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Should You Open a Private Limited Company?

Author Jon MillsJon Mills

10 min read
Better Business

Explore the advantages and disadvantages of a Private Limited Company (PLC) in Hong Kong. With limited liability, easier capital raising, and tax benefits, PLCs offer stability and protection for small to medium-sized businesses. Discover if a PLC is the right choice for your business expansion.

Should You Open a Private Limited Company?

What are the advantages and disadvantages of a Private Limited Company (PLC.)? This company structure is known for conducting business and trade. That’s why it’s often chosen over Sole Proprietorships and partnerships. Let’s explore benefits for small to medium-sized businesses who choose to establish as a Private Company in Hong Kong.

What Is a Private Limited Company?

A PLC is an organisation limited by shares. As it’s established as a legal entity, a Private Limited Company is entitled to conduct business and enjoy the advantages along the way.

Other names for this type of company structure include simply ‘Ltd.”, a “Limited Company” or a “Private Company Limited by Shares”. These terms are interchangeable but they all refer to a Private Limited Company, so that’s what we’ll stick to in this article.

“Limited by shares” implies that business owners possess shares in the company. There can be several shareholders or a single owner can hold 100% of the entity. Depending on their ownership percentage, shareholders are entitled to dividends income that comes from the business profits. Sound like something that suits you? We’ll help you register a company in Hong Kong so you can hit the ground running.

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.

What Does Limited Liability Mean?

In a Private Limited Company structure, owners are excluded from being held financially liable in the case money is owed to other business entities. Ltd shareholders' personal resources or assets are not affected.

Only resources owned by the Limited Liability entity itself can be confiscated by authorities. This is because director duties are carried out as agents for the company and are not associated with personal financial status. On occasions such as this, shareholders are in a Private Limited Company are legally protected from losing their savings or investments (which is not the case in a Sole Proprietorship). Their company stocks in the private liability company will however, be used to cover any damages.

In the case of fraud this protection is negated. The courts have the prerogative to use an individual’s assets to recover debts if an owner is found to be complicit in the knowledge of fraud.

If a company is not legally registered and you choose to undertake the roles, duties and decisions of a Director, you will be considered a “de facto” Director. In the eyes of the law, de facto Directors will usually be treated in the same way as registered Directors.

Advantages of a Private Limited Company

With a Private Limited Company, your business’s financial obligations are not yours. These are separate, belonging to the legal entity itself, so you aren’t liable to pay up any of your own money during any matters that arise from that.

In contrast, this advantage of a Private Limited Company does not apply to Sole Proprietors or partners within a General Partnership. If their businesses go under, their personal assets are liable to cover any debts.

Ben’s company develops an app for Google Play. This app infects users with malware, and Google sues Ben’s business. The court rules Ben must compensate affected users. The business entity can’t afford it and goes bankrupt. Ben doesn’t. He keeps his house, his car and even his collection of rare butterflies. If Ben were a Sole Proprietor, all those assets would be sold to cover the compensations.

A foreigner or a foreign business entity can own 100% of a Private Limited Company in Hong Kong. It works both when the Hong Kong business entity is independent and when it’s a foreign business’s subsidiary. If you’re thinking of expanding to Kong Kong, there are other business entity types but their opportunities are limited. The advantage of a Private Liability Company is being able to make unlimited profits, gain capital, and engage in activities other than the parent companies’.

Sam’s interior design PLC decorates apartments in France. Sam 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.

Limited liability for the shareholders

In a Private Liability Company, your financial obligations affect shareholders to the amount of their shares. This is another advantage of a Private Limited Company as 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.

Sam, Ann and Helen start an interior design Private Limited Company together. Each of them owns HK$1,000 worth of shares. 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 3 of them set up a general partnership, Sam, Ann and Helen would all have been legally obliged to pay the whole sum of the debt.

Better public perception

A Sole Proprietorship involves risks which can make the process of seeking financial support tricky as investors tend to be less confident. On the flip side, the advantage of a Private Limited Company is that it’s a more credible business structure and taken more seriously compared to Sole Proprietorship and Partnership. With a PLC, securing bank loans is easier compared to other business entities.

Sarah is the Sole Proprietor of Goga Company. She’s facing some cash flow issues due to the slow economy, so she tries to get a loan from the bank. As her company is relatively unheard of, her application for a loan was rejected. Her brother Jeremy — who owns a legally registered Private Limited Company — could easily get a bank loan.

Perpetual succession

Another advantage of a Private Limited Company is that it can operate as usual even in the event of a change of membership. The day-to-day operations face minimal to no disruptions if it’s a Private Limited Company.

Janet has decided to resign from her position as Chief Operating Officer. After evaluation, the company has concluded that Frank should take over due to his capability. In this way, there is perpetual succession for the Private Limited Company.

Ease of raising capital

A Private Limited Company can look to raise capital for business expansion by selling entity shares. Investing for growth is facilitated by the ease of funding through the involvement of new shareholders or the issuance of more shares to those already existing.

Stefano has been running his business for two years and is looking to expand the company. He ropes in Larry as a new shareholder, and was able to easily raise the required capital.

Easy transfer of ownership

Ownership of a Private Liability Company can be completely or partially transferred by selling all or a sum of its total shares, or issuing new shares to new investors. The advantage of this straightforward legal process is that operations continue without interruption.

Kate is looking to retire and wants to pass on her Private Liability Company to her son. In this case, she heads over to a law firm to do a complete transference of the entity’s shares.

