4 Popular Hong Kong Company Forms for Foreign Businesses

Typically, small and medium sized companies in Hong Kong are incorporated as Private Limited Companies. This type of entity is often chosen over other forms (partnerships, sole proprietorships, etc.) due to the many benefits it offers. Private Limited Companies are the most common form for conducting business and commerce.

A private limited liability company is a company whose charter capital is divided into shares of a certain value. These shares will be held by shareholders (investors), who enjoy a share in the profits of the company and receive dividends corresponding to their capital contribution ratio. In case of loss, shareholders will only lose their investment capital through the company's shares.

Advantage: 

1. Legal status: A private limited company has its own legal personality, separate from its members. This allows the company to purchase assets, enter into contracts, incur debts, sue or be sued in its own name.
2. Limited: The liability of shareholders shall be limited to the number of shares corresponding to their invested capital.
3. Perpetual Succession: A change in the membership structure will not affect the existence of the company. Shares can be easily changed and transferred between shareholders without affecting or impacting the business operations of the company. This means that companies can continue to operate despite the death, resignation or bankruptcy of shareholders or directors.
4. Easy to raise capital: Private LLCs are quite advantageous in expanding their business model due to the ease in raising capital, which is done by bringing in new shareholders or issuing additional shares to existing shareholders. Additionally, private LLCs will find it easier to raise capital from banks when compared to other types of business entities.
5. Create a positive image for the company: Private limited companies are more trusted and appreciated when compared to sole proprietorships and partnerships because investors are more willing to contribute their capital to this type of company.
6. Easy transfer of ownership: A private limited company can transfer all or part of its ownership by selling all or part of its shares, or by issuing new shares to new investors. The company's business operations after these actions can continue without being affected and the legal procedures will not be too complicated.
7. Tax benefits and incentives: There are many tax benefits that private limited companies enjoy in Hong Kong. Corporation tax, (or profits tax), is 16,5% of taxable profits for companies. Hong Kong follows a territorial basis of taxation. Therefore, only profits generated in or derived from Hong Kong are taxable in Hong Kong. Hong Kong does not impose capital gains tax, withholding tax on dividends and interest and there is no turnover tax or VAT in Hong Kong.

Disadvantages

1. Complicated setup: Establishing a private limited company is often considered more complicated and costly than other types.
2. Comply with the law: Private limited companies are subject to quite a number of laws and regulations in Hong Kong.
3. Public request: Private limited companies must disclose information about (capital structure, specific personal information of shareholders, directors and secretaries, etc.) to the public by declaring to the Companies Registry.
4. The procedures for terminating a company are complicated.: Closing a private limited company is more complicated, time consuming and expensive when compared to other types of business entities.

A public limited company is a locally incorporated company in which the number of shareholders can be more than 50. A public limited company is where shares and bonds are offered to the public.

Typically, when medium and large private companies – those that have achieved significant growth in a certain industry – decide to go public, by increasing their number of shareholders. Most of these public limited companies will be listed on a stock exchange. When this happens, listed companies are subject to strict rules and regulations, as they raise capital from the public. 

The advantages of a public limited company are easy access to capital, strong public awareness, and ease of mergers and acquisitions. 

Difficulties include: public disclosure requirements; time-consuming, complex and costly establishment and maintenance; risk of takeover; sharing of profits; and constant compliance with ever-changing regulations.

This type has no share capital. It has members, not shareholders. The members will act as guarantors/undertakers to contribute a predetermined amount towards the liability of the company in case it goes bankrupt.

The advantage of this type is that members will have limited liability, and can participate in maintaining democratic control over all matters. 

However, the disadvantage of this type is that profits cannot be distributed and the company may face a lack of working capital. Therefore, this type is most suitable for non-profit organizations that wish to set up in Hong Kong.

1. Simple setup.
2. Easy to make decisions: Since the sole proprietorship owner has complete control over all business affairs, decision making is quick and efficient, without the need to seek approval from others.
3. The owner is the sole beneficiary of the profits.: Owners do not have to share the profits earned from the business.
4. Easy to terminate:Terminating this type is easier, less time consuming and less costly than other business entities.

1. Legal status: This type is not a separate legal entity, the owner and the business are considered one. The sole proprietor will be responsible for all debts.
2. No limit on personal liability: In the event of debts arising, this type does not protect personal assets (including the individual's own assets).
3. Limited capital: The only source of capital is the assets of the sole proprietor and the profits generated by the business. With limited capital, the expansion and development of the business is limited.
4. Limited business life cycle: When the sole owner of a company dies, the company ceases to operate.
5. Low public awareness: Due to the risks posed by this form of business, investors are often less confident and thus, raising financial resources becomes difficult.
6. Sale / transfer of all or part of the business: The transfer of a company/enterprise can be carried out by selling the business assets of that enterprise.

Similar to sole proprietorships, general partnerships are also responsible for the debts and obligations of the business. Additionally, each partner is responsible for the actions of the other partners (those actions taken during the course of the partnership).

