Sole Proprietorship vs Limited Company Hong Kong

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Hong Kong is a great place for investors because it offers an attractive taxation regime, an option for simple business entity types, and a welcoming business climate.

In addition, Hong Kong has one of the most developed financial sectors in Asia, with plenty of opportunities for innovative business activities.

It is ideal for owners who want to start their companies backed up by professionals familiar with the Hong Kong business environment.

Starting a business in Hong Kong requires choosing the right entity structures. This article discusses the key factors to consider when selecting an entity structure for Hong Kong entities.

We also provide insights into the pros and cons of a sole proprietorship vs limited company.

Table of Contents

Factors to Consider when Choosing Between Sole Proprietorship and Limited Liability Company

Factors to Consider when Choosing Between Sole Proprietorship and Limited Liability Company

Before registering with the Business Registration Office, one of the first decisions you must make is the type of your new business entity.

Below are some factors to consider when choosing between sole proprietorships and LLCs:

Separate Legal Entity

A sole proprietorship is the most common form of entity ownership in Hong Kong, and for a good reason.

This entity type is easy to set up and usually does not require much capital, making it suitable for small businesses.

However, one downside of a sole proprietorship is that it is not a separate legal body. This means the owner is liable for all debts and losses incurred by the company.

Business owners want to protect their personal assets in unforeseen circumstances that may negatively affect their business operations.

So, many entrepreneurs opt to establish a private limited company instead of a sole proprietorship.

A private company limited is suitable for enterprises engaged in trade and business.

The company’s share capital is divided among the shareholders, whose liability is limited to the number of shares they hold.

If you are unsure which entity structure is right, contact us for a consultation with one of our highly competent accountants.

Separate Legal Entity

Tax Consequences

Regardless of their entity type, Hong Kong businesses are taxed on their profits derived in HK.

However, the tax consequences of doing business in Hong Kong can vary depending on the chosen structure for your business.

The limited liability companies in HK are taxed at a very favorable rate, allowing these entities to have significant tax advantages over sole proprietorships. 

For instance, under the provisions of the Inland Revenue Department, sole proprietorships and partnerships are subject to a 15% tax rate on their assessable profits.

In contrast, companies limited by shares are taxed 8.25% on the first taxable HKD 2 million and a flat rate of 16.5 % for the remaining taxable profits. 

In addition, limited liability companies enjoy various incentives and tax-saving schemes resulting in relatively lower tax liabilities. 

Ease of Formation and Operation

It is relatively easy to form a sole proprietorship in Hong Kong as the source of capital is the owner’s personal finances and business profits.

The main requirement is to obtain the Business Registration Certificate by registering the business with the Business Registration Office.

The elimination of extensive requirements makes it much easier to get started.

Ease of Formation and Operation

In addition, the sole proprietor has complete control over the business and can make necessary decisions without consulting other owners.

This can be a major advantage for people who want total control over their business. However, the owner’s limited capital and personal assets may also hamper the growth of the business.

The downsides of the sole proprietorship business motivate many Hong Kong entrepreneurs to change the structure of their business into a limited liability company.

After forming a Hong Kong limited company, the next step is to choose and check the availability of the name.

The formation of limited liability companies includes complying with the incorporation requirements of the Hong Kong Companies Registry under the Companies Ordinance.

In addition, the Hong Kong company must perform the annual compliance obligations set by the IRD and Companies Registry.

Ease of Expansion

The lack of capital may hinder a sole proprietorship business from expanding its operation. In addition, there are risks should the owner opt to take a loan from banking institutions due to unlimited liability.

In contrast, it is easier for a limited liability company to raise capital for expansion as its structure allows two or more individuals to contribute to the capital.

In contrast to sole proprietors, company owners of a limited liability Hong Kong company can easily raise capital by issuing more shares to existing shareholders or bringing in new shareholders to the business.

Moreover, as a business entity with a strong public image, LLCs may find it easier to secure loans from financial institutions.

Ease of Expansion

Business Registration Fees

Business owners who want to set up a limited company may pay higher business registration fees than sole proprietorships.

The business registration fee paid to the Inland Revenue Department (IRD) for the registration of a sole proprietorship is HKD 250.

Filing for a limited company’s business registration requires HKD 1,720 to the Companies Registry and HKD 250 fee paid to the Inland Revenue Department.

Sole Proprietorship vs Limited Company in Hong Kong FAQS

The FAQS aims to provide more information about sole proprietorships and limited liability companies to help business owners understand the benefits and drawbacks of each structure.

What are the most common Hong Kong Business Entities?

The most common business entities in Hong Kong are sole proprietorships, LLCs, and partnerships. Also, the most common type of corporation is the private limited liability company.

A private limited liability company is incorporated with the participation of one shareholder, one director, and a secretary who is a resident of Hong Kong.

