Hong Kong

Company

Incorporation

Handbook

Everything you need to know

Zegal.com © 2021

1

Table of Contents

Introduction

3

The first step of starting a business: Form a company

4

Most common business types

6

Why a limited liability company

8

How a limited liability company works

12

Directors

14

Shareholders

16

Company Secretary

19

Articles of Association

20

Why you should incorporate early

22

How to incorporate in Hong Kong

24

Incorporating a non-Hong Kong company?

29

After incorporation

31

Annual filing

32

Corporate Tax

33

Open a corporate bank account

34

Apply for the relevant licenses & permits

35

Accounting

35

Annual General Meeting

36

2

Fulfil your obligations under the MPF system

36

Access funds & resources for smal businesses

37

About Zegal

38

3

Introduction

Hong Kong continues to maintain its edge in international rankings for ease of doing business. Government support for startups also remains strong. In 2019, the government injected HKD5 bil ion into the Innovation and Technology Fund (ITF) and announced a HKD2

bil ion Innovation and Technology Venture Fund to encourage private venture funds

to invest in startups through a matching

process, coupled with a 20% growth in the number of startups into 2020. So, if you’ve decided to set up shop in the Fragrant Harbour, you’ll need to know how to go about it.

You often hear people talking about setting up a company, and the word “limited” after a business name comes as no surprise, but what is a company, why do people create companies, and how do you do it?

This is an introduction to limited liability companies in Hong Kong, what it means, how you create one, and some of the advantages of a limited liability company over other business structures.

4

The first step of starting a

business: Form a company

The first step in starting a business is to decide on a business structure. Your choice of a particular type of business vehicle will depend on your particular situation and plans.

Factors such as whether you intend to carry on business activities for profit or wanting to raise capital

through external investment

influence your decision regarding your choice of a business entity.

Your choice of a certain business structure will depend on the following factors:

• What is the nature and purpose of your business?

• What is the size and scope of your business?

• What is the extent of your personal liability in choosing a particular business vehicle?

• How much money is required for

starting your business?

Can you raise capital on your own or do you need outside

investors?

• Can your business attract outside investors?

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• What are the start-up procedures, costs, timeline, and other requirements? • What are the tax implications in choosing a particular business structure? • What are your current and future business needs?

• What is the extent of control you wish to have over your business? • Does your business involve risks?

6

Most common business types

Limited Liability

Sole

Partnership

Company

Proprietorship

Limited Liability Company

The most common business vehicle in Hong Kong is a limited liability company. A limited liability company offers protection of personal assets from business risks and liabilities and is a separate

legal

entity. Compliance

requirements

and

increased formalities are slightly more complex than other business structures.

Sole Proprietorship

Suitable for small scale and low risk businesses with a sole owner and this structure is easy to set

up. However, this is

not a recommended business structure for entrepreneurs as

it does not constitute a separate legal entity.

Partnership

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This business structure allows two or more people to share ownership of a single business. Partnerships enable a

sharing of responsibility with partners jointly and individual y liable for the actions of the other partners. The most common form of partnership is a limited partnership, as it offers limited liability to limited partners.

However, this is not commonly

used.

8

Why a limited liability company

A limited liability company is the most

popular choice of business

structure as, unlike sole proprietorship and partnership, the separate legal entity al ows owners of the business to avoid personal liability and risk.

Advantages

• Separate legal entity

A limited liability company has a legal

identity of its

own, distinct from its shareholders. This enables the

company to acquire assets,

go into debt, enter into

contracts, or sue or be sued in its own name.

• Limited liability

The liability

of the shareholders is limited to the

amount of their respective shareholdings/investment.

• Perpetual succession

A change of membership does not affect the

company’s continued existence. Shares can be easily

transferred and changes

in shareholders have no

bearing on the business operations of

the company.

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This means the company has perpetual

succession

notwithstanding the death, resignation, or insolvency

of shareholders OR directors.

• Ease of raising money

Business expansion is facilitated by the ease of raising

finances, by bringing in new shareholders or

issuing

more shares to existing shareholders.

It is easier for

limited liability companies to secure bank loans when

compared to other business entity types.

• Positive image

Limited liability companies are taken more seriously

when

compared

to

sole

proprietorships

and

partnerships, and investors are more wil ing to

contribute their resources to limited liability companies.

