Find the Right Fit: Which Corporate Structure is Best for my New Company
Establishing a new company, in any setting is a daunting task, let alone in a rapidly growing environment such as Hong Kong, therefore it is important to give your business every chance of success you can. As the owner of your business, you will decide which structure will suit you best.
Hong Kong offers a variety of corporate structures such as Sole Proprietorship, General Partnerships, and Representative / Liaison offices, each of which can benefit the right by businesses. Keep in mind the specifics of your company or goals and you’ll be sure to find the right fit!
The Sole Proprietorship - The Lone Wolf
This is by far the simplest form of business, owned and operated by one person who has complete financial and creative control, the owner and company are one in the eyes of Hong Kong Companies Registry.
Because of this, incorporating a sole proprietorship is one of the riskiest types of corporate structure as debts and liabilities could fall to one person. There is a limited life of business should anything go wrong. Think of this structure as investing in a pair of shoes, a lot of money is provided upfront but if you have done your research right, you are ensured comfort and long term benefits.
This is a rare occasion when the negative aspects of a corporate structure outweigh the positives, and this is simply down to the unpredictability of independent corporations. We can give you further advice on this before taking your organisation to the next level.
Pros
● The sole proprietorship format is simple to establish and just as easy to terminate as an individual has complete control in the aims and direction of the company.
● Decision making is fast and effective, no higher approval is needed to progress with projects, and there is no need to share profits, which is attractive to start-ups.
Cons
● However, due to the company not being a separate legal entity the sole proprietor is responsible for all debts and unlimited liabilities.
● There is little to no protection of assets including personal property.
● Obtaining additional outside financing may be difficult due to low public perception and lower confidence from investors when it comes to sole proprietors.
Who is sole proprietorship best for?
Whilst it is the easiest form of corporate structure to set up in Hong Kong, it is not recommended for independent first-time business owners due to the incredibly high risks that this structure poses.
That being said, this corporate structure is ideal if the business has a substantial amount of funds, an established outside interest; or the scale of the business is not significant and with minimal liability.
A sole proprietorship would suit an individually run business.
Let’s say a home grown jewelry brand set up by a young entrepreneur named Lauren. Her company is slowly gaining popularity, so Lauren registers it as a sole proprietorship in Hong Kong, meaning she has complete control over all stages of her business and direct contact with customers.
However, a sole proprietorship also could end the business should Lauren encounter any issues. Without a partner or external funding she will be held solely liable for any debt which could be devastating for the company.
General Partnerships It Takes Two To Tango
Partnerships can be the perfect way of entering the Hong Kong business landscape with limited liability, you are assured comfort and support from your partners as you step into a new stage of the corporation.
The partner you choose is crucial, many relationships have been tested and come to an end due to company complications, money and pressure can cause even the strongest relationships to crack.
There are two types of corporate partnerships available in Hong Kong, General Partnerships and Limited Partnership. Both have their strengths and can improve your chances of success should they be applied correctly.
A general partnership is no small undertaking, should not be entered into if there is any doubt or worry about the security of the relationship. A limited partnership, on the other hand, allows for a variety of involvement in the corporation which may not be available any other way.
Pros
● Raising capital is far easier in a general partnership than in a sole proprietorship due to increased resources, combined assets, and a sense of reassurance to potential investors as there are multiple people fronting the company.
● You are now able to pool finances and knowledge about the market and any prior experience, making decisions quick and easy! The title of “partner” can be attractive to prospective employees or collaborators as it serves as an incentive for investing.
Cons
● However, similar to a sole proprietorship, there is an unlimited liability in a partnership set-up.
● Involved parties are equally responsible for debts, not limited to personal assets.
Who is a general partnership best for?
Whilst there may be more money to play within a partnership, you must be careful who you enter business with. This is why we suggest this corporate structure for long term business partners who are looking to expand into the Hong Kong market.
A general partnership would suit a growing business such as a developed sole proprietorship which is looking to open itself up to future investors. Additionally, small businesses that are looking to become more competitive in the fast-paced Hong Kong environment would benefit from a further established structure.
Tony Foo enters into a general partnership with his friend Frankie Lim for their educational technology company in Hong Kong. Tony might contribute more expertise and business contacts while Frankie brings in more start-up capital. Both of them decide to have 50-50 liability and debts. As the business grows and changes, Frankie and Tony may adjust their partnership accordingly.
