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What Type of Incorporation is Right For You?

What Type of Incorporation is Right For You?

Welcome to your guide on choosing the best business structure in Hong Kong. If you're thinking about starting or expanding a business in this city, you're in the right place.

In this article, we'll break down the different types of business entities available in Hong Kong, from sole proprietorships to partnerships and limited companies.

Understanding these options is key to aligning your business strategy with your aspirations in Hong Kong's dynamic economy. Let's delve into each option and see how they could serve your business ambitions.

Limited company

A Private Limited Company (PLC) is a business entity limited by shares and recognised as a separate legal entity. It is also referred to as 'Ltd.', 'Limited Company', or 'Private Company Limited by Shares'. If a foreign company is involved, the PLC is sometimes referred to as a ‘subsidiary’.

This structure allows for ownership through shares, with the option for a single owner or multiple shareholders. Shareholders receive dividends from company profits based on their share of ownership.

Shareholders’ personal assets are safe from business liabilities, as only the company’s assets are liable.

The benefits of a PLC are notable. Firstly, the company's financial obligations are separate from personal liabilities of the owners. Foreigners can fully own a PLC in Hong Kong. This flexibility allows for unlimited profit potential and diverse business activities.

Additionally, a PLC’s credibility often simplifies processes like securing bank loans. Its operations can continue smoothly even with changes in membership, and it can raise capital by issuing new shares. Ownership transfer is also straightforward, ensuring uninterrupted business operations.

In Hong Kong, PLCs have a maximum corporate tax of 16.5% (<HK$ 2mln profits at 8.25%, remainder at 16.5%), and there are no capital gains, sales tax, VAT, or dividend withholding taxes.

However, there are some challenges. Setting up a PLC involves a detailed registration process, including obtaining necessary certificates and meeting statutory requirements. PLCs must also prepare financial statements and do an annual audit. Extracting profits from a PLC is more regulated compared to a Sole Proprietorship, as profits must be paid out as dividends or salaries.

Furthermore, PLCs must adhere to strict compliance requirements under the Hong Kong Companies Ordinance, and the process to wind down a PLC can be lengthy and complex.

However, all of these actions can be streamlined by a professional corporate services provider, like blynq. We can take care of the company incorporation, tax and accounting requirements, registered office address, company secretary, share structure, dividend payout and more.  

 

Representative office

Considering Asia as a launchpad for your company's expansion but wary of heavy investments? A popular choice for foreign companies to test the waters is by setting up a Representative Office.

This type of entity focuses on promotional and liaison activities, but is not permitted to engage in profit-making or contractually binding activities. It's ideal for market research and understanding the local landscape before fully committing to the market.

In Hong Kong, a Representative Office operates as a cost centre. You can employ local staff, buy goods and services, and conduct market research. Activities like offering paid consultancy services or engaging in trading are off-limits, as any income must come solely from the parent company abroad.

A key aspect of a Representative Office is that it's not a separate legal entity. Therefore, it doesn't require registration with the Companies Registry (CR) in Hong Kong. However, any debts or liabilities incurred fall under the responsibility of the foreign parent company.

Despite its limited scope, a Business Registration Certificate is still necessary for your Representative Office in Hong Kong. This certificate permits the office to engage in its permitted activities. As profit-making isn't the goal of a Representative Office, it's exempt from filing profit tax returns. You can either apply for an exemption or file annual returns on a "NIL" basis.

A Representative Office in Hong Kong is specifically for foreign businesses, not suitable for companies already registered in Hong Kong.

 

Branch office

If you have an already established company elsewhere and are looking to expand your presence to Hong Kong, a branch office might be a fitting choice.

Registered with the Hong Kong Company Registry, a branch office is essentially an arm of your existing company, rather than a separate legal entity like a Private Limited Company (PLC).

Think of a branch office as an extension of your main company, not a standalone business. It carries the identity of your parent company and operates under its guidance. This means that while it's a formal business structure in Hong Kong, it lacks the independence of a PLC. All major decisions and directions come from the parent company.

A key aspect of a branch office is the financial responsibility. Any debts or liabilities incurred by the branch fall directly on the parent company. This shared risk factor is a crucial consideration.

However, it does streamline tax matters since the branch office has similar legal and tax obligations as any other company incorporated in Hong Kong (and thus benefits from tax rates between 8.25-16.5%).

Like a PLC, a branch office in Hong Kong must adhere to specific compliance requirements. These include filing an Annual Return along with audited financial statements of the foreign parent company to the Companies Registry. Additionally, the branch office must renew its Business Registration Certificate annually.

A branch office setup offers a direct way to enter the Hong Kong market, maintaining a close link with your parent company while operating within the local business environment.

 

Sole proprietorship

A sole proprietorship is often the go-to structure for individuals planning to run a small, self-employed business. This is mainly because it's not an incorporated entity, meaning it's simpler and less costly to set up and maintain. In Hong Kong, all you need to do is register with the Inland Revenue Department's Business Registration Office and annually update your Business Registration Certificate.

However, there are significant liabilities. As the sole proprietorship isn't a separate legal entity, the owner is personally responsible for any debts. If the business can't pay its debts, creditors can go after the owner's personal assets. This aspect also makes it harder for sole proprietorships to secure financing from investors and banks, as they're seen as riskier ventures.

The operation of a sole proprietorship is directly tied to the owner. If the owner decides to stop the business or passes away, the business ceases to exist.

This structure is typically less accessible for expats in Hong Kong unless they hold a dependent visa. Employment and investment visas have specific requirements that a sole proprietorship generally doesn’t meet, such as contributing significantly to the local economy or creating jobs.

Tax-wise, sole proprietorships in Hong Kong are taxed at 7.5% for the first HK$ 2 million in profits and 15% thereafter, which differs from the tax rates for incorporated companies. Sole proprietors report profits through individual tax returns (BIR60 Form).

For those earning below HK$ 2 million, no detailed financial accounts need to be attached to the tax return. However, those earning above this threshold must include a certified balance sheet and profit & loss statement.

Unlike companies, sole proprietorships in Hong Kong aren't required to have their accounts audited, but maintaining accurate financial records is recommended for transparency and ease of management.

Limited partnership and General partnership

In Hong Kong, partnerships are ideal for joint business ventures, with two main types: General Partnerships and Limited Partnerships.

General Partnerships involve all partners sharing equal liability for the business's debts and actions. Each partner can also be held accountable for the others' actions.

Limited Partnerships have general and limited partners. General partners manage the business and bear full liability, while limited partners, whose liability is limited to their investment, don’t participate in management.

To be recognized as a Limited Partnership, registration is necessary. If not registered, it defaults to a General Partnership.

Key benefits of a Limited Partnership include limited liability for limited partners, flexible profit distribution, efficient operation with clearly defined roles, simpler taxation, and fewer compliance requirements than companies.

However, drawbacks include unlimited liability for general partners and limited involvement for limited partners, who cannot influence business decisions or consent to new partners.

In summary, partnerships in Hong Kong offer a way to collaborate in business, with the choice between types depending on desired involvement and liability.

 

Blynq is here to help

Wrapping up, selecting the right business structure in Hong Kong is crucial and can significantly impact your venture's trajectory.

It's a decision that shapes your financial liabilities, tax obligations, and operational flexibilities.

At blynq, we specialise in simplifying this process for you.

Our team is here to provide tailored advice, ensuring your business structure aligns seamlessly with your goals.

Whether you're just starting out or scaling up, we're here to support you every step of the way. Don't hesitate to reach out – let’s start your success story in Hong Kong!