• Easier transfer of ownership

Complete or partial transfer of ownership of companies

can be done by sel ing all or part of its total shares or

through the issue of new shares

to additional

investors.

Business

operations

can

continue

10

unaffected

and

legal

documentation

is

not

complicated.

• Tax benefits and incentives

There are several

tax benefits that private limited

liabilities companies enjoy.

Disadvantages

• Complex to set-up

A limited liability

company is general y considered

more complex and expensive to establish when

compared to sole proprietorships. However, you can

enlist the help of a service, like Zegal.

• Ongoing compliance

There are a number of statutory compliance

requirements that private limited liability companies

must adhere to.

• Disclosure requirements

A company has to make certain information available

(capital structure, particulars of shareholders, directors 11

and secretary etc.) to the public by filing returns with

the Companies Registry.

• Complex winding up procedures

Closing a company is more complex, time consuming,

and expensive when compared to other

business

entities.

12

How a limited liability

company works

A limited company has a separate legal personality – it is a separate

“person” in the eyes of

law, and separate from its owners (the

shareholders) and the people who run the business (the directors).

The company’s legal status allows it to do any of the following:

• Enter into contracts in its own name;

• Take legal action and be sued in its own name;

• Exist perpetually independent of its shareholders -

the

company continues to exist even on the death of its

shareholders;

• Own its own property and assets; and

• Create security for loans for its creditors i.e. the creditor might receive a charge over the assets of the company.

The directors and shareholders are responsible for what the company does, as their actions constitute the company’s actions.

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The extent

of power that the directors

and shareholders can

exercise is defined by company law in general

and the company’s

Articles of Association (its constitution).

The task of managing the company rests with the board of directors who make policy and management

decisions. Certain directors’

decisions are then agreed to by shareholders who are entitled to vote their agreement (or dissent) at a general

meeting. The

shareholders’ voting rights are defined by the Articles of Association of the company.

> Key takeaways of a limited liability company

Legal personality

Ownership

A limited liability company is

A limited liability company can

seen as a legal person in the

own its own property and

eyes of the law.

assets.

Sue or be sued

Board of directors

Legal action directly involves

Manages the company through

the company.

policy and management

decisions.

14

Directors

A limited liability company in Hong Kong must

have at least one

director. This can be a person or another company,

and can be a

local or non-local, and an individual must be above 18 years of age.

Directors have to perform a supervisory and

managerial role in the company. The extent

of

the

directors’

involvement

in

the

day-to-day business operations wil vary, but

al directors, irrespective of the company

size, must retain effective control

of the

company and ensure that it is legal y

compliant at al times.

Directors must have a good working knowledge of all aspects of the company and must

participate in corporate planning,

financial

decision making, and other strategic planning of the company.

Additionally, directors have statutory duties to perform as well as a duty of loyalty and good faith (a fiduciary duty) to the company and shareholders.

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Directors’ duties include the following:

1. Duty to act in good faith for the benefit of the company as a whole.

2. Duty to use powers for a proper purpose for the benefit of shareholders as a whole.

3. Duty not to delegate powers except with proper

authorisation and duty to exercise independent judgement.

4. Duty to exercise care, skil , and diligence.

5. Duty to avoid conflicts between personal

interests and

interests of the company.

6. Duty not to enter into transactions in which the directors have an interest, except in compliance with the requirements of the law.

7. Duty not to gain advantage from the use of

position as

“director”.

8. Duty not to make unauthorised use of company’s property or information.

9. Duty not to accept personal benefit from third parties.

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10. Duty to observe the company’s Articles of Association.

11. Duty to keep proper books of account.

Create a Director’s Service Agreement: Start a free trial.

Shareholders

A limited liability company must

have at

least one shareholder which can be a

person or company corporate; local or

foreigner; above 18 years

of age. The

maximum number of shareholders is 50.

Above 50 and it

becomes known as a

public company. Shareholders are also

sometimes referred to as members.

Shareholders make a financial investment in the company by buying shares in the company.

They own a part

of the company in

proportion to the shares they own.

In the event of the company

making a profit, shareholders are entitled to the profits by way of dividends.

