A company limited by guarantee (CLG) in Hong Kong is the right type of entity for non-profit activities. It is commonly used by charities, private clubs, social organizations, or sport associations.
Companies limited by guarantees do not have a share capital. The liability of its members is limited to their pre-agreed contribution to the company.
Any CLG shall have at least (i) 1 member, (ii) 2 individual directors, and (iii) 1 company secretary.
Any profits generated by this type of company must be reinvested into the organization and cannot be distributed to its members.
If a CLG qualifies as a charity under Hong Kong law, it may enjoy various tax exemptions.
What Is a Company Limited by Guarantee?
A company limited by guarantee in Hong Kong is a specialized legal structure primarily designed for non-profit organizations. This type of company is characterized by the absence of share capital and shareholders, making it distinct from traditional for-profit companies.
Instead of shareholders, a CLG has members who act as guarantors. Each member agrees to contribute a predetermined nominal amount, typically HKD 1. This contribution is the maximum liability that each member may face in case of bankruptcy or dissolution of the company. This limited liability protects members' personal assets from the company's debts.
Even if it does not have a share capital, a CLG is a legal entity separate from its members and has its own legal existence. This allows the company to own property, enter into contracts, and engage in legal proceedings independently of its members.
The Directors of a company limited by guarantee hold the same legal duties and responsibilities as directors of traditional limited liability companies.
Due to its non-for-profit objective, a company limited by guarantee cannot distribute profits to its members. This means that all profits must be reinvested in the activity of the company. Since they do not receive dividends, members engage with the company out of dedication to its objectives rather than for financial gain. In the same manner, upon dissolution, any assets that remain after settling debts are not distributed among the members. Instead, they are typically transferred to another organization with similar objectives, such as another charity or non-profit entity, as specified in the company's constitution or articles of association.
When setting up a CLG, it is crucial to carefully draft its Articles of Association to ensure that they accurately reflect the intention of the members. For example, it is key to agree on what happens to the company’s assets upon dissolution as they may not be distributed to members like in a traditional private limited company.
What Is a Company Limited by Guarantee Suitable For?
A company limited by guarantee is the right vehicle to engage in non-profit or charitable activities.
This covers companies that have the objective of promoting art, science, sports, culture, religion, education, research, or other similar objects.
All of the income and properties of a company limited by guarantee are to be applied solely towards the promotion of its object.
Famous examples of companies limited by guarantee in Hong Kong include the Hong Kong Arts Festival, the Hong Kong Red Cross, but also various sports and private clubs.
Note that CLG is not limited to Hong Kong only. It is not uncommon to see CLG registered in Hong Kong but pursuing activities outside of Hong Kong.
Difference Between a Company Limited by Guarantee and a Company Limited by Shares
In the following table, we have tried to summarize the key differences between a CLG and traditional companies limited by shares:
| Feature | Company Limited by Shares | Company Limited by Guarantee |
|---|---|---|
| Purpose | For-profit businesses | Non-profit organisations |
| Ownership | Owned by shareholders | Owned by guarantors |
| Liability | Liability equals shares held | Members agree to contribute a specific amount |
| Capital Raising | By selling shares | Through grants, membership, or donations |
| Profit Distribution | Shared as dividends to shareholders | Profits are repurposed |
| Membership Structure | Shareholders are members | Directors are the sole members |
| Regulatory Requirements | Standard financial reporting | Adheres to non-profit-specific regulations |
| Assets Distribution upon Dissolution | Distributed to members | As agreed in Articles of Association (no distribution to members) |
What Laws Govern a Company Limited by Guarantee In Hong Kong?
The principal laws which have an effect on the creation, existence, control, management, and dissolution of a company limited by guarantee are the Companies Ordinance (Cap. 622), the Inland Revenue Ordinance (Cap. 112), and common law.
Structure of a Company Limited by Guarantee
A company limited by guarantee must have at least one member.
Its member(s) can be natural persons or companies.
There are no restrictions on the nationality or residence of the members.