Advantages

• Easy to raise capital: Partners do not need to rely on personal sources to raise capital. Sources of finance include loans from partners and bank loans, based on the combined assets of all partners.
• Easy to set up and maintain: Partnerships are considered easier to establish, subject to fewer conditions and legal requirements compared to other types of companies.
• Combining expertise:Effectiveness can be achieved through effective decision making based on the support and synthesis of knowledge, skills and expertise.
• Attracting employees: This type can attract potential future employees because employees have the opportunity to become a partner.

Disadvantages:

1. No Limitation of Liability: All partners have obligations and responsibilities for the business of the enterprise.
2. No protection of personal property: Like sole-proprietorships, the partners are personally liable for the business's debts and losses. There is no protection for personal assets (e.g., home, car, stocks, etc.) that can be used to pay off debts and losses.
3. Share goals and ideas: Partnerships can fall apart due to disagreements between partners on business objectives, management plans, and operating procedures. Personal disputes arising during the course of business can have a negative impact on the business.
4. Profit sharing: Any profits accrued from the business must be shared among all partners.
5. Legal responsibility: Each partner is bound by the other partners and may be liable for the wrongdoings or debts of the partnership partner.

A limited partnership consists of both general partners and limited partners. General partners have unlimited liability for the company's debts and are responsible for the day-to-day operations of the business, while limited partners' liability is limited to the amount of their unpaid share capital. Limited partners may not participate in the management of the company.

Advantages

1. Limited liability of limited partners: The limited partners of a limited partnership are not liable for any corporate debts incurred by the company or for the wrongful acts of the other partners.
2. Easy to raise capital: Limited partners' liability is limited to the amount of their investment, so it is easier to raise capital than a sole proprietorship
3. More efficient: Greater efficiency can be achieved because the general partners have responsibility for day-to-day business decisions and operations and are free to run the business without interference. This benefits the limited partners, who may invest money but do not have the time or expertise required for the business.
4. Comply with few requirements and regulations: Limited partners will meet fewer requirements.
5. Limited Partner can go away or be changed without affecting this type of company.

Disadvantages:

1. Unlimited personal liability of cooperative members:Because the liability of the general partners is unlimited, this type may have difficulty finding suitable partners who are willing to assume the risk.
2. The limited role of limited partners: Limited partners cannot participate in the day-to-day operations of the business, they can only act as passive investors.
3. Expensive setup costs: The cost to establish this type of limited partnership is quite expensive compared to general partnerships.

A representative office is a type of company established by a foreign company in Hong Kong. The main purpose of a representative office is to introduce the parent company's company, products and services to the Hong Kong market, seek customers and build business relationships.

Main characteristics

1. No legal status: A representative office is not an independent legal entity, but only an extension of the parent company.
2. No direct business allowed: Representative offices are not allowed to enter into business contracts, issue invoices or generate profits locally.
3. Limited operations: The main activities of a representative office are market research, brand promotion, partner search and representing the parent company in marketing activities.

Advantage:

1. Low setup costs: The procedure for establishing a representative office is usually simple and quick, with lower costs than establishing a local company.
2. Flexible: Representative offices may close or convert to another legal form when necessary.

Disadvantages:

1. Not profitable: Representative offices are not allowed to generate profits locally.
2. Restrictions on operations: The scope of operations of a representative office is limited and is not allowed to engage in direct business activities.

A Hong Kong branch office is an extension of a parent company headquartered overseas. The branch office does not have an independent legal entity and is directly managed by the parent company. The main purpose of the branch office is to represent the parent company locally and carry out the parent company's business activities in Hong Kong.

Main features:

1. Not an independent legal entity: A branch office does not have separate legal status but is part of the parent company.
2. Responsibility of parent company: The parent company is fully responsible for the operations and legal obligations of the branch office.
3. No separate charter capital: Branch office uses capital of parent company.
4. Incorporation process: The incorporation procedure is usually simpler than setting up a new company.

Advantage:

1. Risk reduction: Establishing a branch office helps reduce risks for the parent company because there is no need to establish a new legal entity.
2. Easy management: Branch offices are directly managed by the parent company, making operations easier.
3. Fast access to market: Branch offices can quickly start local business operations.

Disadvantages:

1. High liability of parent company: The parent company is fully responsible for the branch office's operations, including debts.
2. Limitations on operations: The scope of operations of a branch office in Hong Kong is often limited compared to that of an independent company.
3. Administrative procedures: Although the establishment procedure is simpler, there are still administrative procedures that need to be carried out.

The Private Limited Company is the most popular type because it provides personal asset protection for shareholders, easy capital raising, and many tax advantages.

A private LLC has a limited number of shareholders and is not listed on a stock exchange, while a public LLC has a larger number of shareholders and is usually listed.

The biggest advantage is the limited liability of shareholders, meaning they are only liable to the extent of their capital contribution.

You should choose a sole proprietorship if you want complete control of the company and do not want to share profits. You should choose a partnership if you want to raise capital from many people and share the risks.

Representative offices are only allowed to promote the company and seek potential clients — they cannot carry out business activities or generate revenue. Branch offices, on the other hand, are permitted to conduct the same business operations as the parent company in the local market.

A public company limited by guarantee is often suitable for non-profit organizations because profits are not distributed and members have only limited liability.