Private limited companies are among the most popular business structures entrepreneurs choose when setting up their business in Hong Kong. As the name suggests, the company is held privately, and the owners' liability is limited.
A private limited company is a company limited by shares where the shareholders' liability is restricted to their share subscription.
A private limited company is managed by a board of directors appointed by the shareholders.
There is no minimum share capital required by law, but the common practice is to have a share capital of not less than HK$1,000.
A private limited company is considered a legal person, enabling it to execute contracts, sue and be sued, and borrow money from financial institutions.
A private limited company in Hong Kong pays tax on its business profits but does not incur additional taxes on dividend declaration or capital gains, except for foreign-sourced income.
As of 2021, Hong Kong locals have registered 1,361 241 private companies, and entrepreneurs from over 83 countries have registered 13,870 non-Hong Kong private limited companies.
This article explains:
- What is a private limited company, its structure, and why they are popular in Hong Kong
- Which businesses benefit the most from setting up a private limited company
- What are the pros and cons of setting up a private company in Hong Kong
- How to set up a private company in Hong Kong
What is a Private Limited Company?
A private limited company is a company limited by shares.
The liability of the shareholders is limited to the number of shares they have subscribed. Shareholders of a private company are not personally liable for any debts incurred by the company.
Typically, private companies often restrict the transfer of shares. If the Articles of Association do not restrict the transfer, the company may still refuse to register the transfer.
Structure of a Private Limited Company
A private limited company is a distinct legal entity managed by a board of directors. The shareholders of the company appoint the directors.
Directors are responsible for managing the company's affairs and can appoint officers to oversee the day-to-day operations.
Here are the minimum requirements one must fulfill to set up a private company in Hong Kong:
- Appoint at least one director (can be a resident or a non-resident)
- Have at least one shareholder (can be individuals or corporate entities. There are no restrictions on residence or nationality). The total number of shareholders shouldn't exceed 50.
- Even though no minimum share capital requirement is prescribed under Hong Kong law, the common practice is having a share capital of not less than HK$1,000.
- Have a company secretary. It could be a person resident in Hong Kong or entity registered in Hong Kong.
- Have an auditor registered as a firm of accountants in Hong Kong
- Have a register of significant controllers of the company ( those who have significant control/influence over the company directly or indirectly as they hold more than 25% of the shares /voting rights)
Additionally, the company should obtain a physical address in Hong Kong. PO Box addresses are ineligible — addresses of a business center, co-working space, or residence work.
A capital duty of 0.1% is also payable on the authorized share capital (subject to a maximum of HK$30,000).
Why Private Limited Companies are Popular in Hong Kong?
Here's why such private companies limited by share are popular:
1. Location
Hong Kong is strategically located and offers easy access to the Chinese market along with other Asian Pacific markets.
Thanks to the free trade agreement between the People's Republic of China and the Hong Kong SAR, businesses in Hong Kong receive preferential access to the mainland China market.
2. Attractive Trade and Tax Regime
For a company limited by shares, the taxation structure of its jurisdiction of incorporation is a key factor. Hong Kong doesn't disappoint on this front — it is regarded as one of the most tax-friendly systems in the world that doesn't levy any indirect taxes such as VAT or sales tax, and no capital gains tax.
Hong Kong also has a free trade policy, which means there are no long-drawn customs clearances needed to begin operations.
3. Competitive Economy
In 2022, Hong Kong ranked 5th most competitive out of 63 economies by the International Institute for Management Development. Private companies in Hong Kong get to operate in a favorable and efficient business environment.
Benefits of Setting Up a Private Limited Company
1. Ownership Can be Completely Foreign
Hong Kong laws allow private limited companies to be set up with 100% foreign shareholding except in certain sectors such as broadcasting.
Even if you don't want any local shareholders, you can still set up your company and carry out your business. Also, Hong Kong company formation can be done remotely.
2. Liability of Shareholders is Limited
Shareholders are on the hook for the amount they invest in the company. This insulates their personal assets.
3. A Distinct Legal Entity
Under corporate laws, a company is a legal person. It allows a business entity to execute contracts, sue and be sued, and also borrow money from banks or financial institutions.
4. Efficient Tax Structure
A private limited company in Hong Kong has to pay tax on its business profits. Profits tax should be paid to the Inland Revenue Department (IRD) via e-Filing or in person.
