Hong Kong LLC or Hong Kong Limited Company
Have you ever thought about starting a new company in Hong Kong and confused about the type of business entity to choose? To experience the maximum benefits of international incorporations, one must know about the kind of company you want to set up in Hong Kong for your business. There are many types of business entities in Hong Kong, but the most common type of business entity is a Hong Kong LLC or Limited Liability Company.
Many people are often confused about what an HK LLC company is, the tax features and other aspects of this business type. We often get many inquiries on this, especially from entrepreneurs and foreigners who want to open an LLC in Hong Kong. The questions range from the requirements to set up a company to the ongoing costs involved. In this article, we will cover everything about Hong Kong LLC.
What is a Hong Kong LLC or Hong Kong Limited Company?
The most common misconception of Hong Kong LLCs is in the name. Technically the company type is not commonly called an LLC in Hong Kong, unlike many other countries, but moreso a limited liability company. This is why all company names must end in “Limited”.
A limited company is the most common business vehicle in Hong Kong. It is a separate legal entity from its members, and can either be a private or public company limited by shares or limited by guarantee. Most investors and startups in Hong Kong prefer to choose a private limited company, which offers protection of personal assets from business risks and liabilities as being a separate legal entity. For a company to be a Hong Kong Limited Liability Company, it must be registered with the Companies Registry under the Companies Ordinance (CO).
Small and medium sized companies often choose to be private companies limited by shares. These companies run as a normal company with limited liability; with the business able to run as a separate legal entity, availability of a wide range of business tax deductions and allowances, and the ability of shareholders to receive dividends from the company profits. The shareholders are also only liable to the amount of share capital involved in case of company debt or default.
On the other hand, a public company limited by shares can hold more than 50 shareholders. In this type of company, the shares are offered to the public. These organizations are dependent on stringent rules and regulations, as they raise capital from the public, often on the Hong Kong stock market.
Do Hong Kong Limited companies have pass-through taxation like a US LLC?
In essence, a Hong Kong limited company works similar to a C corporation in the US, where the company’s profit is taxed against the corporate tax rate, and again as it is distributed to the company directors and shareholders.
While Hong Kong limited company members do enjoy limited liability to the company’s debt, as similar to LLCs in the US, this entity type does not have a pass-through taxation feature. However as Hong Kong has a very business friendly tax scheme, with very low salary tax rates and no capital gains tax nor tax on dividends, there are less hurdles to overcome when choosing to incorporate a limited company in Hong Kong. The benefits of this company type greatly outweigh the limitations of the other types of companies in Hong Kong, ie. a sole proprietorship or partnership.
Tax features of a Hong Kong Limited Company
Another significant reason why Hong Kong is such a popular business choice for many investors is due to its tax benefits and low tax scheme.
Hong Kong works on the two-tier profits tax regime, with the first profits under $2 million HKD subject to only 8.25% tax, and profits about this at 16.5%. The main objective behind this tax regime is to significantly limit the tax burden on the small and medium-sized companies. However only one “entity” within a group of “connected entities” can enjoy the two-tier rates.
The applicable tax rates are as follows:
|Assessable profits||Tax Rate|
|First HK$2 million||8.25%|
|Over HK$2 million||16.5%|
Territorial System of Taxation
Hong Kong follows a territorial system of taxation, with only those profits which arise in or are derived from Hong Kong liable to profits tax. Hence, if you carry on business with your Hong Kong company, but it’s profits are derived from outside the city, then the company can qualify for an offshore tax claim. The request for tax exemption needs to be lodged for approval with the submission of the tax return to the Inland Revenue Department (IRD).
To determine whether the profits are derived from Hong Kong or not, various guiding principles are taken into consideration. The broad guiding principles are:
- The operation test: To determine what are the operations used to produce profit and where those operations took place.
- Place where the decision is made: The place where the day-to-day investment/business decisions take place.
- Gross profits from transactions: The difference between Hong Kong profits and offshore profits is made by reference to the gross profits arising from individual transactions.
- Business presence overseas: If the business presence overseas, this is a sign that profits earned are likely not chargeable to profits tax in Hong Kong.
Advantages of Limited Liability Companies in Hong Kong
Setting up a limited liability company in Hong Kong can offer you numerous benefits to grow and scale your business. The main advantages of incorporation in Hong Kong are:
- Tax Benefits and Incentives: There are many tax benefits that are available for private limited companies. The standard tax rate is 16.5% (8.25% on profits under HKD 2 million) on the assessable profits for corporations. Also due to the territorial basis of taxation, only profits earned in Hong Kong are liable for paying the tax. There isn’t any VAT, sales tax, dividend tax, etc.
- More comfortable Transfer of Ownership:
You can easily transfer complete or partial ownership without stopping the operations in the business. This can be done via the issuance of the new shares to additional investors or transfer of existing shares.
- Positive Image: Positive corporate image is one of the most important assets of the organization. A private limited company is taken positively as compared to other business entities.
- Ease of Raising Capital: The ease of raising finances assists business growth, and this can be done by drawing in new shareholders or distributing more shares to the existing shareholders. Not only this, but Hong Kong limited companies can more easily apply for bank loans than other business entities.
- Perpetual Succession: Even when the ownership is changed, the company will continue to function. Similarly, if shares are being transferred, there wouldn’t be minimal effect on the business operations. All this indicates that the company runs in a continuous flow in spite of the insolvency, expiration, or resignation of the directors or shareholders.
- Separate Legal Entity: A Hong Kong limited company has a legal identity of its own that is different from its members. It allows it to acquire assets, sue or be sued in its name, enter into contracts, and even go into debt. The accountability of the shareholders is reduced to the number of their shareholdings and investments. Other business entities such as sole proprietorships and limited partnerships do not enjoy separate legal entity status as their business is not an incorporated entity.
Why Hong Kong LLC is the best option for foreigners
The one thing that comes to the mind for foreigners when starting up a business abroad is the right amount of benefits. Hong limited companies provide many advantages for foreigners when compared to other business locations in Asia. Below are the reasons why a foreigner should choose to set up a Hong Kong limited company.
The best part about opening Hong Kong limited company is that the directors and shareholders of the company can be of any nationality. Foreigners can own 100% of the shares of a company in Hong Kong.
No Minimum Share Capital
There is no requirement for a minimum share capital, and the share capital can be expressed in any currency. The suggested paid-up share capital is HKD 1,000 or its equivalent in any foreign currency.
Time required for the formation of a LLC
It is easy and quick to form a Hong Kong company for foreigners. A company can be set up in one to three business days, depending on the complexity of the business. With expedited services, a company can even be set up in less than 24 hours, subject to due diligence checking and other documents required.The incorporation process of Hong Kong company is fast as compared to many other types of business entities.
How can Startupr help you?
By now, you should have a better idea about the benefits of forming a Hong Kong LLC, or Hong Kong limited company. If you are a serious entrepreneur who wishes to scale their business, follow the steps here to start your new company. You can even start your company in Hong Kong all from home. Hiring a professional like Startupr to incorporate your company would greatly reduce the amount of time and effort you put in, and ensure you are compliant with the company laws in Hong Kong.
We at Startupr will support you so you can easily set up a company in Hong Kong. With years of experience in company incorporation, we can help you every step of the way from creating your company to the running of your business. Contact us and register your company today!