A Full List of Business Entities in Hong Kong

You need to undestand the different Hong Kong business entities, before deciding which entity to incorpoate your business. Each entity has it’s own characteristics, legal eligibility and operations. This article will go through all the business entities available in Hong Kong.

Private Limited Company

A private limited company is the most popular option for small-medium enterprises in Hong Kong.

Private Limited Company Characteristics

1. The right of its members to transfer the company’s shares is restricted
2. The number of its members is limited to 50
3. Any invitation to the public to subscribe for any shares or debentures of the company is prohibited. The company is required to have directors and a company secretary. However, there is no restriction on the residence or nationality of the directors.

The required paid-up capital for establishing a private limited company is only $1, which can be in any currency, making the incorporation process quite simple.

Private Limited Company Advantages

• Separate Legal Entity: A private limited company is a distinct legal entity from its members. This allows the company to own property, incur debts, enter contracts, and sue or be sued independently.
• Limited Liability: Shareholders’ financial liability is limited to their investment in the company. They are not personally responsible for the company’s debts.
• Perpetual Succession: The company continues to operate regardless of changes in ownership or management, such as the death, resignation, or bankruptcy of shareholders or directors. Shares can be easily transferred without affecting the company’s operations.
• Ease of Raising Capital: Private limited companies can attract additional funds by issuing more shares to new or existing shareholders. This is often simpler than securing loans compared to other business structures.
• Positive Image: These companies are often seen as more stable and credible than partnerships or sole proprietorships, attracting respect from investors, customers, and clients.
• Easier Transfer of Ownership: Ownership can be transferred through the sale or issuance of shares without significantly impacting business operations or requiring complex legal processes.
• Tax Benefits: In Hong Kong, private limited companies benefit from a corporate income tax rate of 16.5% on local profits only, with no capital gains tax, withholding tax on dividends and interest, or sales tax/VAT. This tax structure supports free trade and investment, enhancing Hong Kong’s appeal as an economic hub.

Private Limited Company Disadvantages

• Complex to Set Up: Technicalities, costs, and legal requirements are more complicated than other entities.
• On-going Compliance: There are many imperative statutory compliance requirements that private limited companies are obliged to respect.
• Disclosure Requirements: The company must disclose certain information (capital structure, directors and manager information, etc.) to the public.
• Complex Winding-up Procedures: The process of shutting down a private limited company is also very complicated.

Click here to learn more detailed advantages and advantages of a private limited company!

Public Limited Company

In Hong Kong, a public limited company is referred to as a “public company limited by shares.” It differs from private companies primarily in that it is allowed to offer its shares to the general public and may be listed on a stock exchange such as the Hong Kong Stock Exchange (HKEX). This type of company is designed to raise capital by selling shares to a wide array of investors.

Key Characteristics of a Public Limited Company in Hong Kong:

1. Legal Identity: Like private limited companies, a public company in Hong Kong is a separate legal entity from its shareholders. This means the company can own property, enter into contracts, and be involved in legal proceedings in its own name.
2. Minimum Share Capital: There is no prescribed minimum share capital for a public limited company in Hong Kong, unlike in some jurisdictions. However, companies planning to list on the Hong Kong Stock Exchange might have to meet certain financial criteria set by the exchange.
3. Shareholder Requirements: A public limited company must have at least two shareholders, with no upper limit on the number of shareholders.
4. Directors: Public companies are required to have at least two directors who are natural persons. At least one director must be an individual, not another corporate body.
5. Disclosure and Compliance: Public companies are subject to stringent regulatory requirements, including the disclosure of financial statements and other relevant company information to ensure transparency and protect shareholders’ interests. These disclosures are more comprehensive than those required for private companies.
6. Stock Exchange Listing: While not all public limited companies are listed, those that choose to be listed on the HKEX must comply with the exchange’s listing rules, which include requirements for regular financial reporting, corporate governance standards, and other ongoing obligations.
7. Prospectus: If a public company in Hong Kong decides to offer its shares to the public, it must prepare and register a prospectus with the Hong Kong Companies Registry and the Securities and Futures Commission (SFC). The prospectus must provide detailed information about the company, its finances, and the risks involved in the investment.

Advantages:

• Access to Capital: Public companies can raise significant amounts of capital from the public through the sale of shares.
• Liquidity: Shareholders benefit from the ability to buy and sell shares on the stock exchange, providing liquidity and flexibility.
• Visibility: Listing on a stock exchange can enhance a company’s profile and credibility, attracting more business opportunities and partnerships.

Disadvantages:

• Complex Regulations: Complying with the regulatory requirements can be complex and costly.
• Market Fluctuations: Public companies are subject to market conditions that can affect share prices and corporate stability.
• Loss of Control: Original owners may lose some control over the company due to the need to accommodate the interests of a wider group of public shareholders.

