Incorporated Business Meaning in Hong Kong: What You Need to Know

Incorporation Definition

The incorporation process is a major first step for Hong Kong businesses, yet "incorporated business meaning" is one of the most searched phrases related to starting a business, suggesting there is still a major learning curve for new business owners.

In simple terms, the incorporation process is a legal procedure whereby you register a new business entity. In doing so, that business becomes a separate legal entity, separating your assets and liabilities as an owner from those of your business.

As a separate legal entity, your personal assets as an owner/director are distinct from your business, so if your business accumulates debts or liabilities, they are your business's responsibility and not yours. There are exceptions, though, and it ultimately depends on the business type that you register.

When registering this new legal entity, you must create a name, appoint a designated representative, choose directors, assign shareholders, and distribute the shares.

Types of Incorporated Business in Hong Kong

Private and public limited companies are the two main types of incorporated businesses in Hong Kong. The best option for you will depend on your business structure and requirements:

Private Limited Company

A private limited company is the most common business entity for small business owners. It offers personal liability protection to its shareholders and provides various benefits:

• The personal assets of shareholders are protected
• There is no minimum capital
• Shareholders aren't required to host public meetings
• Changes to share ownership do not impact the company's legal status

The operational costs are higher than they are for a sole proprietorship, and there are also stricter transparency requirements, but the pros outweigh the cons for many, and most for-profit businesses in Hong Kong incorporate as a private limited company.

Public Limited Company

Larger businesses seeking a public listing may be better suited to incorporating as a public limited company. Public companies are subject to more stringent regulatory requirements and disclosures, but they can also offer shares to the general public to raise capital, known as "public offerings".

Tax Benefits of Incorporating as a Private or Public Company in Hong Kong

All incorporated entities in Hong Kong qualify for a low tax rate using a two-tiered system. This rate is set at 8.25% on the first HKD 2 million and 16% thereafter. It's not the lowest tax rate in the world, but it's still much lower than many other countries, and there are other benefits.

In Hong Kong, for instance, there is no value-added tax (VAT), and taxes are exempt on offshore profits.

Other Types of Companies in Hong Kong 

In addition to private and public limited companies, Hong Kong businesses can also choose one of the following:

Sole Proprietorship

A sole proprietorship is a simple structure with a single shareholder who is responsible for all of the company's assets, profits, losses, and liabilities. The tax rate is fixed at 7.5% for the first HKD 2 million and 15% after that, which is lower than the corporate tax rate, and there are more favourable reporting requirements, as they only need to submit an annual tax return.

The downside is that the business is not classed as a separate legal entity, so the business owner is personally liable for losses and debts.

Business Partnership

A partnership includes two to 20 "partners", who assume many of the same benefits and disadvantages of a sole proprietorship. There is no protection for personal assets, for instance, but there are fewer regulatory requirements, and profits can be easily distributed among the partners.

If there are more than 20 partners, the business must register as a company and become a separate business entity.

Private Company Limited by Guarantee

Suited to nonprofits, this business type limits shareholder liability to the assets that they contribute. The shareholders guarantee a fixed sum that then goes toward the company's debts in the event of a dissolution. They are not personally liable for more than this amount.

What is a Limited Liability Company in Hong Kong?

The term "Limited Liability Company" or "LLC" does not exist as an official legal structure in Hong Kong. Instead, the term is more commonly used in the United States, where companies are accorded some protections from liability and may have more freedoms when it comes to reporting and paying taxes through the Internal Revenue Service.

The equivalent in Hong Kong is a private limited company, as discussed above. The same is true for other business types popular elsewhere, including both C Corporation and S Corporation business entities.

Incorporation Process in Hong Kong

To become an incorporated entity in Hong Kong, you must follow these steps:

Choose the Type of Corporation

Choose the type of business that you want to incorporate, considering the benefits available to corporate entities, including tax rates and regulatory requirements.