Tax benefits and incentives

Another advantage of Private Limited Company owners are the attractive tax benefits in Hong Kong. Corporate tax (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. There is also no capital gains tax, 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. She only pays 16.5% tax on the profits from the Hong Kong company, as Sharon’s other business is based in Taiwan.

What Are the Disadvantages of a Private Limited Company?

The setup procedure

The cumbersome setup process could be considered a disadvantage of a Private Limited. This entails having to successfully register your business and submit all relevant supporting documents and financials. To prove you’re tax compliant and legally registered, you need to apply for a Certificate of Incorporation and your Business Registration Certificate. Another setup requirement is to supply details on the company in the form of Articles of Association, meeting all employee, shareholder and director requirements.

Quarterly VAT returns

No one loves VAT. So it’s no surprise it’s listed here as a disadvantage of a Private Limited Company. There’s no way around this legal obligation which requires PLCs to file these two important reports within the allocated deadlines, or face hefty fees:

  • Annual Returns to Companies Registry: Top management, shareholder and up-to-date business information
  • Annual Tax Return with the IRD: Including an auditors report on all annual accounts and returns and a detailed view of your financial balance sheet

Getting paid

It’s more complicated to remove cash from a Private Limited Company. Disadvantage? It all depends. In a Sole Proprietorship, it's fairly simple for money to be taken out of the business. With a PLC, directors and business owners can’t use the entity as a personal source of income. It has to be legally transferred and paid out as a dividend or in the form of a salary. This means you’ll need to register for PAYE when setting up your Private Liability Company, drawing a salary from your monthly payroll.

You need to comply with Hong Kong Companies Ordinance, which outlines and monitors the requirements for your Limited Liability Company’s operations. A Company Secretary in the official who is in charge of ensuring there are no violations which could lead to fines or even business closure.

Complicated striking off

If your Limited Liability Company was registered but didn’t actually start operating, you are able to deregister or wind up the entity relatively easily. Striking off as a LLC that’s been operating for some time already can be a lengthy process. It can take several months to effectively close accounts, liquidate and distribute assets as well as pay all dividends or debts due.

Private Limited Company Registration in Hong Kong

Follow these steps to register a PLC in Hong Kong.

  1. Choose your company name

Choosing the right name for your Private Liability Company is a vital step. Here are a few requirements for limited liability company formation:

  • PLC can have an English or Chinese name
  • PLC’s name cannot contain both English words/letters together with Chinese characters
  • English-named businesses must end with the word ‘Limited’.
  • Chinese-names businesses must end with “有限公司”

You can find all the requirements in the Guideline on Registration of Company Names for Hong Kong Companies.

  1. Allot company shares and form company corporate structure

As we’ve covered above, every Private Limited Company needs to have at least 1 or more registered shareholder who may or may not be Hong Kong residents. Shareholders can be a person, legal entity, liquidator, or sole proprietor. In compliance with Hong Kong law, the issuing of new shares in a Private Limited incorporated company involves:

  • Allotment of its shares to specific individuals by Directors;
  • Shares are issued only after the register of shareholders has been supplied with the relevant information;
  • Allotment of other shares requires the prior approval of Shareholders in the annual general meeting (AGM);
  • Shareholders may approve each allotment individually or in general;
  • If not revoked earlier, shareholder approval becomes valid at next AGM;
  • One month after allotment of shares, the Return of Allotment of Shares (Form NSC1) must be filed with the Registrar of Companies;
  • NSC1 identifies members and their shares and allotments may be made on one day or across a period of time (within one month).

Shareholders may form a management team and a board of directors with the following titles.

The Management Team A Board of Directors
  • Chief Executive Officer (CEO)
  • Chief Financial Officer (CFO)
  • Chief Operations Officer (COO)
  • Inside Directors: Work for the organisation daily
  • Outside Directors: Make unbiased decisions
  1. Get your documents ready

When all those requirements are met, you’ll need to submit the documents below to Companies Registry and pay any upfront fees. You can do it via online registry, using a special “CR eFiling” mobile app, or in a hard copy form.

  • Incorporation Form - Form NNC1
  • A copy of the company’s Articles of Association
  • A Notice to Business Registration Office (IRBR1)
  1. Obtain your other permits and licences

You may require a business permit or license to operate, depending on the nature of your

business. Financial Services Provider, Employment Agency, Travel Agency, Event Management Company, Restaurant, Retail Store and Education Businesses are some of the main types that require a permit or licence.

Any existing permits or licences you may have under a Sole Proprietorship cannot be transferred, so you’ll need to reapply when setting up a Private Limited Company. You need to do this within a month of registering and can expect waiting between 2 - 8 weeks for permits to be received.

What a Private Limited Company Needs to Function

  • 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 an organisation can only issue 1 share worth HK$1 and it will work just fine.
  • At least 1 Director. No local director is needed, unlike, for example, in Singapore, Malaysia or Indonesia. You, as the business owner, can be the only Shareholder and the only Director.
  • Company Secretary. This can be either a Hong-Kong based individual or a business organisation with an office here and legal right to do this. The work of a Corporate Secretary is to maintain the business’s statutory books and records and ensure the 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.
  • Keep an eye on the significant controllers register (SCR) - 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. Want details? Here’s the official guide.
  • Pay tax. 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.

PLC Could Be The Way Forward For You

As your ambitions and company grows, it may be a wise option to separate your personal self by creating a corporate body through a Private Limited Company so you’re not personally liable for the business. You also stand to 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.

Let Osome make your life easier

Let Osome make your life easierYou want all the help you can get when you start your business journey. If you have a business question that needs answering, feel free to reach out to one of Osome’s expert accountants.

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