Company Formation

DECIDING THE RIGHT HONG KONG COMPANY TYPE

It is important to have a full understanding of your options before deciding how to establish your company’s presence in Hong Kong.  Overall growth in Hong Kong can be hampered by making the wrong choice, so please consider the following points when deciding the best structure for your needs.

• The current nature of your business
• Business expansion plans
• Current capital to invest
• Need for outside investors, or a desire to attract investors in the future
• Tax implications of structure
• Personal liability and company risk
• Audits and other requirements to remain compliant with the local jurisdiction

If still unsure, please reach out to our consultants for assistance.

PRIVATE LIMITED COMPANY

As a separate legal entity, a private limited company protects personal assets from business risks. Private limited companies, or “private companies limited by shares” are the most common kind of company used for small to medium sized businesses or trading companies in Hong Kong. Private limited companies too are Sovereign’s most commonly used company type because of their flexibility and security.

The way private limited companies function is quite simple. The share capital of a company limited by shares is divided into a number of shares. These shares are held by the shareholders, who are entitled to a share in the profits of a company that correlate to the number of shares held in relation to the total number of issued shares. The payout of the profit by the company is called a dividend.

When considering a private limited company, please weigh the following advantages and disadvantages.

ADVANTAGES:

• Taxation: The rate of taxation is 16.5% on Hong Kong source income only. In practice this means that, with careful structuring, as long as a Hong Kong company is not actually doing business in Hong Kong it would normally be possible to arrange the affairs of the company so that no tax would be payable. Detailed advice on this aspect is available on request
• Timescale: Private limited companies can be established in approximately one to two working days, but pre-registered companies are available for immediate use.
• Distinct Legal Entity: A private l company to acquire assets, enter contracts, go into debt, make legal agreements, etc. all in the name of the company.
• Limited Liability Vehicle: The liability of the shareholders is limited to their investment amount. The personal assets of shareholders can generally not be targeted if the company comes into debt.
• Ability to raise capital: Capital can be easily raised by bringing in new shareholders or issuing more shares to existing shareholders. Also, compared to other company types, private limited companies generally are more likely to secure bank loans.
• Perpetual Succession: As a legal entity, a company in good standing will continue despite changes in membership. Changes to the shareholders and their stakes can easily be made without negative affect to the company or its daily operations. In some instances, taxation or costly procedures can be minimized if assets are held in a company.
• Transfer of Ownership: It is relatively simple to transfer the ownership of a company from one shareholder to another. Partial or complete transfer of ownership can be done by selling all or part of ones total shares, or issuing new shares to a new shareholder. This can simplify inheritance issues and the buying and selling of subsidiaries and properties, thus protecting assets for future growth.
• Legitimate Business Image: As private limited companies are most commonly used for business and trading, they are taken more seriously by investors and banks.

DISADVANTAGES:

• Initial and Ongoing Costs: Generally private limited companies are more expensive to set up and maintain than operating a business as a sole proprietor.
• Audits and Compliance: Hong Kong companies are required to file full audited accounts but small private companies meeting certain criteria may apply for “reporting exemption” and prepare simplified accounts and simplified directors’ reports. All Hong Kong companies must also prepare and file an annual return which gives details of the current directors and of the shareholders who have held shares in the company at any time during the year.
• Sovereign can help your company to remain compliant with local regulations. Please click here to learn more about our auditing and accounting services.
• Shareholder Disclosure: A minimum of one shareholder is required whose details are filed on the public register. Corporate shareholders are permitted and anonymity can be achieved by the use of nominee shareholders.
• Director Disclosure: A minimum of one director is required and full details must be filed with the Public Registry. Currently corporate directors are permitted but as of early 2014 a Hong Kong Company must appoint at least one natural person as a director. There is no requirement for board meetings to be held within Hong Kong and directors may be resident anywhere in the world.
• Sovereign can provide professional directorship services for your company. Please click here to learn more about the benefits of hiring a professional director.
• Registered Office: As a matter of local company law, a company must maintain a registered office address within Hong Kong and must also appoint a Hong Kong resident company secretary. The secretary cannot be the sole director of the company. We would generally provide these services as part of the domiciliary service fee. Please< click here for details
• Restrictions on Names and Activities: Names which suggest any connection to the UK head of state are generally prohibited and certain words which suggest specialist activity can only be used when the appropriate licenses have been obtained e.g. bank, insurance company and other specialist financial enterprises.
• Winding Down Costs and Procedures: Closing a private limited company tends to be more costly and time consuming when compared to a sole proprietorship.

Public Limited Company

Similar to a Private Limited Company, a Public Limited Company is limited by shares. However, the main difference between the two companies is that a public company’s shares are offered to the general public and can have more than 50 shareholders. Most Public Limited companies are derived from medium to large private companies that have grown quickly and want to build their investor base. To facilitate this growth rapidly, most public companies are listed on a stock exchange.

In addition to the advantages and disadvantages of private limited companies, public/listed companies also have the following factors to consider:

• Rules and Regulations: Public companies raise funds from the public and are thus subject to more strict rules and regulations.
• Public Disclosure: Public companies must disclose more information.
• Ability to raise capital: As listed companies are in the public eye, they are more likely to attract capital and investors.
• Takeovers: An acquisition of a company by another is a threat a company must consider when deciding to list on a stock exchange.