At any point when the company's membership is increased, the company is required to notify the Companies Registry of this change. Members of the company may appoint proxies.
Directors
A company limited by guarantee must have at least two Directors at any given time.
A company cannot be appointed as a director of a company, which is limited by guarantee. There are no restrictions on the nationality or residence of the directors.
The directors of a company limited by guarantee in Hong Kong are bound by the general director's duties applicable to any company registered in Hong Kong
Company Secretary
A company limited by guarantee must have a company secretary.
Such a company secretary can be a natural person who is a resident of Hong Kong or a company that has a registered office or a place of business in Hong Kong.
Registered Address
A limited liability company in Hong Kong is required to maintain a registered office address within Hong Kong.
Constitution Documents
A company limited by guarantee must have and be governed by its Articles of Association.
The Articles should notably specify the amount guaranteed by members, the object of the company, how the company assets and income are to be applied in the event of winding up, etc.
Procedures to Set Up a Company Limited by Guarantee
Setting up a company limited by guarantee in Hong Kong requires following several steps:
Pre-Registration
Search for your name through the Companies Registry to confirm the availability of your selected name. Nominate at least two directors and identify the members (guarantors) who will become part of the organization.
Documents Needed
To commence the setting up of a company limited by guarantee in Hong Kong, you need:
- Copies of the passport or ID card for each non-resident or resident member, respectively, plus proof of residential address. In the case of a body corporate, the certificate of incorporation and proof of the registered office address
- Copies of the passport or ID card for each non-resident or resident director, respectively, plus proof of residential address
- Articles of Association
- Standard incorporation Form NNC1G
Registration and Post-Registration Process
1. Submit the NNC1G form, Articles of Association, and all applicable fees to the Companies Registry.
2. Request a Business Registration Certificate confirming the business's legal registration and authorization to operate in Hong Kong.
3. Comply with ongoing filing requirements with the Companies Registry.
The process for setting up a Hong Kong company limited by guarantee is the same as that of any company incorporated in Hong Kong. It is generally fast and straightforward.
Ongoing Obligations of a Company Limited by Guarantee In Hong Kong
Once a company limited by guarantee is incorporated in Hong Kong, it has to consistently meet certain obligations, including:
- Maintaining records of members, directors, debenture holders, and company secretaries
- Keeping account books and records to be audited on an annual basis
- Having annual general meetings, the first of which is to be held within nine months after the first anniversary of the company's incorporation
- Filing annual returns and paying relevant fees
- Reporting changes to members, directors, company secretaries, and registered office addresses to the Companies Registry
Qualification of a Company Limited by Guarantee as a Charity?
A company limited by guarantee in Hong Kong is not automatically treated as a charity.
It's important to note being a non-profit organization does not automatically confer tax-exempt status. To obtain “charitable” status and the associated tax benefits, a CLG must apply to the Inland Revenue Department (IRD) and meet specific criteria outlined in the laws and regulations. CLGs without a “charity” status are subject to standard tax obligations.
For a company limited by guarantee in Hong Kong to qualify as a charity, it must follow a charitable purpose, such as:
- The relief of poverty
- The advancement of education
- The advancement of religion
- Purposes beneficial to the community
Whether a Hong Kong company limited by guarantee qualifies as a charity is to be determined by the Inland Revenue Department.
By the provisions of the Inland Revenue Ordinance, a company that is a charity is exempt from profits tax on its income applied solely for charitable purposes.
Also, donations to such companies can be used to obtain tax relief.
In addition to the requirements stated above for setting up a company limited by guarantee, a charity is required to have a constitution or governing instrument that:
- Specifies its purpose
- Restricts the sharing of the income and assets of the company to its members
- Expresses how the company's assets and income should be applied after the dissolution
- Forbids directors and other persons with powers of control over the company from receiving remuneration
- Makes the keeping of operating records compulsory
After a company limited by guarantee is set up in Hong Kong, the application process to qualify as a charity normally takes 3 to 6 months.
Conclusion
Contact our team of experts if you have questions or need assistance setting up a company limited by guarantee in Hong Kong.
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