Top 7 Types of Business Structures in Hong Kong

1. Sole proprietorship

For the daring entrepreneur, the sole proprietorship provides simplicity and absolute control over your business domain — characteristics many new small businesses are after when starting. It’s a vessel that responds to the single hand without needing to consult a board of directors — a perfect match for those who prefer to navigate independently and claim all income as their personal income. However, this freedom comes with the risk of unlimited liability, where personal and business assets are at risk. Despite this, most startups accept the personal liability associated with being a sole trader. Additionally, this is a common choice for those looking to set up an online business.

However, there are drawbacks to this kind of structure. It's difficult to raise money since you can't sell stock, and banks are reluctant to approve loans. Although a sole proprietorship is vulnerable, it can be dissolved easily for a graceful exit.

2. General partnership

A general partnership is like a shared journey where partners are equally responsible and personally liable for managing and guiding the business. This partnership's financial obligations tie personal assets to the business's fate. This is a business owned by two or more people, as the name suggests.

Pass-through taxation is a positive aspect of a business partnership. This means that the gains and losses of the partnership are directly reflected in the partners' personal tax returns. This helps avoid complications related to corporate tax and personal income tax for each general partner. So, it's a silver lining amidst all the challenges. Compared to other types of businesses, partnerships offer more flexibility but also have greater risk exposure.

3. Limited partnership (LP)

The limited partnership, or LP, combines limited and general partners, providing limited liability for the former and complete exposure for the latter. This vessel involves two or more people and has at least one general partner. LP allows limited partners to invest without navigating the business directly, safeguarding them from the storms of unlimited liability.

However, the general partner is responsible for the management and debts incurred by the LP. A limited partnership is a common choice for small businesses starting out.

4. Limited liability partnership (LLP)

The Limited Liability Partnership, or LLP, appeals to professionals seeking legal protections from personal liability without forgoing the benefit of pass-through taxation. In this alliance, partners are shielded from the financial misadventures of their cohorts, and the LLP structure is particularly favoured among licensed professionals such as lawyers and accountants.

Partners in limited liability partnerships are personally liable only for their own conduct and not for the conduct of other partners or the debts and damages of the business.

5. Limited liability company (LLC)

The Limited Liability Company, or LLC, blends the limited liability of a corporation with the flexibility and tax benefits of a partnership, and exists as its own legal entity. Limited liability companies allow profits to cascade into personal income without the burden of corporate taxation and require fewer formalities than their corporate counterparts, making them an attractive option for entrepreneurs.

Though registering an LLC involves naming protocols and appointing a legal agent, it offers a structure that can be adapted to your management style. Uniquely, a limited liability company can have a single shareholder who can also act as the sole director. This flexibility makes it a popular choice for solo entrepreneurs seeking liability protection and operational control.

6. Corporations

Corporations provide robust protection against personal liability and a powerful platform for capital-raising through stock issuance. Incorporating this type of business, a for-profit corporation, releases owners of the financial liability of the business obligations, and it is a separate legal entity created by shareholders. They come in various forms, including C corporations that can issue multiple classes of stock and have the potential to go public, albeit at the cost of facing double taxation on earnings. Because they can do this, however, C corps have an advantage when it's time to raise money compared to other business entities — they are more attractive to potential investors.

S corporation s, on the other hand, avoid this by:

• Imposing restrictions on the number of shareholders and stock classes
• Filing with the Inland Revenue Department to obtain S corp status
• Allowing profits to pass directly to shareholders without being subject to corporate tax rates

Lastly, benefit corporations differ from C corporations in purpose, accountability, and transparency but are taxed similarly. Benefit corporations are built on both mission and profit, but shareholders are responsible for ensuring that companies provide a benefit to the public beyond just financial gain. A benefit corporation is not the same as a not-for-profit organisation or other business types.

7. Nonprofit organisation

Nonprofit organisations embark on a noble path, prioritising charitable, educational, or social missions over profit-seeking endeavours. These entities are granted tax-exempt status, provided they adhere to stringent rules regarding their use of profits and ensure that all proceeds are reinvested back into their altruistic objectives.

While not all nonprofits must apply for tax-exempt status, those that do, like 501(c)(3) corporations, are spared from federal income tax, allowing them to focus their resources on the greater good.