You can choose from several types of companies when setting up a company in Hong Kong.
The surprising thing, however, is that most entrepreneurs in Hong Kong prefer to set up a private company, even though they can choose to register guarantee companies or public companies.
In fact, out of the 110, 840 incorporated entities in 2021, more than 109,000 are private companies with the rest being either guarantee or public companies. These statistics may motivate you to conform to what is popular and decide to set up a private company in Hong Kong.
But before making your decision, let’s walk through the different types of companies in Hong Kong and the importance of choosing the right type before starting your business.
Importance of choosing the right type of company
Why is it important to select the appropriate business entity from the very start?
Your initial step as a business owner who wants to set up a company in Hong Kong is to choose the best type of business entity. This is a crucial matter, as the type of company you will set will have extensive tax and legal consequences. Note that under the new Companies Ordinance, business people can choose from five types of companies created after the regrouping of the eighty types of companies under the old Companies Ordinance. The types of companies that you can form under the new Companies Ordinance are:
- private companies limited by shares
- public companies limited by shares
- companies limited by guarantee without share capital
- private unlimited companies with a share capital
- public unlimited companies with a share capital
Table of Contents
Private companies limited by shares
Private limited companies are the most common type of company for small to medium-sized business entities in Hong Kong.
Advantages
Separate legal entity
A company limited by shares has its own identity distinct from its shareholders. It possesses almost the same rights and responsibilities as a person, which means it can enter into contracts, acquire assets and conduct other legal transactions under its name.
Limited liability. In line with its distinct legal personality, shareholders of a limited liability company are liable only up to the extent of their investment. As a shareholder, your personal assets will not be used to pay company debts in case of financial distress.
Less complicated ownership transfer. The transfer of ownership of a private limited company is simple and can be done by selling its shares.
Ease of increasing capital. Setting up a private limited company is the way to go if you are looking to raise more capital for your business. The good credit standing of private limited companies in Hong Kong makes it easier for them to secure bank loans. Moreover, you can issue more shares and even bring in new shareholders to raise more capital for your business.
Tax benefits. Private limited companies benefit the most from Hong Kong’s territorial basis of taxation. The business will only pay a profits tax of 8.25% to 16.5% of its assessable profits under the two-tier profit tax system, as there is 0% capital gains tax, sales tax, or dividends tax in Hong Kong. You can read more about Hong Kong corporate tax filings in this article.
Disadvantages
Statutory compliance.
Under the Companies Ordinance, private limited companies have to conduct annual general meetings, file annual returns with the Registry, and file tax returns with HK’s revenue department.
Director disclosure.
The company is also required to disclose certain information to the public, such as the name of the director. You are required to appoint at least one natural person for this position.
Not allowed to offer shares to the public.
Despite being the most popular form of business entity in HK, the shares of a private limited company are not offered to the public.
The complicated process of winding up.
Regardless of the reason for closing the business, the Companies Ordinance in Hong Kong puts emphasis on the realization of assets primarily for the benefit of creditors rather than the shareholders. This makes the winding-up process more complicated and time-consuming. The process of winding up includes:
- selling the assets
- paying the debts
- in case of insolvency, debts are paid to the extent of existing funds
- surplus funds are distributed among shareholders or in accordance with the company’s memorandum and articles of incorporation.
Public companies limited by shares
The Companies Ordinance of Hong Kong describes a public company limited by shares as companies that cannot be classified as either a private company or a company limited by guarantee. In contrast to a private limited company, a public company limited by shares can have more than 50 shareholders with shares and debentures that can be offered to the public.
Read on to learn more about the advantages and disadvantages of a public limited company to determine whether this type of business entity is for you.
Advantages
Raise capital through the issuance of shares to the public.
Public companies can have more than 50 shareholders with shares that can be offered to the public. This makes it easier to attract more investors and raise capital for its business operations.
Limited liability of shareholders.
In the case of insolvency, the business owners are only held accountable for liabilities up to the extent of their financial investment in the company.
