You may hear Limited Company, Branch, Subsidiary, and Representative Office. What can they do for your business?

Vehicles to hold your business in Hong Kong

Every oversea business owner or investor should select the best business entities for doing business in Hong Kong based on their needs. Generally speaking, we advise that you select the best one based on your needs of following qualities:

  • level of liability of the business owners
  • continuity of the business itself
  • ease of sourcing of finance
  • concentration of controlling power

In Hong Kong, there are 4 classes of business entities:

  • Sole Proprietorship
  • Partnership
  • Representative Office / Liaison Office
  • Body corporate (e.g. Hong Kong Company, Non-Hong Kong Company)

We do not classify “Branch” as one of the suggested business entities for entrepreneurs to start their business in Hong Kong, it is because it is valid for Hong Kong registered business to setup a local extension of their business under its parent name, finance and liability.

For foreign entrepreneur decide to land in Hong Kong,  you are advice to take a look of a comparison between Representative Office, Branch, and Subsidiary Company in Hong Kong.

Single-person business

Sole Proprietorship

It is a form of business which is conducted by one person only. This person is the sole owner and investor of the business, nobody is sharing the business profit, but this person is taking up all the liability which is unlimited to this person.

Here is the comparison of its advantages and disadvantages:

Advantages of Sole Proprietorship
Easy RegistrationThe registration procedure involves only the application of Business Registration Certificate from Business Registration Office of the government. This license must be applied within 1 month after the owner begins the business.
Direct ManagementThe business owner is fast and easy to make decision for owned business because no need to discuss with other business members.
All ProfitThe business owner can take up all the profit from his business because nobody can share with.
High MotivationThe business owner must have very good incentive to improve the profit of the business because all the profit and loss are entitled to him personally.
Close RelationshipThe business owner is the solo-boss, usually this person provides service in all business related activities, close contact with customers and suppliers are needed. The owner can directly obtain the market trend in first person for improvement of the business.
Disadvantages of Sole Proprietorship
Single Source of CapitalThe single business owner is usually suffering from limited source of financing because his personal wealth is the major source of capital. Unless this person is wealth, financial management is always a difficulty when the business is starting up, running low of liquidity and expanding.
Unlimited Personal LiabilityEvery business is facing risk, which is sometimes predictable but its consequence could be unmanageable and overwhelms a business, then the Sole Proprietor’s loss is liable to the owner personally and unlimitedly.
Business owner is the only responsible person to the business, taking all the profit but also bearing all the liability which is “unlimited personal liability” of the business, the owner is held fully liable for all the “debts” incurred in the business and the amount of debts is unlimited. e.g., a owned injected a million dollar into his business as startup capital, a year later this business was a failure, losing all the capital and incurred debt of 5 million dollars, the owner lost the a million dollars of initial invested capital and debt of 5 million dollars personally. If the owner cannot paid this debt, the creditors can petition the court to bankrupt this person.
Heavy WorkloadThe business owner is the only boss of the business, not only decision making but also operational duty and business development are handled by this single person. When problem happens, he is also the only person to solve it. If the owner is sick or facing any situations of incapable to work, the business operation may be even stopped. Although the owner can employ staff to work together, it involved extra workload of human resource management as well as the liability of all loss provoked by employees.
High Working PressureThe owner is personally responsible for all the losses, and liable to unlimited personal liability, lack of partners to share workload and exchange of expertise for problem solving.
Limited Business AngleThe scope of business in this form is usually small-to-medium in scale, a business owner may be misled to make wrong decision based on feedback and comment from limited customers and suppliers.

Comment by AsiaBC

Sole Proprietorship may be suitable for business owners in the following conditions:

  • The first time business owner who needs extreme fast and the lowest cost of setup
  • Very limited and small scale of business scope
  • First priority on simplicity of formalities
  • Adequate financial supporting to run the business
  • No need to external supporting of finance and expertise
  • Running low-risk (almost zero-risk) business

Business of 2 or more owners

Partnership

Partnership can be divided into General Partnership and Limited Partnership. Unless further specified, we refer Partnership as General Partnership in this chapter. We will cover the comparison between them in this section.