A Public Company Limited by Guarantee

In Hong Kong, a company limited by guarantee (CLG) is primarily used for non-profit organizations such as charities, sports clubs, societies, and other entities that require legal personality but do not intend to make a profit to distribute to members. This structure is especially suitable for entities that need to secure limited financial liability without raising funds through share issuance.

• Limited Liability: Members have limited financial liability.
• Legal Personality: Ability to conduct activities under its own name.
• Flexibility in Membership: Easy to change or add members without affecting the legal structure.
• Public Confidence: As a structured entity, it often enjoys a higher degree of credibility with the public and potential donors.

Disadvantages:

• Administrative Burden: Requires meticulous record-keeping and compliance with ongoing statutory obligations.
• Regulatory Scrutiny: Subject to substantial regulation and must maintain high levels of transparency.

Sole Proprietorship

A sole proprietorship is the simplest form of business, owned and operated by just one person, where the owner and the business are legally the same entity. This means the owner enjoys all profits but also bears full responsibility for all debts and liabilities, potentially risking personal assets.

Advantages of Sole Proprietorship:

• Simple Setup: Setting up is fast and straightforward.
• Full Control: The owner makes all decisions without needing approval from others.
• Direct Profit: All profits go directly to the owner’s personal account.
• Easy to Close: Shutting down the business is simpler and cheaper compared to other business forms.

Disadvantages:

• Unlimited Liability: The owner is personally liable for all business debts, which may affect personal assets.
• Limited Funding: Funding is restricted to the owner’s personal finances and business earnings, which can limit growth.
• Finite Lifespan: The business does not continue after the owner’s death.
• Perception: Generally viewed as risky, making it harder to attract investors.
• Transferability: The business can only be transferred by selling its assets.

Registering a sole proprietorship in Hong Kong is straightforward, but given the risks, it’s advisable for entrepreneurs to carefully consider this option.

General Partnership

In Hong Kong, a general partnership is a type of business structure where two or more people (partners) agree to share the profits, management, and liabilities of a business operation. This form of partnership is governed by the Partnership Ordinance in Hong Kong.

Advantages:

• Simple to Establish and Operate: Fewer formalities compared to incorporating a company.
• Flexible Management: Partners directly manage the business and make decisions that can quickly adapt to changing business needs.

Disadvantages:

• Unlimited Liability: Each partner’s personal assets are at risk.
• Potential for Disputes: Without a clear agreement, partnership disputes can arise over management and profit distribution.
• Lack of Continuity: The partnership may cease to exist upon the death or exit of a partner unless otherwise arranged.

Limited Partnership

A limited partnership has both general and limited partners. This structure allows for a clear separation of management duties and liability between the partners.

• General Partners: They manage the business and have unlimited liability, meaning they are personally responsible for all the debts and obligations of the partnership.
• Limited Partners: Their liability is limited to the amount of capital they contribute to the partnership. They are not involved in the management of the business and cannot make decisions affecting the partnership.

Limited Partnership Advantages

• Limited Liability for Limited Partners: Attracts investors who wish to benefit from the profits of the partnership without being involved in management or bearing full liability.
• Flexibility in Investment: Allows general partners to raise capital without altering management structure.
• Pass-through Taxation: Avoids the double taxation commonly associated with corporations.

Limited Partnership Disadvantages

• Unlimited Liability for General Partners: Puts personal assets at risk.
• Limited Role of Limited Partners: They cannot engage in management without risking their limited liability status.
• Regulatory Requirements: More complex than a general partnership due to the need for formal registration and compliance with specific statutes.

Foreign/Global Company Office

Companies that have their headquarters outside of Hong Kong are considered foreign companies. They can expand their business to Hong Kong to set up a branch office, representative office or a subsidiary.

Branch Office

A branch office in Hong Kong refers to a business that serves as an extension of a parent company based outside of Hong Kong. A branch office is not a separate legal entity from its parent company. It operates under the business scope and name of the parent company and carries out business activities directly linked to those of the parent company.

Legal Status:

• The branch office is legally part of the parent company, meaning it does not have its own separate legal identity. As such, the parent company is fully liable for all actions and debts incurred by the branch.

Taxation:

• A branch office in Hong Kong is subject to Hong Kong profits tax on all profits derived from or arising in Hong Kong. Unlike a local company, profits attributed to the foreign parent are also potentially subject to taxation if deemed to be Hong Kong-sourced.

Management:

• While the branch office can conduct business and enter into contracts, it must do so in the name of the parent company. The management structure can be flexible, often involving local representatives or managers appointed by the parent company to oversee operations.

Advantages of a Branch Office:

• Visibility and Control: Establishing a branch office can increase the visibility of the parent company and allow for closer control over the offshore operations.
• Ease of Setup: It is generally less complex and quicker to set up a branch office compared to a subsidiary, as it involves fewer regulatory hurdles.

Disadvantages of a Branch Office:

• Liability: The parent company is fully liable for all obligations and liabilities of the branch, which can expose the parent to significant risks.
• Taxation: Branch offices might face more complex tax implications, especially if the profits are considered to be derived from Hong Kong.