Increased business opportunities.
A public limited company is for you if you are looking to expand your business. The company can draw on the financial markets and raise capital by selling stocks and bonds.
With larger capital, the company can expand its operation to settle debts, grow organically, support projects, and expand to other branches.
Share transferability.
With shares quoted in the stock market, it is easier to transfer shares of a public limited company compared to other types of entities. This feature makes a public limited company attractive to investors. For example, investors have more motivation to buy shares from other shareholders, knowing that they can exercise the same rights as the previous owner of shares.
Reputable profile.
Public companies are considered as more credible entities as they have to operate under strict regulations and reporting requirements. They are more likely to have a reputable profile, which plays an important role in making the public trust and identify with them.
Disadvantages
Stricter regulations.
Public limited companies in Hong Kong generate funds by selling their shares to the public. This requires compliance with stricter rules and regulations, as the government has to impose policies to protect the general public. For example, the Companies Ordinance requires that public limited companies have at least two directors, and must conduct annual general meetings after the start of its operation.
Public disclosure.
In addition to the annual general meeting, the ordinance also requires a high level of account transparency, which should be produced every six months.
The public limited companies in Hong Kong are to disclose relevant information to the public, especially those that relate to their accounting information.
Requires larger initial capital.
Should you consider starting a public limited company in Hong Kong? Most entrepreneurs with smaller capital start off with a private limited company before transitioning to a public limited company. For one, setting up a public limited company requires a large capital, with a minimum of HKD 10,000, representing 10,000 ordinary shares valued at HKD 1.00
Companies limited by guarantee without share capital
A company limited by guarantee without share capital is a company owned by the guarantee members who agree to contribute an amount to cover company debt in the event of winding up. A company under this operates without share capital and is generally used by non-profit organizations. This means any profits generated by the business will not be distributed to the shareholders but will be used to maintain the business and other purposes
If you are planning to register a company limited by guarantee in Hong Kong, you need to submit a proposed company name, in addition to the identification documents, proof of address of your office of each member, and director. It’s worth mentioning that this type of company must have two or more directors who are accountable as per the general director’s duties and responsibilities of any company in Hong Kong.
You also need to provide a description of the provisions of your company, including its purpose and range of activities for which it is created.
A company limited guarantee can take advantage of tax exemptions by filing an application as an Approved Charitable Institution and even dispense the word ‘Limited’ in its name.
Note that the creation, management, and dissolution of a company limited by guarantee is governed by principal laws, including the Companies Ordinance Cap. 622, Inland Revenue Ordinance Cap 112, and other common laws.
Reachtop KSHK CPA Limited can assist you in processing with the Companies Registry. Our services include the preparation of application letters, drafting the articles of incorporation, and engaging with various offices, including the Inland Revenue Department.
Private unlimited companies with a share capital
Have you ever heard of a private unlimited company? It is not often that you come across this term, so read on to learn more about this type of company.
A private unlimited company has substantial similarities with a private company limited by shares. For instance, it must provide its articles of association and be registered with the Companies Registry. In addition, it must also have its members and directors just like any other type of company in Hong Kong.
The difference, however, is that the members of this company type have unlimited liability. In the event of insolvency, the members are jointly and severally liable for the liabilities of the entity. This means each of the shareholders may need to contribute beyond their investments should the company assets are not enough to pay the debts.
But with the unlimited liability of shareholders, why would anyone choose this type of business?
An unlimited liability company enjoys many of the advantages associated with a private limited company. In addition, there are advantages that are specific to this type of business entity, such as:
Quality of management
This type of business entity encourages watchful and cautious decision-making, as the owners have so much at stake. Despite not having direct involvement in the management of the business, shareholders are more likely to be interested in ensuring sufficient examination of the directors’ decisions.
Creditor confidence
There are risks associated with investments, and investors are likely to feel nervous and sell their investments, such as shares of stocks when faced with a volatile business environment.