Partnership is a form of business entity which involve 2 to 20 owners. When a person joins with other people to doing business with common view of intention for profits, this is a Partnership firm defined by the Partnership Ordinance in Hong Kong. Therefore, when a person shares the profits of a business consisting of other owners because of his effort contributed to this business, this person is in the nature of running business and in a form of Partnership with other owners.

This form of business must apply for a Business Registration Certificate within 1 month when the business begins to operate. The Partnership Ordinance regulates the rights and obligations of partners in Partnership.

The partnership firm’s structure, duties and rights of each partner must be stated on the Partnership Agreement and which is an mutual agreeing between all the partners.

Partnership Agreement

In Hong Kong Partnership Ordinance, the Partnership Agreement is an mutual agreeing between partners in a Partnership to state and control their rights, obligations and relationship to outsider of the partners in a Partnership business. The agreement can be either in form of written document or verbal agreement. If particular matters are not express in the Partnership Agreement, Partner Ordinance implies into the partners’ relationship to prescribe the solution of arguments and avoid future dispute.

The Partnership Agreement provides terms on the Partnership and partners’ relationship, it usually is covering how to conduct the business, to control finance of the business, and to terminate the business.

The Partnership Ordinance

In Hong Kong, Partnership Ordinance regulates the rights and obligations of partners in Partnership.

Basically, it requires every partners in the Partnership has “fiduciary duty” (in other word, compulsory duty to behave trustworthy, honest, fair and reliable to the firm and to the other partners. Generally speaking, the partners must provide full and true information to their partners and the firm; the partners should disclose any benefit derived from any transaction concerning the Partnership firm (including the use of the firm name and its business connections); the partners must not to carry on any business for the same business nature to compete with the firm.

Is Partnership the same to Joint Venture?

In Hong Kong, “Joint Venture” is a commonly used name to describe a relationship of cooperation between 2 or more business entities. Unlike Partnership, the name “Joint Venture” is not a legal term to describe a particular business entities, the use of “Joint Venture” in business name does not have any legal implication. Therefore, the business owners of the business entities can conduct  “Joint Venture” by binding of Partnership Agreement or commonly by investing into a Private Limited Company.

Limited Partnership vs. General Partnership

“General Partnership” is regulated and formed under Partnership Ordinance – it is neither a body corporate (i.e. company) nor joint-stock company (i.e company which is owned by other companies).

“Limited Partnership” is regulated and formed under Limited Partnership Ordinance and requires the registration in Companies Registry. By default, all partnership is General Partnership unless it can complete its registration and comply with its ongoing requirement to become a Limited Partnership.

We can treat the Limited Partnership as “feature-upgraded extension” of General Partnership by introducing a new type of partner named “Limited Partner” while another type is “General Partner”.

Unless a Partnership Agreement has stated extra clarification, Limited Partner are only liable for the capital they contributed to the firm provided that they do not have management power to the business firm. Therefore, Limited Partners do not involve in the ordinary business matters, do not have power to dissolve the firm, and  need not be consented on introduction of new partners. Nevertheless, they are able to determine their partnership interest.

Limited Partnership provides an additional upgrade path to existing General Partnership for investors who want to contribute their capital to the firm but do not want to take part in management and hope to limited their liable to the amount of invested capital.

Although Limited Partner do not have separate legal entity to the firm, they are NOT personally liable for any debts incurred by the firm.

If investors is looking to setup a new business entity and enjoy the benefit of shared ownership of a business firm and simple of transfer of their ownership, Company Limited by Shares is the choice.

Advantages of Partnership
Shared ResponsibilitiesEvery partners in a Partnership firm in Hong Kong is an agent of the firm. In view of the outsiders (e.g. suppliers and customers), a partner’ action for carrying on the Partnership business (e.g. signing business contracts) is deemed to bind the firm and all of the other partners. The outsiders are confident to do business with a Partnership firm because the action of a partner hold not only the firm but also every partner in the Partnership liable.
Shared WorkloadSince all the partners are liable to all the debts and obligation incurred by the Partnership firm, all the partners have high working incentive and motivation to offer the best services to the firm. And among the partners, they are likely to support and monitor each other for the maximum profits and minimum wrongs.
Transparent BookkeepingThe accounting record on the partnership book must be accessible by all of the partners. Partners have right to investigate every records and copy any of them, if some partners are acting wrongly to the firm, the other partners have the right to find it. When some of the partners are inactive in the management and ordinary course of the Partnership business, these partners can still keep track on the business performance.
Specialized ManagementEvery partner has the right to take part in the management of a partnership firm, the level of right is not binded by the degree of investment. Usually, the more experienced partner will have higher right of management. This can ensure that the decision is made after the discussion of all partners.
Disadvantages of Partnership
Unlimited Personal LiabilityEvery partner in a Partnership firm is jointly liable with all of the other partners, and the level of partners’ liability is personally unlimited (except Limited Partner in a Limited Partnership firm). Incurred debts and obligations of the firm are distributed to all the partners personally in proportion to individual partner’s investment. Even worse, a partner is held liable to all of the debts and obligations incurred by the firm if other partners are unable to pay their portion of liability.

