In Hong Kong, sole proprietorships and private limited companies exhibit both distinctions and similarities. Here, we’ll provide comprehensive insights into these entities to help you make an informed decision.
Definition
A sole proprietorship is an unincorporated business lacking legal personality, unlike a private limited company, which acquires its distinct legal personality upon incorporation with the Companies Registry.
A sole proprietorship is solely operated by one individual, the proprietor, with no provision for other investors to participate in the business. Conversely, a private limited company can accommodate up to 50 shareholders, allowing them to contribute to the company’s share capital.
While the sole-proprietor gets all the profits accruing from the business, he is wholly and personally liable for the debts incurred in the business and must take up all the risks inherent in the conduct of such activity.
In contrast, shareholders of a private limited company bear liability only up to the amount of their initial investments or contributions to the company
The main differences between a sole-proprietorship and a limited company are set out below:
| Sole-proprietor | Private limited company | |
| Legal personality | NO (unincorporated business) | YES (incorporated business) |
| Member | One= sole proprietor | Several=up to 50 shareholders |
| Liability | Unlimited & Personal | Limited liability |
Pros & Cons
Below is a table that sets out the pros and cons of a sole proprietorship:
| Advantages | Disadvantages |
| Easy to set up: the investor only needs to apply for a business licence within 1 month of the commencement of such business. No administrative formalities required with the Companies Registry (during and after the set up process) | Unlimited & personal liability = risky business as the sole proprietor is the only responsible person for all liabilities in the business. |
| Efficiency in the decision making process: a sole proprietor does not need to get approval from other business partners/investors | Losses: the sole proprietor must bear all the potential losses/failures of his business. |
| No profits sharing | Source of finance: the sole proprietor must contribute to the working capital all by himself (no other investors can invest into the business). This could be a potential financial limitation to start or expend the business. |
Taxation
Same general taxation principles apply for both sole-proprietorship and private limited companies in Hong Kong:
- Territorial source principle;
- No distinction between residents and non-residents;
- Only income which has a source in Hong Kong is taxable here; and
- Income sourced overseas, even if remitted to Hong Kong, is not charged to profits tax.
A sole-proprietorship carrying on a trade or business in Hong Kong is liable to profits tax at a rate of 15%.
In addition, the Inland Revenue (Amendment) (No. 7) Bill 2017 was gazetted on 29 December 2017, introducing a new 2-tiered profits tax regime.
The first 2 million HKD of profits will be taxed at half of the current tax rate (i.e. 7.5%), while the remaining profits thereafter will be taxed at the existing 15%.
Below is a comparative table between a sole proprietorship and a private limited company (from a profit tax perspective):
| Tax rate | ||
| Assessable profits | Corporations (private limited company) | Unincorporated businesses (including sole-proprietorship) |
| First 2 million HKD | 8,25% | 7,5% |
| Above 2 million HKD | 16,5% | 15% |
Accounting & Business Records
A sole proprietor is not required to prepare audited accounts, whereas all private limited companies incorporated in Hong Kong have the statutory obligation to prepare audited accounts.
However, a sole proprietor is required to maintain comprehensive records of income and expenditures to evaluate taxable profits. These records typically encompass sales records, purchase and expense documentation, bank statements, asset records, and cash transactions.
For both sole proprietorships and private limited companies, business records must be kept for a minimum period of 7 years after the date of the transaction to which they related.
| Sole-proprietor | Private limited company | |
| Audited accounts | NO | YES |
| Business Records | YES | YES |
Statutory Returns
| Sole-proprietor | Private limited company | |
| Profits Tax return | YES | YES |
| Employment return | YES | YES |
| Annual Return | NO (but the sole trade will need to notify the IRD of any change of business registration particulars) | YES |
