Content Outline
What Is A Limited Company?
The limited company (LC) is the main type of business incorporation in Hong Kong whereby shareholders are protected from the financial risks to the company. Such a legal structure will protect personal asset associated with the company or subscribers being limited to the amount they invest or commit in the company. In law, as regards a limited company, it is considered a separate entity.
Usually in Hong Kong, the name of the company always contains “Ltd.” or “Limited” which is the same as in the UK. Alongside that, a number of forms of limited companies are present in Hong Kong, which allow entrepreneurs and investors to easily incorporate businesses with the required flexibility and features in the region.
How Does a Limited Company Work
In a limited company, it is necessary to realize that the corporation’s assets and liabilities are separate from those of the shareholders. In this case, the shareholders personal assets will not be at risk of being taken away by the creditors as a result of the corporation’s unfavorable financial situation.
The transfer of ownership in the limited company is relatively easier as compared to others, and many of such companies have been passed on to the generations. As a contrast to a public company, where anyone can purchase the shares, limited membership is subject to the company’s rules and law.
The limited company can be a company limited by shares or by guarantee. The company limited by shares is owned by its shareholders who are managed by the company directors. In a limited by guarantee there are guarantors who own the company and directors who manage it.
The main advantage of limited company formation is that there is a significant division of company owners’ and shareholders’ assets and earnings from the limited liability company. This means that in case the business goes bankrupt, the shareholders can only lose up to the value of their initial investment and cannot be liable for any personal asset or income of the owners. Limited liability makes investors more willing to take chances with their capital because their losses are limited in that sense.
What are the Limited Company Benefits
The advantages of incorporating a limited company are vast, and therefore, they attract both entrepreneurs and investors alike. Limited companies can be formed through a legal separation between the company and the proprietors; this comes with a range of advantages including financial security, operational adaptability, and the independence of the legal entity. This discourse highlights major advantages of limited companies, revealing how their organizational structure leads to a strong and considerate milieu for operation. Listed below are these benefits:
Legal Distinction
The limited company has a distinct legal border between the entity and the person or people who are the managers and shareholders. This, consequently, means that the company is regarded as a separate legal person in in the eyes of law. It can enter into contracts , own properties, file or be filed a lawsuit, and perform other legal activities, which are conducted on behalf of its owners. This segregation is significant because it ensures the fact that the personal property of shareholders is always secure despite the company having to face financial obligations or legal disputes. No matter how the company is in financial none of the stakeholders are liable to any amount more than their own investment capital.
Financial Firewall
A separate company in the form of a limited company is a tool which provides a financial firewall between the company’s finances and those of its owners. The firewall in place ensures that the company’s debt and obligations are separate and different from the personal finances of the shareholders. The legal principle of limited liability in practical terms means that a creditor may not pursue the personal assets of shareholders in an effort to settle the firm’s debts. Thus, personal assets are shielded from potential losses, providing an extra level of security to the shareholders allowing them to undertake business exposure with their investment in the company being limited to the amount of capital they have personally invested.
Asset Ownership and Profit Retention
One of the main distinctions between limited companies and other forms of business is that limited companies are endowed with the legal capacity to own assets. It refers to physical assets like property, equipment, and stock and also to the non-physical assets like trademarks, intellectual property rights etc. Besides, they have the right to keep cash after taxes are paid so as to cater for future needs. This skill of retaining profit creates the conditions for companies to reinvest in initiatives of growth, broaden their operations and deploy funds for other business dealings. Additionally, it offers the possibility of aligning the allocation of funds with the company’s objectives and market conditions
Independent Contractual Capacity
What makes a limited liability company stand out is its ability to act independently in signing contracts. The company being the legal entity as a separate person, can enter into the contracts, negotiate terms and satisfy the contractual obligations by itself without the need of shareholders. The contracts that are encompassed in this category are suppliers’ contract, customers’ contract, employees’ contract, and other entities contract. Through this limited liability company form, this business is able to participate in the contractual relations as per its own will and that it ensures transparency and certainty in the legal arrangements. Besides, this very own ability to contract gives the company much needed credibility and professionalism that can boost trustworthiness & confidence of third parties.
Limited companies in UK are expected to pay some taxes among them value-added tax (VAT), capital gains tax and National Insurance contributions. On the other hand, when their income goes over a certain amount, they are eligible for a favourable tax treatment. Indeed, the corporate income tax rate is fixed at 19%.
Hong Kong’s tax system has been designed to be business-friendly, including a competitive 16.5% profits tax rate (starting from April 2024) which is levied on profits from a territorial basis only. Different from other countries, it doesn’t levy VAT, capital gains tax and National Insurance, making the tax regime simpler. This two-tiered system offers a lower rate: The first HK$2 million of profits of corporations and unincorporated businesses will be charged at the rate of 8.25% and 7.5% respectively. Subsequently, the profits will be charged at the standard rates 16.5% and 15% respectively. This feature makes Hong Kong a good place for both multinational corporations and newly established companies with a desire to have an office located at a suitable place with a tax-friendly environment.
On the other hand, in unincorporated businesses like sole proprietorships and traditional partnerships, the owners expose themselves to a greater risk of facing unlimited liabilities as there is no legal separation between the business and the owners. If things go wrong with such business, the owners will be responsible for the debts.
Read Sole Proprietorship vs Partnership Business Structure in HK
Limited Company Variations
Corporations with limited liability exist in pretty much all countries, but the rules governing those corporations are often different greatly from one nation to another. One possible example would be the UK where there are public limited companies and private limited companies.
The share placement belongs only to a certain minority namely the people who are already members of the organization. They are, though, the widely used structures by small business owners. Public limited companies (PLCs) are entities that publish their shares like stocks for the general public which allows them to raise capital. In this case, those shares may also be traded on a stock exchange that has met the threshold of minimum total share value previously (at least GBP 50,000). This structure is also common among larger companies.
In the USA, a limited company usually tends to correspond with a corporation (Corp.) or incorporated (Inc.). Some states allow the use of the Ltd. (limited) after a business name. This depends on properly filing the necessary papers; adding the suffix isn’t enough to serve as a factor for liability protection. Limited companies in the U.S. are obliged to file corporate tax every year with the regulators. The structures of limited liability companies (LLCs) and limited companies are different.
Many countries divide the types of companies into public and private limited. For example, in Germany, the Aktiengesellschaft, abbreviation AG stands for public limited liability companies and can issue shares to the public while the GmbH stands for private limited companies that cannot issue shares.
The structure of the limited company is also common in Hong Kong, but it is a little different from the other jurisdictions. Private limited companies (Ltd.) are the most common form of company structure found in Hong Kong. They offer the freedom of conducting different business activities and are usually the most preferred option for entrepreneurs and SMEs.
Nevertheless, this is not the case in some countries, where there is a difference between what can be offered by a private limited company and a public limited company. However, firms in Hong Kong have the choice to be listed on the Hong Kong Stock Exchange (HKEX) by complying with certain listing requirements and rules. After being listed, these companies can issue shares to the public and trade them on the stock market.
How FastLane Group Can Help?
Are you ready to take your business to the next level with the security and flexibility of a limited company? FastLane is here to guide you through the incorporation process seamlessly. Whether you’re looking to protect your assets or unlock new opportunities for growth, our expert team is dedicated to helping you navigate the path to success. Contact us today to get started on building the future of your business with confidence.