When a partner is acting in the ordinary course of the business for the firm, this partner makes mistake and incurs loss to the firm, the firm holds the responsibility of the loss.

Shared Capital and ProfitsWhen a partner make different contributions to the capital of the firm, this partners will share profits of the business in accordance with their proportion of contribution. The firm must compensate the expanse of a partner when conducting usual and ordinary course of the firm business.

When a partner lends money to the firm, this partner is default entitled to interest rate of 8 percent per annum for this loan when none of agreement is made to the interested rate, it is because the Partnership Ordinance has prescribed it, unless another agreement is made between the partner and the firm regarding to the interest rate.

Disputes on matters of Ordinary CourseAny decision that will change the nature of the partnership business or terms must be made the consent of all existing partners. The decision related to the ordinary courses may be made by a majority of partners. Disputes may easily happens among partners, may lead to long discussion before decision can be made.

Another common dispute is the introduction of new partner to the Partnership firm, no person may be introduced as a partner without the consent of all the existing partners. It requires all partners’ approval before the firm can accept a new incoming partner.

Comment by AsiaBC

Partnership business entity may be the perfect business vehicle to business owner and investor when they are considering the following:

  • The business involves more than one person, and he not want to separate the burden and risk of running a business.
  • The partners are trustworthy, reliable, honest, and fair to the other partner and to the firm.
  • The relationship between the Partnership firm and outsiders is highly accounting on the credibility of the partners personally.

For oversea businesses owner to quickly setup an expenditure-only entity

Representative Office / Liaison Office

Representative Office is the common name but someone may refer this business vehicle as “Liaison Office”, we believe they are refer the same type of business vehicle. This “vehicle” can only accept oversea companies (the companies incorporated outside Hong Kong) to register for them to establish “a place of business” in Hong Kong as “an extension from its oversea owner to Hong Kong” and using the identical name as its oversea company. Since it is not a separate legal entity in Hong Kong from its oversea owner, so its registration is NOT handled by Companies Registry. Representative office / Liaison office registration is handled by only Business Registration Office under Inland Revenue Department.

Unlike all business entities in Hong Kong, Representative Office is NOT allowed to engage in any activity obtaining money from any source other than its parent company, thus Representative Office is impossible to make profit in Hong Kong. Legally, representative office is not an incorporated body. The liability incurred during operation of Representative Office is unlimited liable to the oversea parent company. It is also required that a local registered address must be provided to fulfill the legal requirement. The business owner can hire staffs using the name of Representative Office.

Every Representative office must have one local representative to represent the office for government’s record and serving as a local contact to this Representative Office. The business owner can appoint either one type of following to take this position (More than 1 representative can be appointed for a Representative Office in Hong Kong):

  • a natural person resident in Hong Kong
  • a firm of solicitor or a solicitor corporation in Hong Kong
  • a firm of a corporate practice of certified public accountants (practicing)

Here is a summary of Representative Office in Hong Kong.

  • Representative Office cannot conclude activities intended to make profit because they cannot obtain other source of money except its parent company.
  • Only oversea company is able to register a Representative Office.
  • Representative Office must register its name the same as its owner (the oversea company)
  • Representative office is not an incorporated body thus it is not classified as company and need not fulfilling the compliance requirement same as company, although its registration is processed by companies registry.
  • Its composition requires one local representative, it is only seem as a contact person in view of government.
  • A local registered address is required for its composition.
  • Hiring staff by the own name of Representative Office is allowed for building local workforce.
  • Although it is unable generate profit, it is still required to finish and submit the annual tax return.

