10 Pros and Cons of Private Limited Companies in Hong Kong

There are many different types of company structures in Hong Kong.

These include private limited companies, public limited companies, sole proprietorships, and partnerships.

However, the most popular and common business entity in Hong Kong is the private limited company.

The main reason why entrepreneurs choose to incorporate their business as a private limited company is because of the advantages that come with it.

After addressing the basics, this article explains the 10 pros and cons of private limited liabilities in Hong Kong.

What Is a HK Private Limited Company?

A private limited company, also known as a "private company limited by shares" or simply a "limited company (Ltd.)" is a separate legal entity from its shareholders.

When compared to sole proprietorships and partnerships, it has different obligations and requirements.

It is set up directly with the Hong Kong Companies Registry and is governed by the Hong Kong Companies Ordinance.

Its key characteristic is that it operates in its own right.

What that means is that all of the company's profits, assets, and liabilities are separate from the directors and shareholders of the company.

Unlike a public limited company, shares of private limited companies are not traded on a stock exchange and are simply issued to shareholders.

Shareholders are limited by their shares which means that in the case of any loss or the company being wound up, shareholders will only lose up to the amount of their shares.

How Is a Private Limited Company Structured?

The basic legal requirements applying to any private limited company in Hong Kong include are:

• Shareholders – Limited number of shareholders between 1-50. Shareholders can be local or international individuals or corporations.
• Minimum of one director – There is no limit to the number of directors a company can have.
• Directors can also be both local or international individuals or corporations.
• As opposed to Singapore, a Hong Kong company is not required to have an individual local director.
• Company Secretary – If the Company Secretary is a natural person, then they must reside in Hong Kong and have a local Hong Kong address. If it is a professional company, it should hold a valid TCSP License issued by the HK Companies Registry.
• Business Registration Certificate (issued by the Business Registration Office) – This certificate proves your company's legal existence and separates your personal finances from the business's finances. You can handle the registration process yourself or use a business registration service to guide you through the steps.

If it is a professional company, it should hold a valid TCSP License issued by the HK Companies Registry.

The Pros of Private Limited Companies

1. Limited Liability

The shareholders of the company are not required to pay the company's outstanding debts or costs from their personal assets.

This characteristic ensures that all assets are secured if the company ever runs into trouble and you will not be held liable.

 In a sole proprietorship or a partnership, the founders are potentially liable on their personal assets.

2. Shareholders Are Protected

Due to the concept of limited liability, a company's financial liabilities only affect shareholders up to the amount of their investment.

Therefore, shareholders are protected, and this provides them with an incentive to invest more as there is a limited risk as they would only lose the amount put into the company.

3. Easier to Raise Capital

A private limited company is the standard vehicle when it comes to raising funds.

It can raise capital after incorporation by issuing shares to new investors.

Shares can also be split into different categories to reflect different rights attached to different shareholders.

Also, it is generally easier for a private limited company to get bank loans compared to other business structures.

4. Easier Transfer of Ownership and Perpetual Succession

Unlike a sole proprietorship or partnership, the existence of the company continues despite any sudden deaths of members.

Reorganizing or transferring a private limited by issuing or selling shares company is simple and fast.

5. Attractive Tax Regime

One key benefit of operating a business via a HK private limited company is Hong Kong's “territorial tax” system.

In simple terms, a HK company is only required to pay tax on profits derived from its Hong Kong operations.

This is administered by the Inland Revenue Department (IRD).

6. Fast Incorporation Process

Setting up a private limited company is easy and only takes a few hours.

If you register your company with Air Corporate, we also guarantee you a business account in 48 hours.

7. Business Name Protection

Once a private limited company is incorporated, its name is protected as well.

Companies registered after your company will not be able to use an identical name.

8. Credibility

Running your business with a private limited company and a designated registered office address conveys more trust to your customers than a sole proprietorship. It establishes a professional presence and makes it easier for customers to find you.

The Cons of Private Limited Companies

1. Annual Audit

All companies in Hong Kong are legally required to prepare annual audited accounts.

Small private companies can, however, prepare simplified accounts.

2. Public Information

Both shareholders and directors of a private limited company in Hong Kong are required to disclose their identity to the Companies Registry.

This means that anyone can check who the direct shareholders of a private limited company are.

The identity of the indirect shareholders is, however, not public or reported to the Companies Registry.

Final Words

A few things to have in mind:

• Private companies limited are the most common types of companies in Hong Kong
• As a shareholder of a limited company, you are not personally liable for the debts of the company
• It is easy, fast, and inexpensive to incorporate a Hong Kong private limited company and get a business account
• Hong Kong offers one of the world's most attractive tax regimes for private limited companies

Looking for advice, or maybe you want to form a new company?

Register with Air Corporate today, and we'll get you set up with everything you need in under 48 hours.

Focus on your business. We take care of the rest.