incorporation form including the name of the company, the registered address, the business activity description, details about the members and the share capital as well as types of shares.
- copies of the founder’s identification documents.
A company in Hong Kong needs to have a unique name and a prior company name check can be easily performed before registering the company. Opening a business bank account in Hong Kong is a mandatory step, and others include having a common seal and stamp, share register and share certificate and statutory books.
Another way of starting a business in this jurisdiction is by purchasing Hong Kong shelf company which is an company that is already registered.
The main advantage of the corporation (private or public limited company) over the other business forms presented below by our agents is that it is a separate legal entity with its own legal identity. This separates it from its founders completely and the business may enter into agreements, acquire assets, apply for corporate credit, go into debt as well as sue or be sued in its own name as opposed to the name of its founder/s. The liability of the founders is limited to the amount of their investment in the company (the value of the shareholdings).
The private limited company in Hong Kong is a preferred business form because it helps investors maintain a positive business image compared to the sole trader or perhaps the partnership (in which the founders have a significant level of liability). Compared to a partnership, a business partner may be more willing to contribute or become part of the business particularly because of the limited liability.
Important regulations for companies in Hong Kong
When choosing the business form, it is useful to note that corporations are subject to a number of different requirements, compared to the sole trader, for example. One of these is choosing a unique company name for the new business – one of the first steps for formation, in fact, one that takes place as soon as possible after the investor has decided to open a limited company.
The general requirements for the company name are listed below by our agents 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.
Company names are not approved if:
- they are the same as one that already appears in the index of company names;
- the use of the word or name would be a criminal offence or it is offensive to or contrary to public interest, in the opinion of the Chief Executive.
When choosing to incorporate a limited liability company, it is important to note that the name can pose issues when it is “too like” other names. For example, registering the name does not mean that a company cannot ask for another legal entity to stop using a name or part thereof if it believes that the said name is “too like”. For this purpose, the infringed company can ask that the Registrar prohibits a company from using a name or part of it and in this case, the Registrar will ask that the company that is accused of the wrongdoing change its name. non-compliance with a direct request to change the entire or part of the name can result in the prosecution or the company and/or its officers.
Another important condition for limited liability company incorporation in Hong Kong is to have a local registered office. This means that this office must be situated in Hong Kong and not in another location. The address stated in the incorporation form is the company’s registered office address and this location enters into effect from the date of incorporation (the date inscribed in the company’s certificate of incorporation).
The delivery of the application for the incorporation of a limited company in Hong Kong is subject to several fees, not only to the preparation of a set of documents. Below, our Hong Kong company formation agents list some of these fees when the application is made in electronic form, as they should be taken into consideration as part of the overall start up costs when deciding on the type of business form.
- 1,545 HK$ is the application fee for the incorporation of a local Hong Kong company that has a share capital; if the application for registration is approved, the company owner can apply for a refund of the fee of 1,280 HK$ as the lodgment fee of 265HK$ is not refundable;
- for companies limited by guarantee, the registration fee is calculated according to the number of members and it is 155 HK$ for 25 members or less and 305 HK$ for companies with more than 25 members but no more than 100 (these are just two of the possible fees, please refer to our agents for companies limited by guarantee with more members);
The company registration application fees are different when the said application is delivered in hard copy form. For example, the fee is 1,720 HKD for the incorporation of a local company with share capital, slightly more than in the case of the electronic application. Please reach out to our company formation specialists in Hong Kong for complete information on the fees payable before you decide on a type of company.
As part of the mandatory requirements for opening a company in Hong Kong, investors need to be mindful of the information that needs to be included in the Articles of Association. The following data is mandatory: company name, the liability of the members, the liability limited to any amount of unpaid shares, the capital, and initial shareholdings (for a company with capital). Our agents can provide complete details on how these Articles are drafted.
Taxation, licensing, and reporting for Hong Kong companies
Corporations in Hong Kong may be subject to tax incentives for certain selected activities such as research and development. However, Hong Kong’s entire taxation system is a beneficial one because of the low corporate income tax rate. What’s more, the present profits tax rate in Hong Kong is a two-tier one, meaning that there are two different tax rates:
- 8.25% (or 7.5% for unincorporated businesses) on the first 2 million HKD of assessable profits;
- 16.5% (15% for unincorporated businesses) on the rest of the assessable profits.
The taxation of dividends in Hong Kong is also an advantageous one as those paid from profits that have already been subject to tax in Hong Kong are not taxable in the hands of shareholders. Dividend payments received from foreign companies are not taxable as they are considered foreign-source income. Our team of agents who specialize in company formation in Hong Kong and taxation matters can give you more details about the taxes applicable to corporations.
Investors should note that companies in Hong Kong are subject to special licensing requirements, for example those applicable to money service operators, a licensing service administered by the Customs and Excise Department.
Foreign investors interested in expanding their businesses to another country, besides Hong Kong, maybe to a European jurisdiction such as Estonia, can receive specialized assistance from our partners who are experts in opening Estonian companies.
The partnerships in Hong Kong
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.
The branch in Hong Kong
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
Choosing the suitable business form is an important business decision and investors can start by taking into account a number of important issues:
- 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;
- 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;
- 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;
- 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 the 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;
- 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).
Our specialists in company formation in Hong Kong invite you to watch a short video about the types of companies in Hong Kong:
Companies in Hong Kong
Foreign investors are allowed to incorporate any of the business forms presented in this article. However, some business forms are preferred over others, namely the private limited liability company. Below, our team of agents specializing in Hong Kong company formation lists some of the statistics regarding business incorporation and the corresponding business types, as per the data made available by the Companies Registry:
- 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.
The statistics above refer to companies that have been incorporated under the Companies Ordinance and they include the total number of companies (local companies that were newly registered and those that have remained registered in the Register since 2014). Public companies remain the preferred business form in Hong Kong, as highlighted by the currently available statistics.
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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