Here is a brief comparison between advantages and disadvantages of using Representative Office:

Advantages of Representative Office
Pioneer to Hong Kong marketFor foreign business owners to engage into Hong Kong market, they are concerned about the business environment and market here but they are unfamiliar about. Representative Office is a shortcut for them to extend the present of oversea business because of its simple setup and ongoing compliance requirement when comparing to incorporation of companies.
Building the local workforceHiring local staffs may provide close-to-market information and reliable workforce over sending every staff from oversea to Hong Kong. Representative Office is able to employ local employee under its own name, this facilitate the oversea owners to develop local manpower.
Disadvantages of Representative Office
No fund-makingThe most important restriction of Representative Office is that it cannot engage in any business activity intended to make profit as well as raising fund e.g. issues sales contract to customers. Therefore, “spending” is its only function financially, it is never a valid business entity for goods trading agency of an oversea business owner because of its intention of buy and sell for profit.
Liability to the OwnersSince the Representative Office is not an incorporated body, the office does not have separate legal entity from the owners. In other words, Debts, loss and legal responsibility are held liable to the oversea owner.

Comment by AsiaBC

Although it has its limitation of unable to engage in activities intended to make profit, Representative Office is a fast and simple entity for oversea business to establish a place for business carrying the name of its oversea parent company for the following purpose:

  • Promotional, advertising and marketing research in Hong Kong which need hands-on information of market in Hong Kong;
  • Customer Supporting Service Centre for local clients who make deal with its oversea owners and providing on-site assistance to them.
  • Point of contact as an outpost in Hong Kong to reach potential customers and suppliers here to build up relationship;
  • Intermediate business form for hiring local workforce in prior to incorporation of a Hong Kong Company.

 

A separated legal entity from owners

Company (Body corporate)

Type of Hong Kong company available to registration in Hong Kong

Incorporation of a company in Hong Kong is regulated by Companies Registry under the law Companies.

In Hong Kong, we can classify companies into to 2 types regarding to what the companies’ are limited by – Company Limited by Guarantee and Company Limited by Share, over 99% of registered limited companies are limited by shares, while the remaining are limited by guarantee which is a specific form of business entities for doing non-profit and charity works.

In the category of Limited Company by Shares, they are group in 2 types regarding to level of confidence to their financial situation – Private Limited Company and Public Limited Company. Private Limited Company does not required to disclose its financial statue to the public, and has restriction of its number of investors, so it is the most popular business entity for small-to-medium size business.

Among the Public Limited Company, some of them are also list on Hong Kong Stock Exchange, these company is named Listed Company.

Finally, a minority of Hong Kong company is registered as non-Hong Kong company, it’s a type of legal entity for a oversea/foreign company to setup and own a Hong Kong company without separated legal entity to its oversea/foreign owning company. The non-Hong Kong company is held unlimited liable by its owner.

We usually called a “Company limited by Shares” as “Company Limited (Co. Ltd.)” and even “Limited (Ltd.)”in short-term because this type of company is the dominant in number and popularity.

A company named as “Limited” may theoretically refer to any kind of “Limited Company” (i.e. by Shares or by Guarantee) . However, we always understood that “Limited” is referring to Limited Company by Shares because of it majority in Hong Kong, and this company may be either Private Company or Public Company. The company are not required to include the word “private” of “public” in their company names in Hong Kong.

What does shares do in a Limited Company?

Speaking of owners’ liability of Sole Proprietorship and Partnership, we can easily understand the owner(s) of these business entities are people – a natural born people – and their firms are binded to them personally. Legally, the firm and the owner are not the separate legal body thus the owners are liable to unlimited personal liability to their firm.

While a natural person obtains it personhood when he is born, a company does so when it is incorporated according to certain company laws (i.e. Company Ordinance in Hong Kong). Precisely speaking, a company is a fictitious person who is treated by law as if they were a natural person, we call this artificial form of legal entity as Legal Person.

Unlike other business form, the major difference between Limited Company)  and Sole Proprietorship or Partnership is how the ownership of a company is distributed among owners:

People or organization can acquire the ownership of a company by acquiring “shares” which is issued by this company and holding the “shares” to express his owner’s rights and duties in the company.