Limited Partnerships - Limitless Possibilities
Limited partnerships offer a far more blended option, in which the company is made of general partners and limited partners who are unable to participate in the management of the company but can provide funding.
This corporate structure is the perfect meld of all options if your business is not drawn to one structure in particular. Think of limited partnerships as sneakers, available to adapt to any terrain and will always provide you with the comfort needed when embarking on challenging tasks.
Pros
- The advantages of a Limited Partnership are numerous, with increased investment from limited partners, fewer compliances, and restricted liability for those in a capped role.
- The flexibility of company makeup, especially when it comes to limited partners, ensures the longevity of the business should any member of the board decide to step down or move on. This is the only corporate structure which promotes movement at the top of business.
- As the liability of Limited Partners is reflective of their investment, it is easier to raise capital in smaller instalments rather than one or two large investors who may wish to have significant influence over the company.
- With a select few General Partners your business is assured increased efficiency, fewer interferences or clashes of ideas assure smooth sailing. If there are any issues, the limited influence of limited partners means that they can be replaced or phased out of the company fairly easily with little long term disruptions.
Cons
Like all other corporate structures, limited partnerships pose a set of issues which may make it unsuitable for your organisation.
- General Partners are yet again left with unlimited liability for any issues that may arise, personal assets may be on the line should another partner or the whole organisation encounter issues.
- Yet again it’s important to stress how important the choice of partner is, however with a limited partnership management are able to cap each associate’s involvement or stake in the company.
- Limited Partners have less liability as it is constantly reflective of their investment, however they have no choice but to remain passive investors in all major decisions which could dissuade potential investors.
- Limited Partnerships are generally more expensive to set up in Hong Kong than a General Partnership, which could stop first time business owners.
Ben Smith is a land developer and has an eye for a parcel of land in a particular area. He has a well-thought out plan to build ten properties on the land, and make it profitable. However, he does not have the capital to complete the project. His friend, James Fields has money to invest but does not know how to develop the land. Ben and James form a limited partnership (LP) that allows Jeff to limit his liability. Jeff acts as the investor in the LP while Bill acts as the general partner and manages the construction.
Branching out with Representative or Liaison Offices
What about if you already have an established business and looking to set up a Representative Office in Hong Kong?
The mandatory corporate structure would be founding a Representative / Liaison office which would carry an identical name to its overseas sister.
Pros
● With a Representative / Liaison Office the brand is already highly established, there is no need for outside investors or worries about over expansion.
● As the Hong Kong branch would not be a separate legal entity, registration would be handled by the Inland Revenue Department rather than Companies Registry. This will be a far simpler process!
Cons
- Whilst this may appear to be the simplest way of setting up a business in Hong Kong, a Representative / Liaison office is highly limited in what it is allowed to do in the market.
- Unlike other businesses, it’s not allowed to receive funding from sources other than its parent company, which is also liable should anything go wrong. It cannot generate revenue or profit for the local office or the foreign parent company. Examples include providing consultancy for a fee, trading, selling and receiving money other than from your overseas parent company.
- Furthermore, the internal structure of the company must be changed to accommodate a local Hong Kong representative such as a natural resident, or solicitor who can guide the branch through Hong Kong proceedings.
An established European fashion brand looking to expand into the Hong Kong market would use a Representative / Liaison Office to build brand marketing in Asia before opening new stores in newly researched areas.
Read more: A Guide to Opening a Representative Office in Hong Kong
Finding the Right Fit
All the corporate structures we’ve explored above will help your business and encourage financial growth when used correctly. Making sure you’re implementing the correct corporate structure in your Hong Kong business is key to success. But how do you choose what is right for you?
Answer these questions:
- What is the nature of my company now?
- What are you selling / facilitating?
- How has your company got to the point it is now?
- What is the business need of my company
- Are outside investors a necessity?
- What is the size of my business?
- Will you need to expand any time soon?
- Do we have large enough office space?
- Is there enough management in place to support expansion?
Your answers should guide you to the structure that suits you best!
Still unsure? Reach out to us to discuss setting up a new company in Hong Kong. We can help you with corporate secretarial and accounting matters too.