Representative Office

A representative office in Hong Kong is a setup often used by foreign companies wishing to explore the local market without establishing a formal presence or engaging in direct sales.

Legal Status:

• A representative office cannot engage in profit-making activities and is meant primarily for non-commercial activities such as conducting research, marketing, coordinating activities, and other administrative purposes.

Taxation:

• Since representative offices do not earn income in Hong Kong, they are not subject to the local profits tax. However, they are still required to file annual returns and comply with local tax laws in terms of their operational and staffing expenses.

Advantages of a Branch Office:

• Low Risk and Cost: It is a cost-effective way for a company to explore the Hong Kong market without significant investment or exposure to commercial risk.
• Market Presence: Allows the parent company to establish a presence and build relationships in the Hong Kong market without committing to a full-scale operation.

Disadvantages of a Branch Office:

• No Legal Status: As it’s not a separate legal entity, any legal issues must be handled directly by the parent company.
• Limited Functionality: Cannot conduct sales or generate revenue, limiting its utility to non-commercial activities.

Subsidiary

Unlike a branch office, a subsidiary is a separate legal entity distinct from its parent. It is one of the most popular option for foreign companies to expand their business to Hong Kong, as Hong Kong’s limited liability and tax advantages are very appealing. Subsidiaries in Hong Kong are taxed as separate entities. They are subject to Hong Kong’s corporate profit tax on their taxable profits. The current profit tax rate is 16.5% on assessable profits.

Legal Status:

Being a separate legal entity, a subsidiary can conduct business, enter into contracts, and be liable for its actions independently of its parent company.

Advantages of a Subsidiary in Hong Kong:

• Limited Liability: The parent company’s financial risk is limited to its investment in the subsidiary, protecting the parent’s other assets from the subsidiary’s liabilities.
• Operational Independence: The subsidiary can pursue business strategies that align with local market conditions, offering greater flexibility in operations.
• Tax Benefits: Benefits from Hong Kong’s favorable tax regime, including no taxes on dividends, no VAT or sales tax, and no capital gains tax.

Disadvantages of a Subsidiary in Hong Kong:

Regulatory Scrutiny: Subsidiaries face stringent regulatory requirements and must ensure compliance with local laws, which can be demanding in terms of resources and management attention.

Setup and Compliance Costs: Establishing a subsidiary involves more complexity and higher costs compared to setting up a branch or representative office.

Which business entity type will you choose?

The type of business framework that you choose will ultimately depend on the circumstances and your business’s plans specific to your scenario. Several variables will be invariably factors in what you decide to opt for such as whether you will run your business for profit or do you expect to do external investment or if you wish to set up a non-profit company. You must take into account the following factors of consideration

• If you want to set up a small-scale business and have the sheer amount of your finances, it would be prudent for you to register the business as Sole Proprietorship. Yet, please remember that every creditor’s claim is enforceable against all your assets without any personal assets being protected.
• If you are looking to team up the roles of owning a company or if you do not have enough financial resources, then, a Partnership might be the most effective option. Although those who are owners of the partnership will be in the case of the acts jointly and severally liable, it is except for the limited partnership if you choose limit partnership. Besides, it is complicated to achieve mutually suitable partners, and can experience a conflict with each other’s expectancies.
• After all, incorporating a private limited is the best direction for the company. The benefits are numerous and outweigh the bureaucracy involved in complying with guidelines and standards.

Read Setting up a Sole Proprietorship or Limited Company

How Should You Decide Which Entity Suits Your Business?

Your choice of a certain business structure will depend on the following factors:

• What is your brand? What is the nature and mission of your business? Does it match up with the most suitable business model?
• What is the size and scale of your business?
• How about the revelation of how much of your assets can be accounted for while you are choosing the business you are down for?
• What will be the respective scale of your business in the first three years and how much capital will you need to get started? Do you have the capacity to bootstrap funding or do you need private investor’s backing to stand on your feet?
• Can your start-up gain the trust of venture capitalists and raise funds?
• How much does it cost what do we need to be able to purchase at the startup phase, how long will it take and what else do we need to consider during this process?
• What are the taxation issues that come with setting up a business as opposed to establishing a partnership operation?
• What are your present receding needs and what are your future needs?
• Do you want to be the one who makes decisions and there is a need to find a solution for each problem?
• Is the operation of your business inherently at risk?

How FastLane Group Can Help?

Fastlane provides corporate services like an incorporation service, company secretary, accounting, and audit. Our experts make setting up a Hong Kong business entity super quick and easy to do, leading the client each step of the way. We deal with all the procedures and formalities including documentation and submissions to the respective authorities. On the other hand, comprehensive support by our company includes the opening of bank accounts and ongoing compliance, enabling you to stay compliant with applicable regulations hassle-free. 

Contact us now to talk to our experts!