The owners of “shares” is named as “Shareholders”, and the action of holding the shares is “shareholding”. “Shareholders” is the owner of a company because of injection of capital. A shareholder can precisely expresses his portion of ownership in a company – degree of ownership is proportional to his ratio of shareholding among all of the shareholders. Since a company is a separate legal person to the shareholders, the loss incurred by the company is limited to the Shareholders’ investment and do not liable to them personally. As returns, Shareholders can shares the company’s profit by receiving “dividend” per shares.

In the contrast, Company has legal personality, it means a company is capable of having legals rights and duties within a legal system, for example, a company is able to enter into contracts, sue and be sued. The law treats a company as a natural person.  Therefore, position of shareholder of a company can be acted by either natural person or legal person, the investors can diversify their risk by simply acquiring shares of a company which is shareholding a variety of companies.

To conclude, Limited Company is a man-made entity to encourages the investors to joint their effort together and own an separate legal entity for venturing in the aim of profits; while their liability to loss are limited to their investment and profit are shared in proportion to each investor’s investment.

Composition of a Private Company Limited by Shares

We take the composition of Private Company Limited by Shares as example to explain the basic function of each core member in Hong Kong.

  • Founder member(s):
    • The owner of the company.
    • Minimum one founder member required.
    • Either a body corporate or a person, their incorporation jurisdiction or nationality has no restriction.
  • Director(s):
    • Minimum one Director.
    • The manager of the company, employed by the company and thus the founder member(s).
    • Either a body corporate or a person, their incorporation jurisdiction or nationality has no restriction.
  • Secretary:
    • Minimum one Secretary.
    • Employed by the company and thus the founder member(s), responsible for corporate governance, compliance with law, record keeping etc.
    • Either a body corporate or a person. However, their incorporation jurisdiction or nationality must be in Hong Kong.
  • Register Office Address:
    • One Hong Kong communication address to be given to government.
    • Accessible for letters handling.
    • Be a physical presence.

Effective on 3 March 2014, every Private Limited Company must have at least one director who is natural person according to the amendment of Company Ordinance for enhanced transparency and accountability of directors.

 

When a Limited Company is formed it must issue one or more subscriber shares (e.g. total no of shares created on paper) to its initial members (e.g. structure of shareholding), and nominate the value of each share (e.g. nominal value of each share). Therefore,Share Capital of the company is the total number of shares existing in the company multiplied by the nominal value of each share. In Hong Kong, these initial shareholders need not pay for their subscribed shares at the time of formation, all value are only on-paper.

Basic composition of a Company Limited by Share.

composition of Private Company Limited by Shares

Why Limited Company is the majority?

Limited company (including both Private and Public Company Limited by Shares) offers great advantage over Sole Proprietorship and Partnership, below is the brief comparison over the others:

Advantages of Limited Company
Limited Liability to owners (Investors)The liability of the shareholders for the company is limited to the amount of their respective shareholdings, the shareholders can limit their loss to the amount of investment for purchasing the shares of the company. When the company is unable to settle its debts, it may be wound up by the shareholders, creditors or the court so that all the assets owned by the company will be realized to pay off the debts incurred by the company. Shareholders are free from obligation to pay off the debts when the company’s asset is insufficient to pay to the creditors.
Continual SuccessionThe shareholders of a company is providing financial source and thus holding the ownership of a company, so the amendment of shareholders cannot affect the existence of a company, shareholders are separately from the ordinary course of company business.
2-tier StructureThe company is owned by shareholders, and managed by the directors. Directors is a kind of employee of a company but holding the management power. Although a director can also be a shareholder of this company, it is no contradiction to these 2 identities:

Shareholder is an investor and receive dividend for sharing of company’s profit, while employee is a provider of service and receive salary for return. When this person sell out all the shares to another person for money, the company’s shareholding is changed but it makes no harmful impact to the operation of the company.

Broadened Source of FinanceOther than the investment from shareholders, a company can obtain financial support from banks by creating a floating charge, in which a company can charge all its assets including its land, plant, machinery, stock, shares and cash as security to the bank for granting a loan.

The company can invite other investors to be shareholders when it is in need of new capital for expanding. Since the investors are not required to take part in the management of the company, they can sell the shares to others without complicated procedure for money and receive dividend as return when the company is making profit, buying shares is a feasible form of investment to a company and help a company to attract investors.

