How To Choose Between A Hong Kong LLC, Sole Proprietorship or Limited Partnership

Choosing a structure for your business in Hong Kong can determine a lot of things, such as how you will be taxed, whether or not you will be exposed to lawsuits, public perception of your business, ease of raising capital, and much more.


In this article, we’ll be taking a detailed look at the three most common types of business entities in Hong Kong. Sole Proprietorships, LLCs (Limited Liability Companies) and Limited Partnerships.

We’ll discuss each one, compare the different features and benefits of each individual type of business, and discuss which one may be right for your company. Let’s get started now.


Comparing Key Factors Between These Three Business Entities

Separate Legal Identity

A sole proprietorship is, by definition, owned and operated by only a single person. It is not an incorporated business – so by default, the individual has no separate legal identity from the company. The owner and business are considered to be the same entity.

Additionally, Hong Kong limited partnerships are considered to be extensions of each individual partner – and are not treated as separate legal entities.

However, Hong Kong LLCs do have a separate legal identity from their members. An LLC can operate on its own to go into debt, enter a contract, file lawsuits, and take other such actions.

Is My Company Considered To Have A Separate Legal Identity?

Sole Proprietorship

Limited Partnership

LLC

No

No

Yes

 

Business Liability

A sole proprietor is responsible for all business debts and liabilities, as it is not a separate legal status. This means that the owner of a sole proprietorship has unlimited liability, including a lack of protections for personal assets.

A limited partnership’s business liability depends on the partners, and whether they are general or limited partners. Limited partners are not held responsible for business debts or wrongful acts of other partners, in most cases. However, general partners have unlimited personal liability.

For LLCs, the liability of members is limited. Their personal assets are protected, and their liability extends only to the amount of their investment in the company, making this the best way to protect personal assets.


How Much Liability Is My Company Exposed To?

Sole Proprietorship

Limited Partnership

LLC

Unlimited business liability

Limited partners: limited

General partners: unlimited

Limited business liability

 

Perpetuity & Succession

A sole proprietorship has no rights of perpetuity or succession. The company will cease to exist when the sole proprietor dies.

Limited partnerships, on the other hand, can be operated in perpetuity, because a member who dies can be replaced with another partner.

Similarly, LLCs may be operated in perpetuity. As separate business entities, LLCs continue to exist regardless of the death, loss, or resignation of directors or shareholders.


Can My Company Exist In Perpetuity?

Sole Proprietorship

Limited Partnership

LLC

No, the company ceases to exist upon death

Yes, partners can be replaced

Yes, the corporate entity exists on its own in perpetuity

 

Ease Of Expansion

A sole proprietor can expand, but its only source of capital will be the proprietor’s profits and personal finances. It is not possible to bring in another partner, or take on risk-free loans from any bank or financial institution, which can hinder business growth and expansion.

Limited partnerships can raise capital more effectively by taking on loans from partners, adding new partners to the company, or getting bank loans based on the assets of the partnership.

LLCs can raise capital the most easily, by selling shares to new shareholders or through the issuing of more shares to existing shareholders, facilitating rapid business expansion. LLCs also can secure bank loans more easily, compared to sole proprietorships and limited partnerships.

 
Is It Easy For My Company To Expand?

Sole Proprietorship

Limited Partnership

LLC

No. Finances are extremely limited, loans are difficult to acquire

Yes. Limited partnerships can acquire outside capital get loans more easily than sole proprietorships

Yes. LLCs can secure funding more quickly than either other business structure

 

Taxation

Hong Kong tax rates vary, based on the type of corporate entity established. In addition, Hong Kong taxes companies on a territorial basis – meaning that only the profits made in or derived from Hong Kong are taxed.

Additionally, there is no capital gains tax, no tax on interest or dividends, and no VAT or sales tax in Hong Kong, making taxation easy to understand.

Both partnerships and sole proprietorships are taxed at 15% of their total assessable profits. The only exception is if one of the members of a limited partnership is a corporate entity – in which case it will be taxed at 16.5%.

LLCs are all subject to the same, flat tax rate of 16.5%.

 

What Is The Tax Rate For My Company?

Sole Proprietorship

Limited Partnership

LLC

15%

15%.

16.5% if a partner is a corporate entity

16.5%

 

Transfer Of Ownership

Both limited partnerships and sole proprietorships cannot be sold or transferred to anyone else as a whole – but only by the sale of individual business assets.

In contrast, LLCs can easily transfer ownership by selling part or all of the shares of the company, or issuing new shares to additional investors. The process is simple and does not impact business operations.

 

Can I Easily Transfer Ownership Of My Company?

Sole Proprietorship

Limited Partnership

LLC

No, but business assets may be sold individually

No, but business assets may be sold individually

Yes, through the sale, transfer, or issue of shares

 

Public Perception

Sole proprietorships do not have a good public perception, since only a single person is responsible for all business deals. This means it will be difficult to raise capital, and attract executives who would prefer to own a share of the business.

Similarly, limited partnerships do not have a very high standing in the eyes of the public, compared to LLCs, but they are perceived more positively than sole proprietorships.

Because the business structure of an LLC is permanent, separate from individuals, and legally distinct, it is perceived more positively by the public – including prospective employees, vendors, and business partners. This public perceptions makes it easier to conduct business transactions, and allows the company to grow.

 

How Will My Business Be Perceived By The Public?

Sole Proprietorship

Limited Partnership

LLC

The business may be seen as risky and it may be hard to attract corporate partners

Public perception is better than sole proprietorships, but still limited, compared to LLCs

LLCs enjoy permanence and a higher regard from the public and prospective business partners

 

Dissolution

The owner of a sole proprietorships business can cease operations at all time, with no legal formalities beyond notifying the Inland Revenue Service when the business ceases operations.

Both Limited Partnerships and LLCs, however, must go through a more costly, time-consuming, and difficult operation to dissolve and close the company.

 

Is It Easy To Dissolve My Company And Cease Operations?

Sole Proprietorship

Limited Partnership

LLC

Yes. There are no legal formalities required.

No. The process is complex and expensive, with many legal formalities

No. The process is complex and expensive, with many legal formalities

 

What Should I Choose?

When comparing the pros and cons of these three business entities, LLCs are typically the best choice for entrepreneurs. While somewhat more complex to set up, they are the easiest to manage, offer a number of benefits like separate legal liability and better public perception, and allow you to quickly raise capital through issuing shares.

For these reasons and many more, setting up an LLC is often the best choice when conducting business in Hong Kong. Learn more, and begin setting up your own Hong Kong LLC right away.


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