According to government estimates, there are over 300,000 small-to-medium enterprises (SMEs) operating in Hong Kong - a situation which plainly illustrates the attraction of the SAR as a viable base for small business.
In this article we examine the basics of how to setup a company and start doing business in Hong Kong.
Company Types:
“Anyone wanting to start a business can choose to set up a sole proprietorship, a partnership or a limited company,” says Sarah Yung of Good Partners, an accounting and auditing firm. “A sole proprietorship is run by one person only, while a partnership can be run by between two and 20 persons. A private limited company can have between one and 50 members.”
The more important distinction is the degree of liability. “For the first two types of company, liability remains with the individuals and is unlimited. The extent of liability is up to their personal property,” says Yung. “A limited company, on the other hand, is its own legal entity. The liability is limited to the unpaid issued capital. Liabilities do not affect the personal property of the directors.”
According to Suzanne Liu of S. Liu & Co., the disadvantages of sole proprietorships and partnerships do not end at personal liability. There is also the fact that the name of the business is not unique.
“For practical considerations, a limited company is recommended if you are engaging in a business with some element of risk,” Liu says, “and also if your clients are American, or you are signing an office tenancy agreement, or hiring staff.”
The relative disadvantages of setting up a limited company are the higher costs involved, and the stricter requirements for public disclosure. In addition, a limited company is required to submit audited accounts to the Inland Revenue Department (IRD) on an annual basis.
Cost of Setting Up A Company in Hong Kong:
With limited companies, you have the option of taking a ready-made (or ‘shelf’) company or creating your own from scratch. The former is quicker, taking less than a week, while the latter can take up to 14 days. Shop around for prices of shelf companies from company formation specialists.
Image is an issue here, according to Liu: “Taking a shelf company and then changing the name does not look professional. A tailor-made company with your name of choice is recommended.”
Government licenses are a necessity. These come in the form of Business Registration (BR) Certificates. Currently, these cost $2600 per annum. If branch companies are planned, then extra BRs are needed at a cost of $673 each per year.
Do you need to pay accountants’ or lawyers’ fees? Not necessarily, but it may be advisable. “The setup procedures of a sole proprietorship or partnership are very easy. They can be done by the owner,” says Yung. “But setting up a limited company involves a lot of procedures and needs expert advice. This is best done by a professional.”
Firms are subject to Profits Tax, which for the most recent financial year stands at 17.5% for limited companies. When it comes to filing your tax returns, Liu also recommends using the services of a professional. “Tax representatives are constantly updated with current practice and IRD requirements,” she says, “and they know the Rules of Thumb - for instance, the acceptable amount of an expense claim. Fees paid are tax-deductible, and the amount of profits tax saved may far exceed those professional fees.”
Helpful Tips
Watch out for the common financial hurdles of your first year in business. “As well as spending out on essential equipment, small firms always need to prepare a lot of administrative work at the beginning, like invoicing, accounting records and so on,” says Yung. “This can be a problem. But if the firm sets up a good accounting system from the start, it will avoid problems later.”
Liu recommends using accounting software, as it gives a more up-to-date picture of your business. Whichever system you use, be sure to keep records. By Hong Kong law, every company must keep accounting records for at least seven years from the transaction date. Penalties apply if this rule is contravened.
As always, the information given here is for reference only, and you should consult a professional for more detailed advice.
Sarah Yung, manager of Good Partners,
Suzanne Liu runs Suzanne Liu.