17

Usually, shareholders are not directly involved in the management of the company. In a way, the board of directors runs the company on behalf of the shareholders, to whom it is accountable.

Shareholders are entitled to the following rights:

• Right to vote

This includes voting for the appointment or removal of

directors and auditors.

• Right to dividends

A company’s profits can either

be reinvested in the

company to increase its value or paid out as dividends.

If the profits are paid out as dividends, shareholders

are entitled to receive a share.

• Right to own a portion of the assets if the company is liquidated

Retention for shareholders

• Right to receive information about the company

This helps to prevent the company’s managers from

acting to the detriment of the shareholders. In addition,

18

the ability to obtain information can be important

for

shareholders in deciding whether to take action

against them.

• Right to propose shareholder resolutions

Ability to submit

non-binding recommendations for

voting by the board of directors at an annual meeting.

> Shareholders-related documents on zegal.com

Board Minutes to

Power of Attorney

Shareholder’s

Issue Shares

for a Shareholder

Agreement

at an AGM

Minutes of a

An arrangement

meeting of the

A power of attorney

between a

board of directors

for the exercise of a

company’s

that record the

shareholder’s rights

shareholders that

process of al otting

at an annual general

describes their

and issuing shares. meeting.

rights and

obligations and how

the company should

be operated.

Create a Shareholders’ Agreement. Start a free trial

19

Company Secretary

A limited liability company must have

a company secretary. The company

secretary can be an individual (local

resident of Hong Kong) or a separate

company, often one that

provides

company related services.

A third

party Company Secretary needs to be properly licensed.

The company secretary is a key officer in any company discharging their duties as per the law. The majority of documents that pass a board of directors will need to go through the company secretary.

The duty of company secretary cannot overlap with the position of sole shareholder or director.

The company secretary is responsible for:

• Arranging meetings;

• Taking down minutes of the meetings;

• Maintaining the company’s statutory books;

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• Filing necessary documents, such as annual returns with

the Companies Registry;

• Ensuring that the company’s statutory compliance is met

with; and registering share transfers

The Zegal Professional Plan includes free company secretarial support for your company. Start a free trial.

Articles of Association

A company’s Articles of Association are its lawful Constitution by regulating the internal relations between the shareholders themselves and between the company and its shareholders.

The Articles prescribe the rules for running of the company’s internal affairs. The Articles usually state:

• Rules concerning the holding of meetings

• The process for appointment of directors

• The relationship, rights, duties, and responsibilities

of

shareholders

21

> What makes up a limited liability company?

Directors

Shareholders

A company must at least have

A company must at least have

one.

one.

Company Secretary

Articles of Association

The principal administrator of a

The lawful constitution of a

company.

company.

22

Why you should incorporate

early

If you choose to incorporate a limited

liability company, when should you do

it? If you’ve already considered the

factors above and made a decision to

create a limited liability company, then

there are certain advantages to

incorporating as early as you possibly

can. If you have co-founders,

then

you can agree and set out the

structure of the company’s ownership

before too much work has been done.

A loose arrangement between friends with the idea of a company structure may not offer the stability and reassurance that shareholdings, a board of

directors, and a nominated company

secretary can offer.

As mentioned above, raising capital can be easier if you have a company in place. For example, it might be easier to secure a bank loan with a limited liability company.

23

The founders are protected from personal liability from “day one” –

i.e. from the earliest possible stage of the business.

You can start being compliant and demonstrating an audit trail of

“good practice” from an early stage.

Very useful for impressing

future investors!

By ensuring you have the right

employment and consultancy

agreements in place, you can make sure that the company (not you or any other individual) owns the intellectual property. The IP is a vital and a valuable business asset, and it should be protected by inclusion as a company asset.

Of course, deciding when to incorporate may depend on other strategic factors, such as when you can get

the right people on

board or when your market research is complete.

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How to incorporate in Hong

Kong

You can incorporate your company for free when you subscribe to the Zegal Professional Plan.

Zegal: FREE COMPANY INCORPORATION

Once you have decided to incorporate a limited liability company and have chosen a company name, you can apply for incorporation with the Hong Kong Companies Registry (“CR”).

For a successful application, company names need to be approved prior to incorporation.

When incorporating with Zegal, chosen company names are checked for eligibility.

