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In this article, we will cover the legal pros and cons of the three most common types of business entities in Hong Kong, namely, (1) sole proprietorship, (2) partnership and (3) private company limited by shares.
For those who want to start their own businesses, the choice of business formation is important. It can affect your personal exposure to business liabilities, your ability to raise capital and the degree of legal compliances that you need to adhere to. It can also affect the way you as an individual or business are taxed.
- Key Advantages: Sole proprietorship is a one-person business with minimal administrative costs. It is also the simplest type of business formation in Hong Kong with only one requirement to register with the Inland Revenue Department to obtain a business registration certificate. The owner has complete control of all aspects of the business. The tax levied against a sole proprietorship could be lower than a corporate entity. Sole proprietorship can also be formed and closed down quickly as well.
- Key Disadvantages: Owner of a sole proprietorship is personally responsible for all the risks, debts and liabilities incurred in relation to the business. It is also not easy for fundraising purposes. When the owner dies or goes bankrupt, the sole proprietorship dissolves automatically as well.
- Key Advantages: Two are better than one. You are able to share business capital requirements with your partners. Unlike sole proprietorship, fundraising becomes easier for partnership. Unless otherwise provided in the partnership agreement, partners may pay tax according to their respective share of the partnership profits.
- Key Disadvantages: Must have at least two or more people to form a partnership. The partners are personally responsible for all the risks, debts and liabilities incurred in relation to the business. In particular, the partners are usually jointly and severally liable to all liabilities of the partnership. A partnership is NOT a separate legal entity. Partnership property may belong to all the partners or belong to one or more individual partners. In terms of business management in a partnership, for most legal transactions, unanimous consent of all partners is required, which may lead to internal disputes.
If a partner dies or becomes bankrupt, the partnership dissolves, except where the partnership agreement provides otherwise.
Private Company Limited By Shares:
- Key Advantages: The company has a legal identity of its own, separate and distinct from its shareholders. It can acquire assets, go in debt, enter contracts, sue or be sued in its own name. The beauty of having a business under a limited company is that the shareholder (i.e. the owner) is only liable to the limited company’s debt up to the amount of his shareholding. For example, if the total share capital of the company is HK$100 then the total liability of the shareholder(s) is also limited to HK$100.
The ownership of the company can easily and quickly be transferred by way of share transfer to new owners. The legal document for share transfer is also not complicated. In addition, the existence of a company will not be affected by any shareholder’s death, bankruptcy or retirement.
- Key Disadvantages: Shareholders have to adhere to the company’s articles of association, which may provide share transfer restriction. Minority shareholders might not have a say over any aspect of the company. The company’s directors may have to be personally liable for any unauthorized or negligent actions taken by them. Tax payable by a company is usually higher than sole proprietorship or partnership.
There are several statutory compliance requirements companies must adhere to. This can be time consuming and sometimes costly. For example, all companies incorporated in Hong Kong must file an annual return once every year. If and when a company is closing, the legal procedures involved will be more complex than sole proprietorship and partnership – requiring more time and money.
If you need help with Business Formation or have any questions about your business, the Corporate & Commercial lawyers located on LegalClarus may be able to assist.
Disclaimer: The article is for reference only and should not be construed or relied on as legal advice in whatsoever manner. Please engage a solicitor to seek formal legal advice. LegalClarus does not provide legal advice.