Hong Kong Fact-File Part 1:
Business Formation for Individuals
1.1 Hong Kong Individual Business Structures
Forms of company or business structures used by individuals
in business
Individuals wishing to set up a business
in Hong Kong can establish themselves either as sole-proprietors,
general or limited partnerships or private limited liability
companies. Branches are also permitted, but this business
form is less likely to be of interest to the small business
person.
Setting up business as a sole proprietor is (relatively!)
quick and easy, and means that any profits go straight to
the business owner. So, however, do any costs, and this business
form carries a larger amount of risk, as the individual is
personally liable for any business debts and could sacrifice
personal possessions such as house, car and other belongings
to satisfy creditors. Sole proprietors can have difficulties
in raising capital from banks and other financial institutions,
making expansion of the business dependent on their own finances.
For tax purposes sole proprietors are treated as individuals
and are liable to a 15% profits tax.
A general partnership consists can consist of between 2 and
20 individuals and/or other entities. Each of the partners
is personally liable for all of the business debts and can
be held responsible for the actions of the other partner(s).
Partners should draw up a partnership agreement prior to starting
out in business together so that all aspects of working together
(including the division of profits) are laid out and understood
by all involved. If no such agreement is put in place, then
the rules laid out in the Hong Kong Partnership Ordinance
apply. Under the Partnership Ordinance, ‘no partner is entitled
to remuneration for acting in the partnership business’. The
tax ‘transparency’ of this form of business will mean that
individual partners in the business are liable to profits
tax of 15% on their share. Where a partner is an incorporated
entity, the corporate income tax rate of 16.5% will apply
to their share of the profits.
Limited partnerships are made up of at least one general partner
who is personally liable for all business debts and one or
more limited partners, one or more of which may be a limited
company, who are liable up to the amount of their unpaid share
capital. The general partner is required to conduct the day-to-day
running of the business with limited partners having no influence
on business decisions. Setting up a limited partnership can
be difficult as it is often not easy to find partners prepared
to invest in a business in which they are not allowed to take
on any of the management roles. However, such a structure
could be useful for a sole proprietor requiring additional
business investment when banks or other financial institutions
are unwilling to lend. Family members or friends, for example,
might be tempted to give financial assistance for the limited
risk involved and without having to commit time and energy
to the project. Individual participants in a limited partnership
would be liable to profits tax of 15%.
A Limited Liability Company is the most popular incorporated
business structure. It must have one director and can have
one or more shareholders. The business must also have a company
secretary who is responsible for maintaining company books
and business compliance; although there is no requirement
for the director to be resident in Hong Kong, the Company
Secretary must be. If the company consists of a sole director/shareholder,
the same person cannot be the company secretary.
Individuals involved in a Limited Liability Company will not
be held personally liable for business debts incurred and
will generally receive dividends on profits. Company profits
tax is payable at 16.5% for all profits achieved within Hong
Kong. No tax is payable on profits made outside of Hong Kong.
The terms 'Freelance', 'sole-trader' and 'self-employed'
The terms ‘freelance’, ‘sole-trader’ and ‘self-employed’ all
define someone who produces goods and/or services in Hong
Kong or trades in goods and/or service in Hong Kong, on their
own behalf, rather than on an employed basis. There is no
real difference in tax status or definition, although the
visa application process is somewhat different for a freelance
contractor as opposed to a self-employed entrepreneur.
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