FORMATION OF COMPANY
The first and most important step in starting a business is to decide on an appropriate business structure. It is important to weigh the pros and cons of each business company against your business goals, in order to choose the right structure and steer away from the wrong one.
- Private Company Limited by Share
- Public Company Limited by Share
- Public Company Limited by Guarantee
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Foreign Company Office
Private Company Limited by Share
Most small to medium sized companies in Hong Kong are set up as ‘private companies limited by shares’ and are commonly referred to as ‘private limited companies’. It is often chosen over other forms of business entities like sole proprietorships and partnerships owing to its many benefits. A company limited by shares is the most common type of company for conducting business and trade. A company limited by shares has a share capital which is divided into a number of shares of certain value each. These shares are held by shareholders (investors) who are entitled to a share in the profits of the company and receive a dividend corresponding to their respective percentage of shareholding in the company. In case of a loss, the shareholders will lose their investment in the shares of the company.
Public Company Limited by Share
A public company limited by shares is a locally incorporated company in which the number of shareholders can be more than 50. A public company is one where shares and debentures are offered to the public. Usually, medium to large private companies who have achieved significant growth in the industry decide to take the company public, by expanding their shareholder base. Most public companies are listed on a stock exchange. Public/listed companies are subject to stringent rules and regulations, as they raise capital from the public. The advantages of a public company are easy access to capital, strong public perception and ease of implementing mergers and acquisitions. The disadvantages include: public disclosure requirements; time consuming, complex and expensive to establish and operate; risk of takeovers; sharing of profits and ongoing statutory compliance.
Public Company Limited by Guarantee
A company limited by guarantee has no share capital. It has members, rather than shareholders, who guarantee/undertake to contribute a predetermined sum to the liabilities of the company which becomes due in the event of the company being wound up. The advantages are that the members enjoy limited liability and retain democratic control over all matters. The disadvantages are that profits cannot be distributed and there may be a lack of working capital. This form of business entity is meant for non-profit organizations, that are interested in Hong Kong incorporation.
Foreign Company Office
Foreign/overseas companies who wish to establish a business presence in Hong Kong.
Sole proprietorship is considered the easiest and simplest form of business. As the name suggests, the business is owned and operated by a sole person and since the business is not a separate legal entity, the owner and the business are considered one. Although this is the simplest form of business it is often considered as the riskiest as there is no protection of personal assets from risks and liabilities that arise from the business. While the sole proprietor accrues all the profits from the business, he is equally responsible (solely and personally) for all the liabilities. This poses a tremendous financial risk and aspiring entrepreneurs are strongly discouraged from adopting this form of business. It is relatively simple and easy to register a sole proprietorship in Hong Kong.
Partnerships are defined as businesses that are established and co-owned by two or more people who join together to carry on the business with a view of sharing profits. Partnerships in Hong Kong are governed by the Partnership Ordinance and are of two types: General Partnership and Limited Partnership.
Similar to sole proprietorships, general partnerships make every partner in the firm personally liable for the debts and liabilities of the business. Additionally, each partner can be held responsible for the actions of another partner (as long as these acts were done in the course of the partnership business).
Limited Partnerships constitute both general and limited partners. A general partner has unlimited liability for the firm’s debts and is responsible for the day-to-day running of the business, while limited partners’ liability is limited to the amount of their unpaid share capital. Limited partners cannot participate in the management of the partnership.
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