Public Company Limited by Guarantee

Typically used for non-profit organizations and clubs, a public company limited by guarantee is unique from the other forms of limited companies. This kind of company is limited by guarantee rather than capital, meaning that the parties involved are guarantee members and are not shareholders. Instead of investing capital, the members guarantee to contribute a predetermined sum to the company to cover the liabilities of the company. This predetermined sum is due when the company is being wound up.

Please consider the following characteristics of a public company limited by guarantee:

• Limited Liability: Members have a fixed liability based on the predetermined sum he or she guarantees.
• Profits: Profits cannot be distributed and working capital might be limited.

PARTNERSHIPS

A partnership allows two or more people to share ownership and liability of a business. Partners are jointly and/or individually responsible for the business as well as liable for the actions of the other business partners. One of the key benefits of using a partnership is that with shared liability and multiple partners, more capital can be raised.

General Partnership

A general partnership requires that each partner in the company is held responsible for the debts and liabilities of the business. Each partner can also be held responsible for the actions of the other partner taken on behalf of or in service of the business.

The advantages and disadvantages of a General Partnership Company are as followed:

Advantages:

• Set Up and Maintenance: Partnershipsare easy to set up and manage in comparison to limited companies.
• Partnership as an Incentive: General partnerships tend to attract and retain employees as partnership can be offered as an incentive.
• Raising Capital: Capital can be raised from partners and outside sources such as banks.

Disadvantages:

• Liability: Partners are personally liable for the business’ debts and liabilities. Partners’ personal assets can be held accountable for business debts and losses.
• Liability for Partners’ Actions: Each partner can also be held responsible for the actions of the other partner taken on behalf or in service of the business.
• Personal Conflict: Overall company growth can be deterred by conflicting opinions and goals. Personal disputes can cause issues in the management and daily business practices of the company.
• Profit Sharing: Profits from a general partnership must be shared between all parties.

Limited Partnership

A Limited Partnership has both general and limited partners. General partners have unlimited liability for the company’s debts and are involved in the businesses’ decision making process. Limited partners’ liability is restricted to the amount of their contribution to the capital of the partnership. Limited partners are not able to be involved in the decision making process of the company.

The advantages and disadvantages of limited partnerships are as followed:

Advantages:

• Limited Liability of Limited Partners: Limited partners are not personally liable for business debts or liabilities, or for the actions of other partners.
• Flexibility of Limited Partners: Limited partners can be replaced without dissolving the partnership.
• Investment Separate from Management: Clear definition of managing partners from limited partners allows for funds to be raised without affecting how the business is managed.

Disadvantages:

• Personal Liability for General Partners: General partners are personally liable for the debts and liabilities of the company. Also, general partners are liable for actions taken by other partners on behalf of the company.
• Limitations for Limited Partners: Limited partnerships are required to be passive investors.

SOLE PROPRIETORSHIP

Sole Proprietorships, or businesses with one sole owner, are best suited for small scale businesses with low risk. Although easy to set up, sole proprietorships do not constitute a separate legal entity and thus the owner’s personal assets can be subject to business liabilities.

The advantages and disadvantages of sole proprietorships are as followed:

Advantages:

• Profits: All profits from the business are attributed to the founder.
• Simplicity: Sole proprietorships are simple to set up and run. With only one investor, decisions are made quickly without unnecessary bureaucracy. Also, sole proprietorships can be wound down easily.

Disadvantages:

• Not a Distinct Legal Entity: Sole proprietorships are linked to the sole founder, so all legal actions, liabilities, and risk are carried by the investor.
• Risk: All the risks and liabilities of the company are attributed to the founder. Tremendous risk is involved, and those who wish to proceed with a sole proprietorship should take extreme caution with their investments.
• Debt: The debt of a business is the personal debt of the founder. The founder’s personal assets are at risk if the business comes into debt.
• Limited Investment Opportunities: Only the founder’s capital and profits are injected into the company, making long term growth slow and difficult. Other parties such as banks and investors are aware of the heightened risks and may be less willing to invest.
• Limited Succession: The business is tied to the life of the founder, and ceases to exist on the death of the sole proprietor.

FOREIGN COMPANY OFFICE

Foreign Companies are capable of setting up a local office in Hong Kong by either registering a branch office, subsidiary, or a representative office.

A subsidiary is a private lmited company that is structured to be the asset of an overseas company. Hong Kong allows for 100% foreign ownership of companies, meaning that the subsidiary will be fully foreign owned.

Most foreign companies prefer to set up a subsidiary for many reasons. Primarily, a subsidiary is a separate legal entity and is independently liable for its own debts and other liabilities.  Multinationals often when investing into China use Hong Kong private limited companies as an intermediary between the foreign parent company and its Chinese operating business entity, protecting IP and assets to be used in China while taking advantage of free trade agreements and double taxation agreements.

Branch Offices are not separate legal entities and are seen as an extension of the parent company. So the parent company is accountable for the debts and liabilities of the Hong Kong branch.

Representative Offices do not have legal standing, so the foreign parent company is fully responsible for the debts and liabilities of the branch. It cannot enter into legal contracts on its own, nor can it negotiate on behalf of the parent company, sign deals, raise invoices, or be involved in trading activities.

A representative office cannot engage in profit making activities, and is generally used for promotion and liaison activities.  There are no registration requirements with the Companies Registry, and no compliance procedures like filing tax returns, auditing or maintaining accounts.