Private limited companies are the most popular type of business entity in Hong Kong: they make 99% of all businesses registered there.
But would a private limited company work for you? Let’s find out.
What It Is, Briefly
A private company limited by shares is a legal entity that has the right to do business.
It can be called “HK Private Company Limited by Shares”, “a Limited Company” or just “Ltd.” — all that means a Private Limited Company.
The company owners possess shares. One shareholder can own 100% of the company — or there can be several people. Each shareholder gets a proportion of the company’s profit in dividends.
What Are the Advantages of a Private Limited Company?
Your company’s financial obligations are not your obligations. A company is a legal entity separate from its owners. So if it messes up, the owners won’t have to give away their personal money to pay out the business’s debts.
In contrast, both a sole proprietor and a partner in a general partnership have to give away their personal assets if their businesses go under.
Jason’s company develops an app for Google Play. This app infects users with malware, and Google sues Jason’s company. The court rules that Jason must pay compensations to the affected users. The company can’t afford it and goes bankrupt but Jason doesn’t — he keeps his house, his car, and even his collection of butterflies. If Jason was a sole proprietor, all that would be sold to pay the compensations.
You company’s financial obligations affect shareholders to the amount of their shares. The investors will feel safe, because the only money they would risk losing is the amount they put in. Unlike in the case of a general partnership, for example.
Jason, Ann and Dan start together a private limited company that does interior design. Each of them owns shares HK$1,000 worth. The business runs into debt of HK$30,000. “I told you not to trust that designer,'' says Jason. The company goes bankrupt, Jason, Ann and Dan lose HK$1,000 each. Had the guys set up a general partnership, Jason, Ann and Dan would have been legally obliged to pay the whole sum of the debt.
A foreigner or a foreign business entity can own 100% of a Hong Kong company. It works both when the Hong Kong company is independent and when it’s a foreign business’s subsidiary.
There are other business entity types to opt for when expanding for Hong Kong, but their opportunities are limited. Only a private limited company can make unlimited profits, gain capital, and engage in activities other than the parent companies’.
Jason’s company decorates apartments in France. Jason wants to expand to Hong Kong and opens a private limited company there. He finds investors and engages in another activity in Hong Kong — landscape design.
What are the drawbacks of a private limited company?
The setup procedure. You should apply both for a Certificate of Incorporation (saying you are registered with Company Registry) and a Business Registration Certificate (saying you are registered within Inland Revenue Department). You need to draw Articles of Association (details on the company). You need to meet the requirements for the directors, shareholders, employees — the details on that are below.
Maintenance. You need to comply with Hong Kong Companies Ordinance, outlining the requirements for a company’s operation. An officer called Company Secretary is in charge of that. If a company violates the Companies Ordinance, it can get fined or even closed.
Every year, you are to file an Annual Return with the Company Registry and an Annual Tax Return with the Inland Revenue Department.The first report contains up-to-date information on the company, its shareholders and top management. The second report includes your company’s balance sheet, the report of an auditor and account of profits and losses.
Apart from these two major filings, a company is to renew the business registration and the business licence (if any), hold Annual General Meetings, keep the minutes of certain meetings, and hold a record of all the assets and liabilities. Ouсh.
Complicated striking off. You can either deregister or wind up the company. The company may be deregistered only if didn’t start to operate. In this way, it’s relatively easy.
However, if you have been operating for some time, you will need to close the accounts, liquidate and distribute the assets, and pay all the debts and dividends. In this case, striking off can take up to several months.
What a Private Limited Company Needs to Function
It needs at least 1 shareholder. Maximum is 50. Both individuals and companies can own shares. The minimum paid-up capital is HK$1. You can pick another currency and invest 1 euro, 1 yuan, etc. This means a company can only issue 1 share worth HK$1 and it will work just fine.
It needs at least 1 director. No local director is needed, unlike, for example, in Singapore, Malaysia, or Indonesia. You, as the company owner, can be the only shareholder and the only director.
It needs a Company Secretary. This can be either a Hong-Kong based individual or a company with an office in Hong Kong and legal right to do this. The work of a company secretary is to maintain the company’s statutory books and records and ensure the company’s compliance with all reporting requirements.
If you are the only director & shareholder, you can’t also be the company secretary — you will need someone else to fill the position.
It needs to keep an eye on the significant controllers register (SCR). The SCR is a list of people and companies that control the business (ultimate beneficial owners): those that hold more than 25% in shares, those that make changes to the board of directors, etc. For details, see the official guide.
It needs to pay tax. The Profits tax, to be more specific. It is counted through the two-tiered rate system introduced in 2018: under it, you pay 8.25% on assessable profits up to HK$2mln and 16.5% on any part of assessable profits over HK$2 mln.