While a Hong Kong private limited liability company is the most common form of incorporated entity, the Territory offers other options that may be more suitable for your business goals in Hong Kong. Requirements, costs, and obligations vary considerably between them. This guide will cover some of the major advantages, disadvantages, and requirements of the primary types of incorporated entities for your business in Hong Kong.
Incorporated Entities : the Limited Liability Company
The limited liability company is by far the most widely used form of incorporated entity in Hong Kong. The key feature of a limited liability company is that it is separate from its owners. The liability of the owners, in the event of a loss, is limited to their investment in the entity.
Some of the advantages of a limited liability company include a smooth succession process (as the company is separate entity from the owners), substantial ability to raise funds to finance expansion, and a strong credibility factor.
A limited liability company has relatively more requirements than other entity types which may give you reason to consider other incorporation options depending on your business goals and interests in Hong Kong. The major disadvantages to be aware of are:
- Complexity of Incorporation Process: Relative to other entity types such as a partnership, sole proprietorship, and representative office, a limited liability company is time-consuming and costly to establish (please see our other guide on the basic requirements of forming a limited liability company).
- Ongoing Compliance Costs and Obligations: A limited liability company must remain up to date with all regulations and rules. This will mean ongoing accounting costs for business.
Private Limited Liability Company
A private limited liability company restricts the number of shareholders to 50.
Public Limited Liability Company
The number of shareholders may exceed 50 and shares may be offered publicly. Taking a company public to grow the shareholder base is a very complex endeavor, particularly with regards to compliance. There are many disclosure requirements and other measures in place to protect shareholders. This type of entity can be useful when the cultivation of a strong public perception is important for your particular business.
Incorporated Entities and Partnership
A partnership may be formed when two or more people share a common business goal and wish to share profits. Partnerships are much easier to form and maintain than limited liability companies because the incorporated entity is not separate from its partners. Another major advantage is the ability to raise capital, which arises due to the fact that loans are written on the basis of the personal assets of all partners in the firm.
According to the Hong Kong Partnership ordinance, each and every partner has a fiduciary responsibility to the partnership, in which the partner must act honestly and make decisions that are in the best business interest of the partnership. The ordinance forbids a partner from conducting business of the same kind that directly competes with the partnership.
One of the main disadvantages of a partnership is that partners are personally liable for the actions of other partners. On the other hand, decision-making regarding management plans, business strategy, and administration is evenly divided unless otherwise stated in the partnership agreement.
- Partnership agreement When forming a partnership, it is important to write a partnership agreement that delineates the terms of the partnership and responsibilities. It should spell out how profits will be shared among partners and how decision-making powers and responsibility will be divided. In the absence of these rules laid out in the partnership agreement, the Partnership Ordinance assumes profits will be shared evenly among partners and that decision-making power is based on unanimity among partners.
Ownership and profits are shared and all general partners are personally liable for the business.
In a limited partnership, there may be so-called limited partners, who enjoy limited liability in the firm. In other words, limited partners are only liable for the capital that they contribute to the organization. A limited partnership may have both general and limited partners within the entity. In this case, limited partners enjoy limited liability while general partners do not. In the absence of a partnership agreement, the Partnership Ordinance states that general partners exercise decision-making on ordinary business matters, limited partners do not have the authority to dissolve a partnership, and the introduction of new partners (be them general or limited) does not require the consent of limited partners.
Incorporated Entities and Sole-proprietorship
A sole-proprietorship may be a suitable option for individuals doing business on their own. Entrepreneurs considering this type of enterprise should think carefully about the risks involved in their business, as sole-proprietors do not have limited liability. As such, sole-proprietorship are best for very low-risk businesses and freelancers.
A sole-proprietorship is very easy to set up. Sole-proprietors must obtain a business registration certificate from the Hong Kong Companies Registry. This license must be applied for within 1 month after the owner begins business. Sole-proprietors should register independently for each business. In other words, one sole-proprietorship may not cover more than one business.
Incorporated Entities and the Foreign Company Office
Foreign companies may form an extension of their organization in Hong Kong by registering a representative office, subsidiary, or branch. Registering a representative office for a foreign company is the simplest option when entering the Hong Kong market, while being by far the most limited in terms of permitted business activity. This kind of entity may not directly conduct business and, as such, is not suitable for most entrepreneurs.
To form a representative office, the founder must merely register with the Inland Revenue Department where they will obtain a business registration certificate. A representative office is not considered a legal entity. As such, a representative office may not engage directly in profit-making activity including the signing of contracts, directly negotiating deals, or issue invoices. A representative office may only act as a liaison between prospective customers or suppliers and the parent company. The organization may also engage in promotional activities on behalf of the overseas organization. Lastly, a representative office is permitted to engage in market research and other activities that do not directly involve profit making and that are done solely on behalf of the parent organization. Generally speaking, a representative office can be a prudent first step for a business that is interested in developing marketing opportunities in Hong Kong but is not ready to make the commitment to forming a full-fledged legal entity.
A subsidiary is effectively a wholly foreign-owned limited liability company. As such, it is a far more complex endeavor to form and operate than a representative office and is best suited for those with more certain, long-term interests in the territory.
A branch office is distinct from a subsidiary in that it is not a separate legal entity from the parent company. Therefore, parent organization is fully responsible for the debts and liabilities of the branch office.