Understanding sole proprietorship in Hong Kong: A complete guide for entrepreneurs

What is a sole proprietorship?

A sole proprietorship is a type of business structure where a single individual owns and operates the business. It's the most straightforward form of business ownership, often chosen by entrepreneurs for its ease of setup and minimal regulatory requirements. The sole proprietor, or the individual who owns the business, is personally responsible for all aspects of the business, including its debts and liabilities².

The sole proprietorship's meaning revolves around the concept of individual ownership and control. Unlike a limited company, a sole proprietorship is not a separate legal entity. This means that the owner's personal assets are not protected from business liabilities. Despite this, many entrepreneurs find the simplicity and control offered by this structure appealing¹.

Benefits of sole proprietorship in Hong Kong

Choosing a sole proprietorship in Hong Kong comes with several advantages¹²³:

1. Ease of setup

Registering a sole proprietorship in Hong Kong is relatively straightforward and involves minimal paperwork compared to other business structures. The process is designed to be hassle-free, allowing entrepreneurs to focus more on their business operations rather than administrative hurdles.

The simplicity of the registration process is one of the primary reasons many choose this structure, especially when starting a new venture.

2. Cost-effective

The costs associated with setting up and maintaining a sole proprietorship are generally lower than those for a limited company. There are no requirements for annual audits or complex compliance procedures, which significantly reduces overhead costs. This cost-effectiveness is particularly beneficial for startups or small businesses with limited initial capital.

3. Full control

As a sole proprietor, you have complete control over all business decisions without the need to consult with partners or shareholders. This autonomy allows for quicker decision-making and the ability to pivot or adapt the business strategy as needed. The freedom to make decisions swiftly can be a significant advantage in a fast-paced business environment.

4. Tax advantages

Sole proprietors in Hong Kong benefit from a simple tax filing process and may enjoy lower tax rates compared to corporations. The Profits Tax rate for sole proprietorships is typically lower than the corporate tax rate, providing potential savings. This can be a substantial benefit, especially for businesses that are just starting and need to maximise every dollar.

5. Flexibility

The business structure allows for easy changes and adaptations to the business model as it grows or shifts. Whether you want to expand your services or change your business direction, a sole proprietorship offers the flexibility to do so with minimal red tape. This flexibility is crucial for businesses that need to respond quickly to market changes or new opportunities.

Limitations of sole proprietorship

Despite its benefits, a sole proprietorship also has its limitations¹:

1. Unlimited liability

The sole proprietor is personally liable for all business debts and obligations, which means personal assets are at risk if the business incurs debts. This lack of liability protection can be a significant risk factor for entrepreneurs. In the event of financial difficulties, creditors can pursue the owner's personal assets, which can be a daunting prospect.

2. Limited capital

Raising capital can be challenging, as sole proprietorships cannot issue shares or attract investors in the same way a limited company can. This limitation may hinder the ability to scale the business quickly or invest in significant growth opportunities. Access to funding is often limited to personal savings, loans, or small business grants.

3. Sustainability

The business's continuity is heavily dependent on the owner's presence and health, which can be a risk factor. If the sole proprietor is unable to work, the business may suffer or cease operations. This dependency on the owner can limit the business's ability to grow beyond a certain point.

4. Perceived lack of credibility

Some clients or partners may perceive sole proprietorships as less credible than limited companies. This perception can impact the ability to secure contracts, partnerships, or even attract top talent. The perception of credibility can be crucial in industries where trust and reputation are key.

Taxation and profits

In Hong Kong, sole proprietorships are taxed under the Inland Revenue Ordinance. The profits of a sole proprietorship business are subject to Profits Tax. Currently, Hong Kong implements a two-tiered Profits Tax for sole proprietorships: a tax rate of 7.5% applies to assessable profits under HK$2 milion, while a tax rate of 15% applies to assessable profits over HK$2 million. This is generally lower than the corporate tax rate of 16.5%, offering a potential tax advantage for sole proprietors³.

The sole proprietor must file a tax return annually, declaring all business income and expenses. It's important to maintain accurate financial records to ensure compliance with tax regulations and to maximise allowable deductions. Keeping detailed records of all transactions, receipts, and invoices is crucial for accurate tax reporting and minimising tax liabilities⁴.

