If you're a freelancer and have successfully run a sole proprietorship for a number of years, you may be thinking of converting your company structure to a Private Limited Company to expand your business operations.
In a nutshell, a Private Limited Company in Hong Kong is the most popular type of business entity and can be known by various names — “HK Private Company Limited by Shares”, “a Limited Company” or simply “Ltd.”. Shares are possessed by the company owners. A shareholder can be the sole owner of the company, or there could be several others. Each shareholder will get a proportion of the company's profit in dividends.
This article will go through:6 advantages of a private limited company
3 steps to a new company structure
8 elements to maintaining your new company
Six advantages of a private limited company
This company structure is known for conducting business and trade, thus often chosen over other forms including sole proprietorships and partnerships. In fact, almost all small to medium-sized companies in Hong Kong are established as a Private Company limited by shares, thanks to its multiple benefits.
1. Limited liability for the shareholders
The shareholder's liability is only limited to the sum of their respective investment. Your company will be considered a legal entity separate from its owners. In the situation that your company is not performing well, the owners will not have to repay the business's debts with their personal assets.
Elizabeth's events management company promised to execute a car roadshow for the client but was unable to make good their promise. On the day of the event, there was no turnout as her staff had forgotten to send out the invitations prior to the big day. The client sues Elizabeth for his loss and the court rules that Elizabeth will have to cough up a hefty sum for compensation. Unfortunately, Elizabeth's company is unable to afford this and eventually shut its operation. However, since the company is a Private Limited Company and not a sole proprietorship, this means that Elizabeth gets to keep her personal assets, including her house and car.
2. Better public perception
A sole proprietorship involves risks and makes sourcing for finance difficult since investors are less confident. On the flip side, a Private Limited Company is a more credible business structure and taken more seriously compared to sole proprietorship and partnership, which makes securing bank loans easier compared to other business entities.
Lisa is the sole proprietor of Goga Company. Due to the slow economy, she is facing cash flow issues and tries to get a loan from the bank. However, she was rejected as her company is relatively unheard of. On the other hand, her brother James, who owns a Private Limited Company, could easily get a bank loan due to his business entity.
3. Perpetual succession
The company can operate as usual even in the event where there is a change of membership. The company’s day-to-day operations face minimal to no disruptions.
Joan has decided to resign from her position as Chief Operating Officer. After evaluation, the company has concluded that Faye should take over due to her capability. In this way, there is perpetual succession for the company.
4. Ease of raising capital
The company can look to grow their business since this is facilitated by the ease of funding through the involvement of new shareholders or the issuance of more shares to existing shareholders.
Stephanie has been running her business for two years and is looking to expand the company. She ropes in Lizzie as a new shareholder, and was able to easily raise the required capital.
5. Easy transfer of ownership
The company's ownership can be completely or partially transferred by selling all or a part of its total shares, or by issuing new shares to additional investors. In the meantime, the company's operations can continue undisrupted and legal documentation is also a straightforward process.
Joel is looking to retire and would like to pass on the business to his son. In this case, he heads over to a law firm to do a complete transference of the company’s shares.
6. Tax benefits and incentives
Private limited companies in Hong Kong get to enjoy several tax benefits. The corporate tax, or profits tax, is capped at 16.5% of assessable profits. As Hong Kong goes by a territorial basis of taxation, only profits yielded from Hong Kong are subject to tax. Additionally, there is no capital gains tax, no sales tax or VAT, and no withholding of tax on dividends in Hong Kong.
Sharon owns two companies, one in Hong Kong and one in Taiwan. She makes a profit margin of 30% from the two companies, but since one is based in Taiwan, she will only have to pay 16.5% tax on the profits from the Hong Kong company.
3 steps to a new company structure - Goodbye, sole proprietor. Hello, private limited company!
Since a sole proprietorship and a Private Limited Company in Hong Kong belong to completely different organisational structures, conversion of a sole proprietorship to another entity is not exactly a fuss-free procedure. Nonetheless, there is a feasible route that you can take.