Overview of minimum requirements to set

up a Hong Kong

private company:

Shareholders

Minimum of one and maximum 50

Director

25

Minimum of one

Company Secretary

Must be based in Hong Kong

Registered office address

Must be a physical address in Hong Kong

Share Capital

There is no share capital requirement for Hong Kong

To simplify the process of setting up a limited liability company, any application for company incorporation includes a simultaneous application for business registration.

You may submit applications for incorporation of local companies online at the 24- hour portal e-Registry or deliver the fol owing documents in hard copy form to the Companies Registry with the correct fees.

The Hong Kong Companies Ordinance has undergone a recent

amendment in 2018 and has since streamlined the process of incorporation in Hong Kong.

The entire process to incorporate in

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Hong Kong wil take around 5 to 7 days (subjected to the completion of the required documents).

However, with Zegal, we streamline and work on the process for you, cutting down company incorporation time to just 24 hours, with the need to sign the required Directors’ Consent and personally file to the Companies Registry within 15 days.

Application for incorporation must include:

● Incorporation Form (Form NNC1 for

company limited by

shares)

● A copy of the company’s Articles of Association

● A Notice to Business Registration Office (IRBR1)

The fees for incorporating a company limited by shares are:

• Company Registration fee (including levy): HKD 1,770 -

if unsuccessful, an application for a refund of HKD 1,425 may be made

• Business registration fee:

HKD 250 for

a one-year

certificate (currently discounted from HKD 2,250); HKD 3,950

for a three-year certificate

Online applications at the e-Registry portal for company

incorporation and business registration can normal y be processed 27

within one hour. If you deliver your application in hard copy form at the Queensway Government Offices , the Certificate of Incorporation and Business Registration Certificate wil normal y be issued within four working days.

All the following information is required to incorporate in Hong Kong:

• about the company (registered office address, email

address, phone number); • about the shares (number

of

shares, value of each shares, classes of shares); • about the company (name, registered address, currency, class of

shares, and rights attached);

• about the shareholder(s) (name, address, share capital

subscribed); • about the director(s) (name, address, email address, HKID number

or passport number, company

number); and

• about the company secretary (name, address, email

address, the HKID number or passport number, company

number).

Keep in mind that due to Hong Kong company law information on company directors, company secretaries, and shareholders is public 28

information. Company details are filed with the Hong Kong Company Registrar.

Physical presence is not necessary when incorporating in Hong Kong, but may be needed when opening a bank account.

29

Incorporating a non-Hong

Kong company?

A non-Hong Kong company

is a company that

is incorporated

outside of Hong Kong but it has an established place of business in Hong Kong. It is compulsory to apply for registration as a non-Hong Kong company within a month of

its establishment as a place of

business in Hong Kong.

Documents required for

submission: (either electronically or in

hardcopy)

● Form NN1

● A certified copy of

the instrument defining the company’s

constitution (e.g. charter, statutes or memorandum & articles of association)

● A certified copy of the company’s latest published accounts

● A Notice to Business Registration Office (Form IRBR2)

The approval upon submission of the correct and completed forms along with the registration fees will

take approximately 10 working

days.

Upon filing these documents and successful

approval, you wil be

issued a Certificate of Incorporation (or the Certificate of 30

Registration

of

Non-Hong

Kong

Company)

and

Business

Registration Certificate in electronic form for online applications and in hard copy for hard copy applications.

Electronic Certificates will

typical y be issued within one hour after submission of

documents

while it may take several days for applications submitted in hard copy form.

31

After incorporation

Once the company

has been incorporated, within a month of

commencing business, the business must be registered with the Business Registration Office of the Inland Revenue Department. It is compulsory to display the Business Registration Certificate at the

place of business.

Hong Kong al ows

for a simultaneous application for business

registrations

together

with

the

application

for

company

incorporations.

The additional business registration fee of

HKD$2,000 (1-year certificate) or HKD$2,500 (3-year certificate) must be made together with these documents:

● A Notice to Business Registration Office (IRBR1)

● Levy to the Protection of Wages on Insolvency Fund (1-year Certificate, HKD$250 or 3-year Certificate, HKD$750)

If the simultaneous business registration is done electronically, it

would take an hour or 4 working days for hard copies.

