Hong Kong is a favorite location for individuals worldwide to conduct business. Even though there is no U.S. Tax Treaty with Hong Kong is becoming one of the world’s leading business hubs for U.S. investors.
Unlike the United States that has a 34% or 35% tax rate, profits from Hong Kong have a corporate tax rate of 16.5%. Before incorporating in Hong Kong, it is important to understand the different business entities and corporate structures that are available in Hong Kong.
The following is a summary of the different types of companies a person can form in order to conduct business in Hong Kong or outside of Hong Kong as a nonresident Hong Kong business:
For an entrepreneur who is unsure if they are ready to take the plunge and formally structured their business, a sole proprietorship may be the best form to begin the business. While the biggest positive is that it is inexpensive to form the downside is that it is not a distinct and separate legal entity, and therefore the sole proprietor may be subject to personal liability and risk for any debts or lawsuits from the company.
Hong Kong offers two different alternatives for partnership arrangements – General Partnership and Limited Partnership:
In a general partnership, all partners can be held liable for the debts and liabilities of the business, as well as the debt and liability of other partners that stem from business operations. As in the United States, it does not take much paperwork or formalities to form a general partnership. The problem with the general partnership is that all partners can be liable for the debts, as well as the fact that there is no protection for a partner’s personal assets, With this type of structure partners are putting a lot of faith into the competence of their partners.
Similar to the United States, a limited partnership in Hong Kong is comprised of both general and limited partners. The limited partners have “limited liability” up to the amount of money they invested in the business and do not operate the day-to-day activities of the business. Therefore a Limited Partner’s personal assets are not at risk.
Limited Liability Company
As in most countries, the limited company is a favorite business entity for many individuals looking to start a company in Hong Kong. A limited liability company is a separate legal entity, and therefore investors are only subject to liability up to the amount of money they have invested in the business. In Hong Kong, there are two different types of limited liability companies – either a private limited company or a public limited company.
Private Limited Company
Most small companies are established as private limited companies. They are owned by shareholders who have shares in accordance with the investment capital that they made into the company. If the company does not do well, then the owner’s liability is limited to the his or her investment share. Some of the drawbacks of this type of company are that there are several reporting annual requirements as well as substantial procedures required in establishing the business; moreover, winding down the company is relatively expensive.
Public Limited Company
This type of company is similar to C Corporation and that it is the main option for large companies who want to “go public.” These type of companies are generally listed on the stock exchange and receive investments from the general public at large. Unlike a private limited company, a public limited company has various disclosure requirements and intense statutory compliance requirements, which would dissuade most small businesses.
*Since the company is considered an incorporated business is governed in part by the Closer Economic Partnership Arrangement (CEPA), which is an agreement involving free trade with Mainland China.
Branch Office of a Parent Company
If a parent company is located outside of Hong Kong but would like to form a branch in Hong Kong, the parent company will register the branch as a registered non-Hong Kong company. One reason for forming a branch office as opposed to a wholly-owned subsidiary is it may be easier for the Branch Office to obtain “Credit” by piggybacking off the prior success and good-will of the parent company.
Similar to other Asian countries, a Representative Office represents an expansion of the nucleus of the business without using the office to sell products or services — or other direct profit motive activities. Many businesses will create a representative office at first in order to test the waters to determine whether Hong Kong is a viable option to expand their business – before making a full investment.