Setting up a Sole Proprietorship or Limited Company

This article is originated from: https://fastlanepro.hk/sole-proprietorship-or-limited-company/

Entrepreneurs who wish to start a business have a variety of business entities to choose from, the most common company types being a sole proprietorship or private limited company. While many entrepreneurs are eager to begin their business ventures and incorporate their company, it is important to understand the various advantages and disadvantages associated with each company type. In this article, we look to provide insight regarding the advantages and disadvantages of sole proprietorships and limited companies so that entrepreneurs can understand the most appropriate company type for their business.

1. Private Limited Company

Majority of SMEs in Hong Kong are incorporated as a private limited company as this company type has various advantages that other company types do not have. Private limited companies are commonly utilized by companies who are engaging in trade and business. 

As opposed to a sole proprietorship, a private limited company’s share capital is distributed among various shareholders who are each entitled to shares of the company’s profits.

1.1. Advantages of a Private Limited Company

Limited personal liability

• All limited companies provide the reassurance of limited liability. In other words, shareholders will not be personally liable for any financial losses incurred by the company and their liability is limited to the amount of their respective shareholdings / investment
• In the event that a Hong Kong company has outstanding debt obligations to settle, the shareholders will have no responsibility to settle the outstanding debt

Professional Image

• Operating a limited company can help instil confidence in your business. Larger companies with more recognisable names tend to prefer working with limited companies, rather than a sole proprietorship or partnerships.

Perpetual Succession

• Any change of shareholders will not affect the existence of the business as the company is owned by shareholders and managed by directors of the company
• The shares of a Hong Kong company can be easily transferred and doing so will not affect the operations of the company

Property Ownership

• In Hong Kong law, a company is treated as an individual. This means that a company may enter into contracts and own property under its own name
• Contracts entered into by a Hong Kong company are not affected by any change in the company’s shareholders

Tax Benefits and Incentives

• A private limited company can enjoy various Hong Kong tax benefits. Besides having a relatively low corporate tax rate of 16.5%, Hong Kong follows a territorial basis of taxation whereby only profits that are derived or incurred in Hong Kong are subject to corporate tax
• Hong Kong does not impose any tax on capital gains, VAT or sales tax and withholding tax on interest and dividends

Efficiency in Incorporation

• A private limited company in Hong Kong can be incorporated in approximately one to two working days

1.2. Disadvantages of a Private Limited Company

Regular audits and compliance

• Hong Kong companies must adhere to statutory obligations and are thus, required to annually file a full set of audited financial statements
• All Hong Kong companies must file an annual return, providing details of the company’s current directors and shareholders
• Small private companies may apply for a “reporting exemption”and prepare simplified accounts and directors’ reports

Registered Office

• A private limited company in Hong Kong must have a Hong Kong registered office address and have a company secretary who is a Hong Kong resident. The company secretary may also not be the sole director of the company

Director and Shareholder Disclosure 

• At least one shareholder and one director is required to be disclosed and the details must be filed on the public register. At least one natural person must be appointed as the company director

Public Disclosure Requirements

• Hong Kong companies are required to disclose certain company information to the public by filing returns with the Companies Registry
• Private limited companies must disclose their capital structure, personal particulars of shareholders, directors and company secretary on public records

Dissolution Procedures

• Closing up a private limited office in Hong Kong can be tedious and costly, compared to that of a partnership or sole proprietorship

2. Sole Proprietorship

Sole proprietorships are businesses that are owned and operated by a single individual, also known as the sole proprietor. As a single individual is responsible for ownership and operations, there is no legal distinction between the individual and the business entity.

2.1. Advantages of a Sole Proprietorship

Easy to Incorporate

• Hong Kong incorporation processes are simple. Sole proprietors who operate a sole proprietorship are only required to apply for a business license from the Hong Kong Business Registration Office

Efficiency in Decision Making

• A sole proprietor is responsible for all aspects of a sole proprietorship, as such there is no need to discuss any business decisions with other parties. Business decisions can therefore be made more efficiently as compared to other company types

Entitlement to Profits

• Sole proprietors are not required to share their profits with other parties. As no one else is involved in this company type, sole proprietors will be entitled to all the profits of a business

Ease of Dissolution

Dissolving a sole proprietorship is easier and less expensive compared to that of other company types due to typically limited size

2.2. Disadvantages of a Sole Proprietorship

Unlimited Personal Liability

• In a sole proprietorship, there is no separation from the Hong Kong company and the sole proprietor who owns and operates it. Therefore, if the sole proprietorship incurs debt, the owner will not be able to enjoy security of their personal assets

Limited Capital

• The source of capital for sole proprietorships is the personal finances of the sole proprietor. Therefore, the prospects of growth and expansion of the sole proprietorship can possibly be hindered in certain circumstances

Limited Business Life

• Sole proprietorships do not practice the concept of perpetual succession. Therefore, in the event that the sole proprietor passes away or cannot continue carry out their job responsibilities, the company would cease to exist

Conclusion

Private limited companies and sole proprietorships each carry with them their own unique set of advantages and disadvantages. However, it is important to note that one company type is not particularly “better” than the other – each company type has certain situations which make them more appropriate. As a licensed Hong Kong company secretary, the FastLane Group has extensive experience incorporating companies in Hong Kong. Please contact the FastLane Group for assistance!