The initial and most important step in starting a business is to choose on an appropriate business structure. It is important to weigh the pros and cons of each business vehicle against your business goals, in order to choose the right structure and steer away from the wrong one.
There is no doubt that Hong Kong is a global leader in open economics — its inherent focus on free trade has elevated it to be the world’s freest economy for 25 of the last 26 years. Most people will know about Hong Kong’s low corporate tax rates, and the fact they have no capital gains tax, sales tax, or withholding tax on dividends or interest.
Let’s take a look at the different types of business entities in Hong Kong so you can find what will best serve your needs.
Sole Proprietorship in Hong Kong
The most basic and entry-level of business to create in Hong Kong is a sole proprietorship. A single owner is fully liable for all profits and losses made by the business. The ownership of the business may be transferred by selling the assets.
Advantages of Establishing a Sole Proprietorship in Hong Kong
- Simple to register — The easiest of all business entities to register with the Business Registration Office
- Low income tax — Income is taxed at only 15% as opposed to 16.5% for corporate income.
- Minimal tax reporting — Just one annual tax return to be filed with the Inland Revenue Department.
Disadvantages of Establishing a Sole Proprietorship in Hong Kong
- Liability — a sole proprietorship has the highest degree of personal liability. There is no distinction between the business and the owner as a legal entity.
Business Partnership in Hong Kong
A partnership is the natural expansion of a sole proprietorship, where two or more people join forces to grow a business and share the profits. There can be from two to a maximum of 20 partners in a partnership, and they will all usually have equal rights in the business. If it grows above 20 partners, it must register as a company in Hong Kong.
There are two kinds of business partnerships in Hong Kong — a general partnership and a limited partnership.
A general partnership means the partners are personally liable for profits and debts. Partners can also be held liable for the actions of other partners.
A limited partnership has both limited and general partners, where the limited partners are only liable to the amount of their capital contribution, where the general partners have unlimited liability. The general partners cannot have a say in the operation of the business however, while general partners do.
Advantages of Establishing a General Partnership in Hong Kong
- Simplicity — Much easier to set up as opposed to a company.
- Flexibility — The arrangement of partners can be extremely flexible.
- Minimal reporting — Because there are fewer statutory controls compared to companies, there is no need to audit or publish business accounts to the public, except for income tax.
- Employee retention — Since you can offer partnership as an incentive to employees, they are more likely to be productive staff members.
- Easier capital — A general partnership can raise capital from outside sources, e.g. banks.
Disadvantages of Establishing a General Partnership in Hong Kong
- Unlimited liability — All partners are liable for profits and debts of the partnership
- Liability to other partners — All partners can be held liable for the actions of a fellow partner.
- Profit splitting — As opposed to a sole proprietorship, you must share the profits with your partners.
Advantages of Establishing a Limited Partnership in Hong Kong
- Limited liability — Limited partners are not personally liable for the debts of the business.
- Limited liability to other partners — Limited partners cannot be held liable for the actions of a fellow partner.
- Flexibility — Limited partners can be replaced without dissolving the business.
- Investment vs. Management — Capital can be raised without affecting business management, due to the separation of general partners and limited partners.
Disadvantages of Establishing a Limited Partnership in Hong Kong
- Unlimited liability for general partners — General partners are still personally liable to debts of the business.
- Restrictions for limited partners — Limited partners can only be passive investors and have no say in the running of the business.
Would you like to learn more about the business entities in Hong Kong? Check out this Hong Kong Company Registration blog.