1. Report cancellation of your sole proprietorship to Inland Revenue Department and establish your new company name with Companies Registry
A sole proprietorship cannot simply be 'converted' into a Private Limited Company. To kickstart this procedure, you'll have to cease business under your sole proprietorship and report cancellation of the related Business Registration Certificate (BRC) with the Inland Revenue Department (IRD).
Subsequently, you will have to establish a limited company in Hong Kong with the Companies Registry, once the company name has been approved. You will also need to apply for a new BRC unique to your new Hong Kong limited company.
2. Apply for a new bank account
The conversion of a sole proprietorship to a Private Limited Company is akin to starting from scratch, meaning your previous company's assets, liabilities, transactions and others incurred under your sole proprietorship will have no relation with this newly incorporated company structure. As such, a clear distinction between your business and personal finances is pivotal and you should steer away from using your personal account for the new company. Instead, go ahead and start a new corporate bank account for you to better manage your company's finances.
3. Apply for business permits and licenses if required
Depending on the nature of your business, you may require a business permit or license to operate. The main business types that require a permit or licence would be Financial Services Provider, Employment Agency, Travel Agency, Event Management Company, Restaurant, Retail Store and Education Business. Note that your existing permits or licenses under your sole proprietorship cannot be transferred to the new company, thus the need to reapply for a new permit or license if your field warrants one.
8 elements to maintaining your new company
Unlike a sole proprietorship that is known for being simple and cheap to maintain, a Private Limited Company is a lot more complex and costly to sustain.
There must be a minimum of one individual director, with an unlimited maximum number allowed. The appointed director must be a natural person of any nationality and does not have to be a Hong Kong resident, However, directors must be at least 18 years old, not convicted for malpractice, or bankrupt. Directors are not required to be shareholders. In addition to the individual director, nominee corporate directors can also be appointed. These Directors Board meetings can be convened anywhere in the world.
A minimum of 1 and up to a maximum of 50 shareholders is allowed for a Hong Kong Private Limited Company. Shareholders are not limited to their country of residence. A shareholder and director can be the same person, or a separate individual, so long as they are at least 18 years of age and of any nationality. The shareholder can also be a company. 100% local or foreign shareholding, as well as the appointment of nominee shareholders, is allowed. Similar to Directors Board Meetings, Shareholders meetings can also be convened anywhere in the world.
3. Company Secretary
Appointing a Company Secretary is compulsory. If the Company Secretary is an individual, this person must reside in Hong Kong. If the Company Secretary is a company, this body corporate must have a place of business or registered office in Hong Kong. Take note that in the case of a shareholder or sole director, that same individual cannot be the Company Secretary. The Company Secretary is liable for upkeeping the records and statutory books of the company and make sure the company is compliant with all statutory requirements. Additionally, a nominee secretary can also be appointed.
4. Share capital
While there is no minimum share capital requirement, Hong Kong companies typically have a minimum of one shareholder with one ordinary share issued. This share capital is not limited to the Hong Kong Dollar and can be in any major currency. Shares can be transferred out of freewill, subject to a stamp duty fee.
5. Registered address
A local Hong Kong address has to be provided as the company's registered address. This address will have to be a physical address and not a PO box.
6. Ongoing compliance
It is imperative for companies to prepare and upkeep accounts, which has to be audited annually by Hong Kong's Certified Public Accountants. Together with a tax return, the audited accounts must be filed annually with IRD. It is mandatory for every company to file annual returns with the Companies Registry, with an annual registration fee involved.
7. Business Registration Certificate
The BRC should be renewed, one month prior to expiry, on an annual basis or once every two or three years (depending on the option your company would choose when you register for the certificate).
8. Annual General Meeting
Every calendar year, an Annual General Meeting (AGM) should be convened. This AGM should be summoned within 18 months from the incorporation date, following which no more than 15 months can elapse between one AGM and the subsequent. In lieu of an AGM, a written resolution is also acceptable.
Essentially, as your company grows bigger, the wise option is to separate your personal self by creating a corporate body through a Private Limited Company. In this way, you are not personally liable for the business.
Furthermore, you could gain from the protection and stability of a Private Limited Company since it is considered a more stable structure than a sole proprietorship, making funding easier to source in the future.