However, with proper risk management in place, creditors and investors have a higher incentive to remain invested in the business.
Despite the advantages, fewer entrepreneurs favor a private unlimited company. This may very well be because of the disadvantages of this type of business, such as:
Unlimited liability
As the name implies, the shareholders of private unlimited companies may suffer losses beyond their investment during liquidation.
The possibility of incurring more losses to pay back creditors during liquidation is something that you should consider when deciding whether this type of company is for you.
Missed opportunities
With the risks of incurring unlimited debt, the company’s decision-makers may turn away from taking high-risk ventures despite the possibility of higher profits.
Not many people understand it
Many entrepreneurs may not have heard of a private unlimited company. Even external advisers may not suggest registering this type of business.
But, if a private unlimited company is something that interests you, please contact our team.
Public unlimited companies with a share capital
This type of business entity is used primarily by professional organizations, such as accounting and law firms.
The clear disadvantage of a public unlimited company is the unlimited liability of its members. This means that shareholders are liable to pay company debts even after the full payment of their shares.
FAQs
What are the advantages of a private company limited by shares?
Most entrepreneurs in Hong Kong prefer a private limited company for the simple and straightforward processes of setting up this type of business. Moreover, the fact that shareholders are liable only up to the extent of their investment makes this type of business highly attractive to investors. A private limited company promotes entrepreneurship as it allows business people to invest without risking their personal assets.
What is a Hong Kong limited company?
A Hong Kong limited company is a distinct legal entity, where the liability of its shareholders is limited to their investments in the business.
Can a foreigner open a company in Hong Kong?
A foreigner can set up a company in Hong Kong even without being physically present. This is made possible by the creation of the e-Registry, where foreigners can set up their company in HK online.
Who are the owners of a limited company?
The owners of a limited company are the shareholders who buy in the company shares. Remember that a private limited company has a personality that is distinct from the people who manage the business.
What is the difference between a guarantee member and a shareholder?
A private company limited by shares is substantially similar to that of a company limited by guarantee. Both types of companies should register at the Hong Kong Companies Registry, submit annual returns, and will have directors to run the business. The difference, however, is the distribution of profits as a company limited by guarantee does not have any shareholders and does not issue shares. In place of shareholders are guarantors who control the business but do not have the right to receive profits.
Why is a private limited company a preferred business entity?
A private limited company is a preferred type of business in Hong Kong, especially for small entities because of the ease of registration and minimal requirements. For instance, after choosing the company name, you can already establish your company in Hong Kong by complying with minimal requirements as imposed by the companies registry.
In addition, a private limited company has a separate legal identity, so its shareholders are not personally liable for the company’s debts.
What is the role of the Companies Registry in the registration of a Hong Kong company?
The Companies Registry is responsible for providing services for the registration and incorporation of business entities in Hong Kong. The registry also helps in making companies’ information accessible to the public, as well as ensuring that these businesses are operating in compliance with the relevant Hong Kong Ordinances. Further, the Companies Registry is expected to advise the government on policy and legislative matters.
What entity is best for you?
We offered a discussion of the different types of business entities. Now it’s your turn to take your pick.
Your choice of a business entity largely depends on your plans and circumstances, such as your location and finances. Do you intend to carry on your business by raising more capital from investors or do you plan to set up a not-for-profit organization in Hong Kong?
Note that the choice you make involves examining the pros and cons of factors that apply to the type of business structure. Also, bear in mind that the nature of your business may change over time.
It helps to take several factors into consideration in making your decision:
- The degree to which you can take risks
- how you can take advantage of tax regimes given the business structure
- the possibility of attracting investors to your business
- cost of setting up and maintaining the entity
Conclusion
In setting up a company, most investors in Hong Kong choose a private limited company due to less stringent requirements in setting up this type of entity.
If you need assistance in deciding the best option for your new company in Hong Kong, we at ReachTop KSHK CPA will be happy to assist you.
