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Forms of Business Ownership in Hong Kong

SOLE PROPRIETORSHIP
 
A person owns a business - This the simplest business organization. A sole proprietor needs to: (1) register their business with the Inland Revenue Department (“IRD”) for profit tax purpose; (2) obtain the Business Registration (“BR”) Certificate; and (3) renew BR Certificate annually with BR Office of IRD only. A formal document to set up a business in Hong Kong is not required. 

 
PARTNERSHIP
 
Two or more persons own a business. Under the Partnership Ordinance (Cap 38), Section 3(1): “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”. Although a partnership can be formed simply by oral agreement(s), it is advisable to have a written contract to ensure that the partners are clear about what they have agreed.

 
LIMITED PARTNERSHIP
 
Limited partnerships are governed by the Limited Partnerships Ordinance (Cap 37). Section 3(2) provides that a limited partnership must consist of at least one general partner (“GP”) and at least one limited partner (“LP”). GPs are liable for all debts and obligations of the firm and LPs, at the time of entering into such partnership, are required to contribute to the limited partnership a sum or sums as capital or property valued at a stated amount.
 
 
COMPANY
The Company owns the business. A company is a separate legal entity from the people who own the company’s shares (i.e. the members or shareholders) or its managers (i.e. the directors). Most of the companies in Hong Kong are formed by the registration procedure set out in the Companies Ordinance (Cap 622).
 
Most Hong Kong companies’ members enjoy the benefit of limited liability. When the company fails financially or is liquidated, the members will only lose their investment. Their personal wealth will not be affected. Company law is governed mainly by the Companies Ordinance but case law is an important source of law relating to company administration, management and liabilities.
 
Regardless of the form of business, a BR Certificate must be obtained from the IRD for profits taxation purposes. Choosing an appropriate business form is the key decision for the business. 
 
  • Types of Companies
It is possible to form several different types of companies under the Companies Ordinance. The most common one is the company limited by shares. It is the one most often used for general commercial purposes. The shareholder of the company may lose the value of their shares if the company is liquidated and cannot pay all of its debts. They will not be personally responsible for the company’s liabilities.
 
Alternativeley, there is a company limited by guarantee. This type of company is used mainly for charities or professional associations. The object of the company is not for trading or running a business but to further professional objectives or the promotion of charitable objects. Should the company fail, the members of these companies make a written promise (the guarantee) to contribute a small amount to the assets of the company - usually HK$10 or HK$100.These members have no further liability for the company’s debts.
  
  • Private Company vs Public Company
 Another distinction in law is between public and private companies. In Hong Kong a private company is intended for use by a small number of persons who wish to have the advantages of incorporation.
 
Under Section 11(1) of the Company Ordinance a private company restricts under its articles of association (1) the transfer of shares; (2) limits the number of members to no more than 50 persons; and (3) prohibits any invitation to the public to subscribe for shares in the company. Besides, a private company cannot be incorporated as a company limited by guarantee. There are about 1,170,000 private companies in Hong Kong.

A public company is neither a private company nor a company limited by guarantee. It can : (1) have more than 50 members, (2) has no restriction on the transfer of its shares and (3) may invite the public to buy shares.

The Hong Kong Companies (Amendment) Ordinance 2003 provides that with effect from February 2004, a private company may have only one director and one shareholder, so permitting the formation of a “one-man company”. The requirement to have at least 2 directors for a public company remains unchanged.
 
  • Listed Company
A listed company is a public company which is listed on the Stock Exchange of Hong Kong (“SEHK”). The SEHK is simply a market place where one can easily buy or sell shares in the companies that are listed there. The process of listing a company is called an initial public offering (IPO) and the company must satisfy a number of very stringent requirements set by the Ordinance and by the Listing Rules of the SEHK.
 
  • Non-Hong Kong Company
Many companies operating in Hong Kong are incorporated under the law of foreign countries. When a foreign company intends to carry business business in Hong Kong, it must apply to the Registrar of Companies for registration, within one month from its establishment in Hong Kong.
 
  • Shelf Company
This is a company that has already been formed by registration agents to be sold and has not commenced business. The advantage of using such a ready-made company to set up a new business is speed – the company already exists and can trade immediately. However, the memorandum, articles, capital limited and name may need to be altered to suit the specific needs of the business and its owner.


November 2015

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