There are no additional taxes payable on dividend declaration or capital gains, except for foreign sourced income on account of the Foreign Source Income Exemption which came into effect from early 2023.
Disadvantages of Setting-Up a Private Limited Company
Key drawbacks include:
1. The Costs of Operations are High
Doing business in Hong Kong is not exactly easy on the pocket. Rent for office space, labor costs, paying company secretary and auditors, and other day-to-day expenses can quickly add up.
For a new entrepreneur doing business in a foreign location like Hong Kong with limited financial resources, this can be a potential bottleneck.
2. Incorporation is Not Straightforward
Compared to operating your business as a sole proprietorship or a partnership, incorporating a private limited company in Hong Kong can be time consuming. For non-Hong Kong companies, it can take up to 10 working days.
This excludes the time spent on collating the necessary paperwork and completing the application.
3. The Competition is Intense
Even though the regulatory and business ecosystem of Hong Kong is extremely inviting, one cannot discount the intense competition in the market.
With an increasing number of entrepreneurs globally considering Hong Kong as their dream destination for doing business, new entrants may find it challenging to establish their presence quickly.
Should I Structure My Company as a Private Limited Company?
There is no straightforward answer to this, as it depends on the nature of business, tax treatment, and your goals. Always consult a lawyer for professional legal advice to understand whether you should incorporate as a private limited company in Hong Kong.
As a rule of thumb, if you want limited liability protection of shareholders and have ample scope for external investors, a private company structure is definitely an option to consider.
Given that you understand what is a private limited company and the unique benefit it offers, this structure may be the best option for certain scenarios/businesses, such as:
- SMEs who want to set up a distinct legal entity with limited liability of owners
- Companies engaged in IT and other technological services including fintech
- Companies engaged in export/import and trading activities
- Media and creative businesses given Hong Kong is a hot spot for media companies. Incorporating a private company can help such businesses protect their IP rights
- Any foreign company that wants to establish presence in Hong Kong or set up a subsidiary
How Can I Register a Private Limited Company in Hong Kong?
Under the Business Registration Ordinance (BRO), everyone doing a business in Hong Kong needs to register their business with the Business Registration Office of the Inland Revenue Department. Below is a snapshot of registering a private company in Hong Kong:
- Pick a name for your company. It shouldn't infringe any trademarks or be already in use.
- Obtain a registered office address. It can be the same as the local Hong Kong address of the company secretary.
- Decide your share capital and identify the shareholders. You should also appoint at least one director and a company secretary to oversee the registration process.
- Prepare your incorporation documents, such as Articles of Association, Incorporation Form (NNC1), and Notice to Business Registration Office (IRBR 1), and file them with Hong Kong Companies Registry, either online or in person.
- Once you receive the certificate of incorporation from the Companies Registry and obtained a Business Registration Certificate (BRC) from IRD, you can file for a Business Registration Number for annual tax filing.
Hong Kong government has also started a One-stop Company and Business Registration service that allows you to apply for business registration and incorporate your company through a single application.
Keep in mind that certain business activities might need additional certificates, permits, and approvals. You can find more information about these requirements on the Business License Information Service provided by the Trade and Industry Department.
- Open a company bank account and obtain licenses/permits depending on the nature of your business. Businesses that need a regulatory license include banking, insurance, medical services, securities, food and beverage.
Given the number of steps involved in registering a private limited company in Hong Kong, it is natural to feel overwhelmed. If you are a foreign business looking to set up your presence in Hong Kong, you may not feel comfortable navigating the entire process independently.
And that's why a service like Air Corporate exists.
With Air Corporate, you can register your Hong Kong company and a bank account within just 24 hours.
FAQs
Unlike a private company which restricts share transfers and limits the number of shareholders, a public company allows its shares to be freely traded on a stock exchange.
Public companies also need to fulfill stringent reporting requirements.
Companies in Hong Kong need to file an Annual Return with the Companies Registry, which includes the updated particulars of its share capital, directors, shareholders, and assets over which any charge/security has been created.
You can issue ordinary or preference shares with special voting rights.
Your Articles of Association should include the nature/class of shares and voting rights attached to them.
A company's Articles of Association outlines the rules for how it works and describes what the company aims to do. It explains how things get done inside the company, like choosing directors and the handling of financial records.