Management of Investment OwnershipThe Hong Kong Law treats a company as a separate legal body (i.e. company is a legal person) to engage various business activities using its own name, and it has legal protection and take legal action against other legal person and natural person to protect its property. Since the change of shareholders in a company does not affect its existence, the change of ownership of these asset can be done by transferring the shares of the company to others.
Efficient ManagementA company adopts 2-tier structures to separate ownership and management: Shareholders represent the ownership, Directors does the management personnel. Since the liability of the shareholders are limited to the amount of their shareholdings, the shareholders is able to hire the expertise to act as directors and promote their progressive thinking to achieve business goal. When a company is making profit, shareholders are paid dividend in return so they are incentive to make good contribution to the company.
Disadvantages of Limited Company
Disclosure to PublicAccording to Company Ordinance in Hong Kong, every company is required to disclose the identity of core shareholders and directors information to the public, it is required to reply and filing Annual Returns with the Companies Registry to describe capital structure, personal particulars of shareholders, directors and secretary, mortgage and transfer of shares. Furthermore, every public company has to disclose its annual accounts to the public additionally.

Furthermore, every public company has to disclose its annual accounts to the public additionally.

Extra register and maintenance expensesCompanies Ordinance regulates the Hong Kong companies obligations of initial incorporation as well as ongoing continuity, and companies registry enact this law. It is said that the incorporation procedure and maintenance of a company are more expensive when compared with that of a Partnership and Sole Proprietorship because it has to submit the information of Directors, Shareholders and a Company Secretary during incorporation, and filing the return to companies registry of company structures annually. Additionally, a company is also required to prepare audited accounts annually.
Extra Management WorkloadRequired by Company Ordinance, every company has to maintain certain registers (e.g. register of members, register of directors and secretary, register of charge,), conduct various meetings in the operation and keep minutes of meeting (e.g. annual general meeting, extraordinary general meeting, and board of directors meeting), and also different resolutions. Failure to comply with these requirement may lead to the discontinual of its legal body, it is recommended that investors should seek advice from professional corporate service providers as well as assistance.
Cost by Cessation of BusinessWhen a company opts for going out of business, there are several legal procedures to discontinue its affairs. Liquidation is the legal process by which a company is brought to an end, and its assets are redistributed, a company can normally be closed by way of liquidation. To begin a “simple” liquidation, the company must appoint a liquidator to realize the assets of the company and distribute dividends to creditors and shareholders, and also to clear its obligations to other parties such as its employees, suppliers, customers, landlords, and etc. Where the company is solvent, the company can be closed by way of members voluntary winding up. If it is insolvent, the proper mechanism for closing a company would be creditors voluntary winding up and compulsory winding up. The procedure itself is complicated and expensive. Quite often it is required to appoint a solicitors and auditing firm to handle, and the costs of liquidation for even a “simple” company would be more than HK$50,000.
Higher Taxation RateHong Kong has a low and simple tax regime to promote doing business in Hong Kong, only three direct taxes are imposed (which are Profit Tax, Salaries Tax, and Property Tax). For a company, only Profits Tax which is capped at 16.5 percent is imposed on its final profit. Although Hong Kong’s tax rate is one of the lowest tax cities for a company, this rate is still slightly higher than that for Sole Proprietorship and Partnership which are 15 percent. In spite of that 1 percent difference, lots of company’s expenses are tax deductible in accounting control. e.g. directors’ remuneration is an expense of a company thus it is tax deductible.

Comment by AsiaBC

An owner may consider setting up a Private limited company to conduct his business:

  • Limiting his liability in the operation of a business;
  • Using a corporate vehicle as a separate legal body to conduct the business;
  • Maximizing finance support from the bank by using the movable assets of the company as security;
  • Delegating his authority to other management personnel for them to conduct the business on his behalf.

For only foreign companies to setup presence in Hong Kong with purpose of profit-making

Non-Hong Kong Company

Hong Kong is one of the best cities for doing business, when foreign companies (which is those companies incorporated outside Hong Kong) are prepared to establish a place of doing business here, the investors can choose either setting up a Representative Office, incorporation of a Private Company limited by Shares (a.k.a Limited Company) and/or Non-Hong Kong Company under the Hong Kong Company Ordinance.

Do you know?