Choose a Company Name

Choose a name that isn't already in use, one that reflects your business and purpose. Your name is the first thing that customers will see and it forms a key part of your business identity, so spend some time finding the perfect name.

Chose a Designated Representative (DR) and Directors

The Designated Representative (DR) will report to the Significant Controllers Register, a legal requirement in Hong Kong. They can be an owner, director, or employee, but must be a Hong Kong resident.

You also need to assign directors, the people tasked with managing your business, while also defining share ownership. Directors and shareholders don’t need to be residents.

Register Your Business

To register your business, you need a Hong Kong address. A PO Box won't suffice. It can be a residential address, but it will be visible to the general public. You can also use a company registration service, which will provide you with a registered address in the region.

Key Considerations Before Incorporating a Business

Are limited liability companies, sole proprietorships, or other business types more suited to your needs? To determine the best option, consider the following:

Tax Implications

Your business income will be subject to a two-tiered system as a registered company, and this rate is higher than it would be if you were not an incorporated entity (as with a sole proprietorship). However, the difference is marginal and may not justify the fact that you will be personally liable for debts. Also, Hong Kong doesn't charge tax on offshore profits, so there will be various tax benefits if you mainly deal with foreign clients and receive many Global Payments.

Financial Implications

Liability protection is a big consideration when it comes to incorporation.

For example, if a sole proprietorship gets into considerable debt or is sued by its clients or the regulators, the owner will be responsible and their personal assets will be at risk. With a limited liability company, however, there are various protections to limit personal asset loss.

Corporate Governance

Sole proprietors don't have to deal with the corporate veil and the many checks and balances it requires. However, bigger businesses need structure and may benefit from the rigid systems that define ownership, liability, and company direction.

Streamline Your Business Finances from Day One with Aspire

Once you have incorporated your business, the next step is to create an account that can hold business funds and allow for easy transfers and payments.

The Aspire Business Account is one such solution. This free account provides you with everything your business needs from day one and can help you to rapidly scale with tailor-made solutions, including multi-currency collection accounts, invoice management, and bill management.

With an Aspire Corporate Card, you can empower your employees and facilitate a faster, smoother purchasing process. You can set spending limits and assign each card to a specific project or team. Plus, enjoy 1% cashback on eligible SaaS and digital marketing tools.

You can also track all card expenses in real time through Aspire’s free built-in Expense Management solution.

Aspire was designed to meet the needs of growing small and medium-sized businesses in Hong Kong, regardless of their business type. So, join the countless Hong Kong businesses that already trust Aspire and use our services to facilitate daily operations.

FAQs

Which company type offers the best tax benefits?

Sole proprietors pay the least amount of tax, but the difference is marginal, at 7.5% for under HKD 2 million compared to 8.25% for incorporated entities. This jumps to 15% for over HKD 2 million, which is 1% less than the corporation tax.

However, sole proprietorships assume more personal risk than business entities, and these risks may offset the slightly lower tax rate for most entrepreneurs and small business owners.

Can I set up a limited liability company in Hong Kong?

No. Limited liability companies or "LLCs" are US business entities that offer liability protection and flexible tax solutions, including beneficial options for reporting to the Internal Revenue Service. You can, however, set up a private limited company, which is the Hong Kong equivalent.

Do I have to pay to register a company in Hong Kong?

Yes. The fees differ by company type. You can see a list of the payable fees on the Companies Registry, or read a full breakdown in our Hong Kong Company Formation Cost article

What is a registered agent in Hong Kong?

A registered agent is a designated individual tasked with receiving legal documents and other official communication on behalf of a business. They are a point of contact for government correspondence and legal matters and help companies to stay compliant.

What does personal liability protection mean?

It means that your personal assets, including your bank accounts, savings, investments, and physical assets (such as property), are accorded some protection. If your business suffers significant losses resulting from business operations or lawsuits, you will not be personally liable for them if you are incorporated under a limited company but will assume liability if you are not incorporated.