Before starting a firm, you must choose a structure and assess the advantages and drawbacks of forming a legal organization.
The main types of legal entities in Hong Kong are:
- Limited Liability Company.
- Individual Private Enterprise (Sole Proprietorship).
Also, if you have an operating foreign company, you can start a HK company incorporation by opening:
- Branch of a foreign company;
- A subsidiary registered in Hong Kong;
- Representative offices of a foreign company.
Below you can find a comparative description of each of the above forms of ownership.
Limited Liability Company
Under the Companies Ordinance, the Companies Registry and Inland Revenue Department may register a Hong Kong limited liability company.
Companies can be either limited or unlimited. A limited liability company can be either public or private. These companies are of two types:
- liability limited by shares (Limited by Shares);
- liability limited by guarantee (Limited by Guarantee).
The second sort of corporation is used solely by non-profit organizations like benevolent foundations, religious, and educational institutions that don’t make a profit or donate it.
The most well-known and practiced form of ownership in Hong Kong is the Private Company Limited By Shares.
This firm has share capital distributed among shareholders in agreed volumes of shares of a certain value. Based on share capital, participants may get dividends and profits. Shareholders lose value if the corporation loses money in the reporting period.
The benefits of a Private Company Limited By Shares:
- Independent legal entity. The firm is a legal entity apart from its stockholders. This lets the firm buy assets, incur debts, sign contracts, and sue and be sued.
- Limited liability. The company is not responsible for each shareholder’s (investor’s) private assets (real estate, personal savings, securities, etc.).
- Continuous succession. The company can continue to operate even if shareholders or directors resign, die, or go bankrupt.
- Ease of increasing the authorized capital and attracting third-party investors. You may expedite the growth of your firm with a fast and uncomplicated approach for obtaining extra financing. By issuing more shares or adding stockholders, this occurs. Compared to sole proprietorship and partnerships, banks are more loyal to these firms when lending.
- Positive image. Investors trust LLCs more than sole proprietorships or partnerships.
- Ease of selling shares. You may quickly add a new shareholder or alter the company’s owners by transferring shares. This method does not influence corporate operations.
- Tax benefits. This sort of corporation has various local tax benefits. Accumulated capital, dividends, value-added, and sales taxes are exempt. The sole tax is corporate income tax, which is 16.5% of the company’s net profit and is imposed according to the territorial concept of activity. Only Hong Kong earnings are taxed.
If you are looking for more country options to start a business, check out company formation in British Virgin Islands.
Public Limited Companies
This firm needs above 50 stockholders. The corporation may trade stock and debentures. Medium and big companies that have had some success usually offer their shares for a free float to become public companies and attract more investment. Since their shares are publicly traded, such corporations have severe reporting obligations.
Public corporations may readily raise cash and are tightly regulated.
Disadvantages include disclosure of company structure information, complexity and high cost of developing and launching, the danger of absorption, a necessity to disperse earnings to all members, and severe reporting requirements.
Public Company Limited by Guarantee
Participants, not shareholders, guarantee a contribution to the authorized capital of this form of the corporation until its dissolution.
This business offers limited liability and equal control over all operations.
Participants cannot disperse earnings and lack working cash.
Hong Kong non-profits utilize this ownership.