If you are an entrepreneur in Hong Kong and interested in establishing a Limited Liability Company (LLC) in the region for the first time, this guide will help you learn more about the composition, structure, and legal liabilities of such a corporation. Let’s begin.
Note that this guide does not show you how to incorporate a company in Hong Kong. To learn more about this process, please refer to one of our page related to incorporation in Hong Kong.
Understanding The Basics Of Hong Kong Limited Liability Companies
Legally, a Hong Kong LLC is seen as an artificial person. In other words, it has a distinct legal identity from its directors and shareholders. It is a separate legal entity.
This entitles a Hong Kong company to a number of rights, which are automatically granted along with incorporation as a limited liability company. The company may:
- Enter into contracts using its own name
- Sue other companies and be sued with its own name
- Exist in perpetuity, without and independent of its members. Unless it is formally dissolved, the company can and will continue to exist even after the death of major shareholders, directors, executives, and other such leadership members
- Own its own property and assets. The assets of the company are legally distinct from assets owned by shareholders, directors and other executives
- Borrow money to create floating charges. This allows for the creation of a security for the creditors of the company
The “artificial person” of the company is operated through its members or officers. The directors are the primary operational personnel, followed by shareholders. Together, these officers are responsible for directing the actions of the company. Their actions as a collective constitute the individual actions of the company.
The Articles of Association in Hong Kong corporate law help determine the extent of the power which can be exercised by Hong Kong LLCs. In addition, the Articles of Association created during incorporation helps determine the power of the directors and shareholders.
In general, a board of directors is responsible for making management and policy decisions. Then, their decisions must be ratified by shareholders at a general meeting. Shareholders may vote to agree or disagree with a decision – their particular voting rights are defined by the company’s Articles of Association.
All private limited companies in Hong Kong must have at least one director. This must be a person, but can also be a corporate body. The director can be either a foreigner or a local, but must be above 18 years old. Public companies must have at least two directors which conform to the above criteria.
The directors of a company are responsible for both managerial and supervisory roles, and directing the actions of a company. The precise role of directors in all of the daily operations of a business will vary, based on its size.
But regardless of the size of the company, the directors are responsible for maintaining its “effective control,” and ensuring its legal compliance. This means that the directors must always maintain open lines of communications with company stakeholders, delegate power when necessary, and ensure that the company is always accountable for its actions.
This means that directors are required to have a good overall working knowledge of all corporate affairs – from finances to operations, strategic planning, and more. They are required to exercise all of their statutory and administrative duties in accord with the general law and fiduciary duties of good faith and loyalty. Additionally, they must exercise Duties of skill and care.
There are 11 general principles, as set by the Companies Registry of Hong Kong, outlining the responsibility of directors.
- Directors have the duty to always act in good faith for the company
- Directors have the duty to always use their power for the proper purpose, and for the benefit of the company’s members as a whole
- Directors have the duty to not delegate powers unless they have received proper authorization, and to exercise independent judgment
- Directors have the duty to exercise skill, care and diligence
- Directors have the duty to prevent and avoid conflicts between the interests of the company and personal interests
- Directors have the duty to not enter into any transactions in which the director has an interest, unless the requirements of the law are followed
- Directors have the duty to not gain advantage from using their position as a director
- Directors have the duty to not accept personally-beneficial gifts from third parties
- Directors have the duty to always observe the Articles of Association of the company
- Directors have the duty to keep proper financial records and books of account
Breaching any of these duties can result in the disqualification of a director, civil and criminal sanctions, or personal liability and lawsuits for civil wrongs like copyright infringement.
Any private limited company operating in Hong Kong must have at least a single shareholder, which can be any person or a corporate body, either local or foreign, and over 18 years old.
A shareholder makes an investment in the company by purchasing shares. In other words, they own a proportionally-sized part of the company, based on their total number of shares and monetary investment.
Shareholders invest their money in hopes of a return. In most cases, a company making a profit must share the profits with investors through dividends.
Shareholders are not directly involved in day-to-day management of the company. For this purpose, a board of directors is appointed. These directors are accountable to the shareholders – and run the company on their behalf.
Shareholders have the power to modify provisions found in the Articles of the company, and also can disallow any alteration of the company’s capital. Additionally, shareholders are entitled to all of the rights that follow, as part-owners of a company:
- The right to vote – This can include voting for both appointment and removal of persons like directors and auditors
- The right to dividends – If a company’s profits are not reinvested and are paid out as dividends, investors are entitled to the appropriate share, based on their position
- Right to own a portion of assets – Being part-owners, investors also own part of the company’s assets, and have the right to reclaim this investment if the company is liquidated
- Right to receive information about the company – Obtaining information is critical for preventing corporate managers and directors from acting to the detriment of shareholders, and to help recognize irregularities, and take action against those engaging in corporate malfeasance.
- Right to propose shareholder resolutions – Shareholders may propose and vote on resolutions related to corporate decisions and other such matters
All private limited companies in Hong Kong must have a company secretary who is a local resident. This can be either a private individual or a body corporate. The sole director and/or shareholder of the company is not allowed to have this position.
The company secretary operates as the chief administrative officer, and is responsible for things such as:
- The arrangement of meetings
- The taking down of minutes during meetings
- Maintenance of all statutory books for the company
- Filing all necessary documents with the Companies Registry
- Ensuring the company meets all statutory compliance requirements
- The registration of all share transfers
- Being the primary communication channel between directors and officers of the company
The appointment of the secretary is done based on the Articles of Association. Typically, the secretary is appointed and their compensation is fixed by the Board of Directors.
Articles of Association
You can think of the Articles of Association as the “Constitution” of a company. These Articles regulate all internal relations between the company and its members – and they prescribe all of the rules for running the internal affairs of a company. They usually state things like:
- Rule and regulations concerning the regular holding of meetings
- How directors are appointed
- The individual rights, responsibilities, duties and relationships of members (shareholders, directors etc.)
These Articles are legally binding, statutory contracts. The company itself and its members are legally obligated to observe all statutes and provisions set out in the Articles.
Share Capital is the investment made in a company by its shareholders – its owners. It’s the private means of finance for all private limited companies.
In Hong Kong companies, there are two types of capital. The first is authorized share capital.
It is typical for companies incorporated in Hong Kong to have an authorized share capital of 10,000 ordinary shares of HKD 1 each – representing HKD 10,000.
After the incorporation of the company, authorized share capital can be increased at any time – but the Hong Kong government is entitled to a capital duty of 0.1% of all share capital over HKD 10,000 – usually capped at HKD 30,000 for a single transaction.
The second type is “issued” or “paid-up” capital. For issued/paid-up capital, the minimum that can be issued is 1 share worth HKD 1.
For both types of capital, there is no limit on the maximum amount of share capital. In addition, it can be not only in HKD, but in other currencies such as USD. All shares can be transferred at any time, but a stamp duty fee must be paid when doing so. Bearer shares are not legally allowed, however.
All Hong Kong LLCs have a legal identity of their own, distinct from the identities of their members. The company can act as its own unit and do things like purchase assets, get loans, and file lawsuits.
The liability of each shareholder is limited by their investments, and changes in directors and shareholders have no effect on the company’s existence. The business expands by raising finances through bringing in new shareholders or selling more shares to existing shareholders. It can be completely or partially transferred by selling part of all of its shares, or by issuing new shares to new investors.
Due to the ease of incorporating and managing an LLC structure, most entrepreneurs in Hong Kong choose to use this corporate structure. To learn more about operating a business in Hong Kong, you may refer to our other Hong Kong FAQs related to company formation and incorporation.