What is a public company (PC) limited by guarantee?

Entities that operate as public companies limited by guarantee do not have share capital. The guarantee members contribute a predetermined amount to cover the entity’s liabilities.

The members of an entity limited by guarantee are liable for the company’s debts, but only to the extent of their contribution.

This means that even if the obligations of the company exceed the total amount of the guarantees, the members will not be personally liable for paying back more than their original investment.

The entities limited by guarantee must still file annual tax returns with certified copies of the director’s reports, auditor’s reports, and financial statements.

Foreign investors prefer this type of limited company since it does not require investing a specific number of share capital.

A PC’s profits are used to promote the entity’s objective. So, a public entity limited by a guarantee is most suited for clubs and charity organizations.

What is a private company limited by shares?

A company limited by shares is a type of business structure commonly used in Hong Kong. This type of company is owned by shareholders, who have limited liability for the debts and obligations of the business.

The shares of an entity limited by shares are typically divided into two classes: ordinary shares and preference shares.

Ordinary shares give their holders the right to vote at shareholders’ meetings and receive dividends, while preference shares offer preferential treatment concerning dividends and other distributions.

Which is better, a sole proprietorship or a private limited company?

Sole proprietorships are the simplest and most common type of business entity in Hong Kong. However, sole proprietorships also have some disadvantages.

The owner is personally liable for all debts and obligations of the business, and they may risk losing personal assets if the company fails.

Additionally, sole proprietorships can only raise capital through personal investment or loans, which may limit growth potential.

Private limited companies are more complex than sole proprietorships but offer several advantages.

The ownership is divided into shares, which means that liability is limited to the amount invested in the company.

This makes it easier to attract investors and raise capital. Private limited companies also tend to be more stable than sole proprietorships, as they are less dependent on a single individual.

However, setting up a private limited company requires more paperwork and can be more expensive than a sole proprietorship.

What is the single important factor to consider when choosing a business form?

When choosing a business entity, it is important to consider your long-term goals for the company. A private limited company may be better if you plan to grow the business and attract investors.

A sole proprietorship may be the best option if you want complete control over the business and are willing to accept personal liability risks.

Ultimately, the decision should be based on what will work best for your business.

What is a sole proprietorship in Hong Kong?

A sole proprietorship is the simplest type of business in Hong Kong. However, there are also some disadvantages to this type of business.

One of the biggest potential problems is that the sole proprietor is liable for all debts and liabilities incurred by the company.

If the business fails, the sole proprietor could lose personal assets, such as their home or savings.

In addition, raising capital for a sole proprietorship can be difficult since investors want some level of protection from personal liability.

A sole proprietorship is best suited for businesses with low risk and limited liability.

What is the best business structure for Hong Kong Foreign companies?

For foreign companies looking to do business in Hong Kong, the best business is a limited liability company (LLC).

An LLC offers several important benefits, including limited liability for shareholders, flexible management structures, and tax efficiency.

Reachtop KSHK CPA Limited can help foreign companies set up an LLC in Hong Kong.

We can handle all the necessary paperwork and filings and provide ongoing support to help your business operate smoothly and efficiently.

Contact us today to learn more about how we can help you establish your business in Hong Kong.

What is a limited company in Hong Kong?

A limited company in Hong Kong has at least one shareholder, director, and a registered office in Hong Kong.

A limited company can be private or public and listed or unlisted on the Hong Kong stock exchange.

Limited companies offer many benefits, including limited liability for shareholders, a simple corporate structure, and easy to raise capital.

However, some drawbacks to setting up a limited company include complying with certain regulatory requirements and filing annual returns.

What are the two types of partners in a limited partnership?

There are two types of partners in a limited partnership: general and limited.

General partners are responsible for the day-to-day management of the business and have unlimited liability for the debts and obligations of the business.

Limited partners are only liable for the amount of their investment in the industry and are not involved in the day-to-day management.

Many companies choose to structure their businesses as limited partnerships because it provides them with the flexibility to raise capital from a variety of sources.

However, it is important to note that a limited partnership is not a separate legal entity in HK and therefore does not have its own legal identity.

This means that the partners are liable for any debts or obligations incurred by the business.

As a result, before entering into a limited partnership, it is important to seek professional advice to ensure that you understand the risks involved.

Are Hong Kong companies required to file audited financial statements?

Regardless of its structure, a Hong Kong company must comply with the statutory obligations of filing full audited financial statements.

The entity’s annual returns must also include details of current shareholders and directors.

Which is better, a sole proprietorship or a private limited company

Wrap Up

Are you still unsure about the best business structure for your company? Call Reachtop KSHK CPA Limited for more information. 

We would be happy to provide a free consultation and help you make the best decision for your business. Thanks for reading!

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All consultants are qualified Hong Kong company accountants and tax advisors.