Differences between a sole proprietorship and other business structures

As mentioned earlier, a sole proprietorship is considered the simplest and most cost-effective business structure in Hong Kong. But how does it compare to other business structures in the region, especially in terms of how it operates?

Sole proprietorship vs partnerships

A partnership involves two or more individuals who share ownership of a business. Unlike a sole proprietorship, where one person has full control, a partnership requires shared decision-making and profit distribution among partners.

While partnerships can pool resources and expertise, they also involve shared liability and potential conflicts between partners. Partnerships can be beneficial for leveraging diverse skill sets, but they require clear agreements to manage roles, responsibilities, and profit-sharing⁵.

Sole proprietorship vs limited company

A limited company is a separate legal entity, offering limited liability protection to its owners. This means that the personal assets of shareholders are protected from business debts. However, setting up a limited company involves more complex regulatory requirements and higher costs.

In contrast, a sole proprietorship offers simplicity and direct control but does not provide liability protection. Limited companies may also benefit from greater credibility and easier access to funding, but they come with more stringent compliance obligations and administrative burdens¹.

How to set up a sole proprietorship in Hong Kong

A sole proprietorship can be an ideal business structure if you’re starting a new venture. Fortunately, in Hong Kong, setting one up is straightforward and requires only minimal documentation. Here are the details:

Required documents

To register a sole proprietorship in Hong Kong, you will need the following documents⁴:

• A completed Business Registration Form (Form 1(a) or Form 1(c)), which you can obtain by emailing taxbro@ird.gov.hk or visiting the Business Registration Office in person.
• A copy of the owner's Hong Kong Identity Card or passport (for foreigners)
• Proof of business address

Registration procedures

1. Choose a business name

Ensure that the name is unique and complies with Hong Kong's naming regulations. The name should not be misleading or similar to existing businesses⁴.

2. Submit the application

Complete the Business Registration Form and submit it to the Business Registration Office along with the required documents and registration fee. The fee depends on the validity period of your business certificate, which can be either 1 year or 3 years. For the April 2025–March 2026 period, the fee for a 1-year certificate is HK$2,200, while a 3-year certificate costs HK$5,720⁶.

The process is generally efficient, with applications typically processed within a few working days.

3. Receive the Business Registration Certificate

Once your application is approved, you will receive a Business Registration Certificate, which must be displayed at your place of business.

Registration procedures for foreigners or non-residents

Foreigners can register a sole proprietorship in Hong Kong, but they must have a valid visa that allows them to operate a business. The process is similar to that for local residents, but additional documentation, such as a copy of the passport and proof of address, may be required. It's important for foreign entrepreneurs to ensure compliance with immigration regulations and to seek legal advice if necessary¹.

Compliance requirements

Sole proprietors in Hong Kong must comply with various legal and regulatory requirements, including⁴:

• Renewing the Business Registration Certificate annually to maintain the legitimacy of the business
• Filing annual tax returns and paying Profits Tax to comply with the Inland Revenue Department's requirements
• Maintaining accurate financial records to ensure transparency and facilitate tax reporting
• Complying with employment laws if the business hires employees, including mandatory contributions to the Mandatory Provident Fund (MPF) and adherence to labour regulations.

Managing your finances better with Aspire

Sole proprietorship may be the ideal choice of business structure if you want to start a new venture. However, as your business grows, you may consider incorporating your company to make it easier to raise new funding or attract investors. At that stage, your financial operations will also become more complex, and without the right tools to manage them, you may find yourself spending more time on administrative tasks than on driving business growth.

This is where Aspire can help. Our Business Account is designed to streamline your financial operations, from managing invoices to making international payments.

With Aspire, you can:

• Track and monitor expenses in real time, ensuring your actual spend aligns with your budget.
• Create and send invoices in just a few clicks, and monitor their status in a single dashboard for full visibility of current and upcoming cash inflows.
• Save up to 50% of time on manual accounting tasks with smart automation.
• Eliminate 100% of manual data entry through real-time syncing with Xero and QuickBooks.
• Simplify cross-border payments and international transactions with detailed, upfront invoice documentation.