We sometimes hear the name “subsidiary” and “branch office” from foreign investors in Hong Kong. Although literally these two names mean a place of doing business which are an extension of their parent companies, they have different legal definition in Hong Kong:

  • “Subsidiary” is NOT a legal business entity in Hong Kong, it is no way to set up a “subsidiary office” in the Hong Kong Companies Registry (CR);
  • “Branch” (a.k.a Branch Office) has a specific meaning in Hong Kong: it is NOT a legal entity registered in CR, this is merely an extension of its parent business which must be incorporated / registered in Hong Kong. Branch office is not treated as a separate legal entity from its parent company, it does not has its own right so that the parent company is responsible for all the debts and liabilities of it.
  • The registration of Branch is solely handled by Business Registration Officer (BRO) under Inland Revenue Department.
  • For example, a local company which is a registered fashion retailing business opens a few chain stores sharing the same brand name and centrally managed by this company in Hong Kong. Each store must be registered as a “Branch” in BRO under the single parent company in order to doing business in each store.
  • The advantage of registering each store as a branch over that of a company is that the parent company is responsible to handle all tax filing as well as annual return of all the branch thus lowering the accounting and auditing expense and enhancing central manageability.

The “Non-Hong Kong Company” is a form of incorporated body exclusive to the oversea companies (incorporated outside Hong Kong) to solely owning a company in Hong Kong for engaging in intended profit-making business without separate source of fund, name, as well as liability from its oversea company.

Alike the private company in Hong Kong, it has the requirement on company secretary and registered address. However, the owner (a oversea company) must submit its published account books, Certificate of Incorporation and any other information required for annual return and tax return in its jurisdiction of incorporation to Hong Kong Companies Registry on the registration of a “non-Hong Kong Company”. After registration, these document are required for submitting annual return and tax return.

Comment by AsiaBC

An oversea business owner may consider setting up a “non-Hong Kong company” to conduct his business:

  • Usually, the business owner enjoys some sort of benefit under the tax and company laws in the oversea jurisdiction of incorporation.

Our conclusion

Rating of various business entities

Summary of characteristics of 4 major business entities
Sole ProprietorshipPartnershipCompanyRepresentative Office
Owners’ liabilityExtremely High
The owner is at high risk because of unlimited personal liability
Extremely High
Every partner is at high risk because of unlimited personal liability to the firm’s wrong doing
Limited
A company is a separate legal body from the owners and it can carry on business activities by its own name; Owners hold shares of a company, the shareholders liability is limited to the amount of their shareholding.
Limited
RO does not have separate legal body from the owners but its registration is only valid to Company incorporated outside Hong Kong, it is still true for the business has only limited liability.
Business Continuity
Extremely Incontinuous
The owner is almost the only manpower to keep the business running
Moderately Incontinuous
Termination of a partner does not lead to the discontinuation of business. Due to difficulty in introducing new partners, ownership transfer of partnership involves the consent of all partners.
Highly Continuous
2-tier structure of separate ownership and management by shareholders and directors respectively. Changes in shareholders do not affect the legal entity of a company.
Low
RO is simple and fast to register, and does not allow to engage in profit-making activities. Its business relationship is built on the brand and name of oversea parent business, so its cancellation is also simple.
Ease of Financial SourcingExtremely Difficult
The owner may have to loan money from friends and relative personally for the business.
Moderately Difficult
Partners may lend money to the firm in addition to the investment. Investors must become a partner for protection of their investment, that is infeasible to new investors.
Easy
Buy and sell of shares is a flexible form of investment for investors, the company obtain wider financial support from shareholders, while shareholder receive dividend in return.
Extremely Difficult
RO can only obtain financial support from its oversea parent.
Concentration of Controlling PowerExtremely Concentrated
The owner can plan, make decision and operate the business without discussing with other people.
Moderately concentrated
Ordinary decision must be made by the consent of majority of partners, if the decision is related to the change of Partnership, all partners’ consent is required.
Distributed
The portion of shareholding in a company is proportional to the controlling power. For the shareholders with subordinate shareholdings, their power is suppressed. When the company invite new shareholders by issue of new shares, it dilutes the power of existing shareholders.
Extremely Concentrated
The local representative of a RO is a employee of the business owner to fulfill the legal requirement of composition, every business decision is made by the owner.

Company is the best business vehicle for running a business in Hong Kong. No matter your business is a startups or expansion into Hong Kong.