If it is a separate business registration, it can only be done in hard copy and it would take 30 minutes in person or 2 working days by post.

32

Annual filing

Al

Hong Kong-based companies must meet annual filing

requirements with the Inland Revenue Department (IRD) and

Companies Registry, once every calendar year.

Your company will need to comply with annual filing requirements and deadlines administered by the Companies Registry and the Inland Revenue Department (IRD). This may include the following:

● An Annual Return filed with the Companies Registry once, every calendar year (except in the year of incorporation);

● Additional statutory documents in addition to the Annual Returns, as required under the Companies Ordinance (CO).

The filing requirements vary depending on whether you are a Local Limited Company or

a Registered Non-Hong Kong

Company.

33

Corporate Tax

Hong Kong requires corporate tax filing depending on the end of a company’s financial year.

Financial year ended

Filing due date

Between 1 January – 31 March

15 November of the calendar

year in which the financial year

ended

Between

1

April

and

30 2 May of the calendar year in

November

which the financial year ended

Between 1 December

and 31

15 August of the calendar year

December

in which the financial year

ended

Check out the Profits Tax section on the GovHK website for more information.

FURTHER READING: The Guide to Hong Kong Corporate Tax Rate 34

Open a corporate bank account

Before heading down to a bank to open a corporate bank account, make sure that you prepare the fol owing:-

● Al the documents required by the bank’s application form, including certification by either a certified, public accountant, company secretary, lawyer or banker;

● Initial minimum deposits (required by most

banks in Hong

Kong in order to open a bank account);

● Any other requirements for foreign companies (check with the bank accordingly).

Due to strict due diligence procedures, almost al banks in Hong Kong wil require the physical presence of the account signatories, principle directors and shareholders at the time of opening the bank account. However, this requirement may be exempted in some cases and the documents can be signed at

one of the bank’s

overseas branches in the presence of a witness should a key party not be able to be present.

35

Apply for the relevant licenses & permits

In order to commence business operations in Hong Kong, you may require particular government licenses, permits, certificates or approvals. To determine which licenses and permits apply to your business, check out the fol owing useful resources:

● Licensing & Permits section of GovHK and Business License Information Service. This is where to go for

information on

government licenses, permits, certificates and approvals

relevant to business operations in Hong Kong.

● Online License Services. If you have already submitted a license application, you can track the status of your

application on this site.

Accounting

The Hong Kong Institute of Certified Public Accountants (HKICPA) issues official standards relating to accounting and auditing practices. The Hong Kong law requires all Hong Kong-incorporated companies to prepare audited financial

statements. Al private

companies must keep and maintain proper

books of account.

Companies must also file annual returns specifying directors, members and the location of a registered office.

36

Annual General Meeting

Al companies must convene its annual general meeting in respect of each financial year of the company, as opposed to every calendar year.

Fulfil your obligations under the MPF

system

As a business employing staff,

whether full-time or part-time, you

must enrol your employees aged 18 to below 65 in a Mandatory Provident Fund (MPF) scheme. You may select from one of the schemes under the MPF system and should consider factors such as the types of constituent funds available and the fees and charges payable under the scheme. For more information, check out the Employers’ Handbook on MPF Obligations by the MPF Schemes

Authority (MPFA).

37

Access funds & resources

for small

businesses

Seek advice on startup issues as well

as grants available to your

small business by the Hong Kong government. Some resources for picking up information relevant

to smal businesses include the

following:

● InvestHK which works with foreign entrepreneurs, SMEs and multinationals looking to set

up an office or

expand their

existing business

in Hong Kong offers

free advice and

services to support companies.

● HKTDC SME Start-up Programme which provides supporting

services for the stages in your

startup roadmap, including

operational management and sales promotion.

38

About Zegal

Zegal is a contract automation platform that enables your business to create, collaborate and execute contracts at

scale. Unlimited

eSignatures, thousands of business agreements, al online.

Hong Kong

+852 5801 9997

sales@zegal.com

Singapore

+65 6589 8923

sales@zegal.com

Australia

+61 2 9191 9738

sales@zegal.com

New Zealand

+64 9951 5840

sales@zegal.com

United Kingdom

+44 20 3393 3885 sales@zegal.com

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