Starting a business in Hong Kong offers various company structures to choose from, including private limited companies, public limited companies, sole proprietorships, and partnerships. Yet, the private limited company stands out as the most favored and prevalent entity.
Entrepreneurs opt for private limited companies due to their associated advantages. Beyond the fundamentals, this article delves into the 10 pros and cons of private limited liabilities in Hong Kong.
What Is a HK Private Limited Company?
A private limited company, also referred to as a “private company limited by shares” or “limited company (Ltd.),” stands as an independent legal entity distinct from its shareholders. In contrast to sole proprietorships and partnerships, it entails distinct obligations and requirements, established directly with the Hong Kong Companies Registry under the governance of the Hong Kong Companies Ordinance.
Its defining feature lies in its autonomous operation, signifying that the company’s profits, assets, and liabilities are separate entities from those of its directors and shareholders. Unlike public limited companies, shares of private limited companies are not publicly traded on stock exchanges but are instead issued to shareholders.
Shareholders’ liability is confined to the extent of their shares, implying that in the event of losses or liquidation, shareholders stand to lose only up to the value of their shares.
How Is a Private Limited Company Structured?
The fundamental legal requirements for any private limited company in Hong Kong include:
Shareholders: Limited to a maximum of 1-50 shareholders, who can be individuals or corporations, either local or international.
Directors: Must have a minimum of one director, with no maximum limit. Directors can be local or international individuals or corporations. Unlike Singapore, there’s no requirement for a local director in Hong Kong.
Company Secretary: If the company secretary is a natural person, they must reside in Hong Kong and possess a local Hong Kong address. Alternatively, if a professional company serves as the secretary, it must hold a valid TCSP License issued by the HK Companies Registry.
Business Registration Certificate: Issued by the Business Registration Office, this certificate verifies the company’s legal existence and segregates personal finances from business finances. The registration process can be managed independently or with the assistance of a business registration service.
TCSP License (for professional companies): Professional companies acting as company secretaries should possess a valid TCSP License issued by the HK Companies Registry, ensuring compliance with regulatory standards.
The Pros of Private Limited Companies
- Limited Liability
Shareholders aren’t personally liable for the company’s debts or expenses, safeguarding their personal assets. This ensures asset security in case of company financial difficulties, unlike in sole proprietorships or partnerships where founders risk personal asset liability.
- Shareholder Protection
Limited liability shields shareholders from financial liabilities, restricting their exposure to the amount of their investment. This protection incentivizes investment by minimizing risk, as shareholders stand to lose only the capital invested in the company.
- Easier Capital Raising
Private limited companies excel in raising funds, post-incorporation, by issuing shares to new investors. Shares can be categorized to reflect varying shareholder rights, facilitating capital procurement. Additionally, private limited companies often find it simpler to secure bank loans compared to other business structures.
- Effortless Ownership Transfer and Perpetual Succession
The company’s existence persists irrespective of sudden member deaths, contrasting with sole proprietorships or partnerships. Reorganizing or transferring ownership in a private limited company through share issuance or sale is swift and uncomplicated.
- Appealing Tax Regime
Operating a business through a Hong Kong private limited company offers the advantage of Hong Kong’s “territorial tax” system. This system mandates tax payment solely on profits derived from Hong Kong operations, administered by the Inland Revenue Department (IRD).
The Cons of Private Limited Companies
- Annual Audit
Hong Kong mandates all companies to prepare annual audited accounts. While small private companies can opt for simplified accounts, compliance with this requirement is compulsory.
- Public Information
Both shareholders and directors of a private limited company in Hong Kong must disclose their identities to the Companies Registry. Consequently, anyone can access information regarding the direct shareholders of a private limited company. However, details regarding indirect shareholders are not publicly disclosed or reported to the Companies Registry.
Conclusion
Here are a few key points to consider:
Prevalence of Private Limited Companies: Private companies limited by shares are the predominant company type in Hong Kong, offering various advantages such as limited liability and operational flexibility.
Limited Liability: Shareholders of a limited company are shielded from personal liability for the company’s debts, safeguarding their personal assets.
Incorporation Convenience: Incorporating a Hong Kong private limited company is a straightforward, speedy, and cost-effective process. Additionally, setting up a business account is hassle-free, facilitating swift operational commencement.
Attractive Tax Regime: Hong Kong presents one of the world’s most appealing tax environments for private limited companies, characterized by a simple and favorable tax system, particularly with the “territorial tax” approach.
If you’re seeking guidance or considering forming a new company in Hong Kong, exploring professional advice or services could be beneficial in navigating the process smoothly and optimizing your business endeavors.
