Last time on Understanding Unlimited Companies, we shared some important information on unlimited companies. Since then, readers have been contacting us for information on limited companies and their characteristics. That’s why we are here to share more and let you better understand the difference between limited and unlimited companies, so as to start your career as a boss or a director as soon as possible.
Characteristics of Limited Companies
Limited companies are legally regarded as single entities with legal personalities, which allows them to exercise specific rights and assume legal obligations. The director of a limited company can sign contracts, litigate, own assets and borrow in the name of the company.
Advantages of Limited Companies
- No liability in bankruptcy – As mentioned in the characteristics, a limited company qualifies as a legal person, so the shareholders’ responsibility for the company is very limited (limited to the amount of shares). For example, if a limited company owes a large amount of money, even if creditors apply for liquidation, shareholders do not need to pay off the debts in question for the company.
- Limited companies have greater recognition – In Hong Kong’s commercial society, limited companies have greater recognition than unlimited companies, because unlimited companies provide guarantees in personal capacity, and there are fewer documents that can prove credibility and financial background. On the other hand, in addition to providing financial statements, a limited company can also provide audit reports as relevant proof. Therefore, when signing a major contract, most will choose to do it with a limited company.
Disadvantages of Limited Companies
As limited companies are regarded as legal persons, in order to protect other stakeholders, related restrictions will also be relatively high.
- Low personal data protection – under current Hong Kong laws, the public has the right to access the personal data of shareholders, directors and secretaries of a limited company.
- Relatively high operating costs – limited companies are regulated by the Companies Ordinance, so operating costs will be higher. For example, limited companies must appoint independent auditors to review accounts every year, as well as pay annual filing fees and other necessary expenses.
- Relatively high tax rate – the tax rate is 8.25% for the first HKD 2 million adjusted profit before tax of limited companies, and 16.5% for amounts exceeding the first HKD 2 million, which is slightly higher than that of an unlimited company (7.5% for the first HKD 2 million adjusted profit before tax, and 15% for amounts exceeding the first HKD 2 million).
Who can establish a limited company?
The application criteria and methods for limited companies are relatively simple and convenient, regardless of whether you are a foreigner or not. As long as you are 18 or above, you are eligible to establish a limited company in Hong Kong.
Structure of Registered Limited Companies
Establishing a limited company requires:
- (At least) one shareholder;
- (At least) one director; and
- One company secretary
At the same time, an address in Hong Kong is required as the registered address. The registered address can be any address in Hong Kong (Note: a post office box is not a Hong Kong address), so even a residential address can be used as the registered address of a limited company. (It will be more difficult to set up a company bank account with a residential address as the company’s registered address. We will share more about that in the future.)
Registration Procedures for Limited Companies
- First and foremost, you will have to think of a company name. However, there are a few points you must pay attention to, otherwise your money and time will go to waste.
- Chinese or English name – You can just register with either a Traditional Chinese or English company name, or you can register with both;
- Regulations on naming – The last word of an English company name has to be “Limited”, while the last four characters of a Traditional Chinese company name has to be「有限公司」;
- Avoid matching company names – No two companies registered in Hong Kong are allowed to have the same name. If you want to know whether the company name you’ve thought of has already been registered, you can use the Cyber Search Centre of the Integrated Companies Registry Information System (ICRIS) to find out (see Note 1 for ICRIS website);
- Avoid using the following words: “department”, “government”, “commission”, “bureau”, “federation”, “council”, “authority”, etc.
- After confirming the company name, the following documents have to be prepared:
- Incorporation Form (NNC1) – Form is downloadable from the Companies Registry website (refer to Note 2 for form and specimen). Fill in the proposed company name, proposed company registered address, proposed share allocation, as well as proposed shareholders, directors and company secretaries in Form NNC1.
- Articles of Association – A sample of the Articles of Association can be downloaded from the Companies Registry website (see Note 3 for sample). We suggest that the Articles of Association be as simple as possible, because the more complicated the Articles of Association, the more hindrance the company will face in operation. Yet, if the structure of a company is relatively complicated, it is worth putting in some thought to protect the beneficiaries and stakeholders.
- Notice to Business Registration Office (IRBR1) – The period for choosing to apply for a Business Registration certificate is either 1 year or 3 years (ticking “no” indicates the choice of 1 year, ticking “yes” indicates the choice of 3 years. It is generally recommended to choose the one year option, as the government sometimes exempts business registration certification fees, so applicants may have to endure a lengthy period of time and difficult procedures required for the refund of paid fees.
- When all the aforementioned documents have been prepared, below methods can be used to apply for company establishment:
- Hard copy submission – Hard copies of documents can be handed in at the Shroff Counters on 14/F of Queensway Government Offices, along with HKD1,970 (company establishment fee of HKD1,720 and Business Registration application fee of HKD250). Most applications take 4 working days to be processed.
- Online submission – Applications can be submitted electronically through the e-Registry or CR Exchange mobile application of the Companies Registry. If you choose to use online submission, you must first register for an e-Registry individual user account. Generally, applications are processed on the same day.
- After completing the application, you will be able to collect the “Certificate of Incorporation” and “Business Registration Certificate”. The two certificates will be issued in the same format as your original delivery method. Specifically, if the application was submitted through hard copy documents, you will receive hard copy certificates, and vice versa.
A limited company provides more protection to shareholders, and the method of opening is not complicated, but the operating cost is relatively high, so it is more suitable for people who do enough homework or have certain mature considerations when operating as an unlimited company.
Pacers is a company that provides multifaceted and professional consulting services. We are eager to grow with our clients, so if you encounter any issues on business establishment, you’re welcome to contact us through our website or email at firstname.lastname@example.org.
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ICRIS Website: https://www.icris.cr.gov.hk/preDown.html
Form NNC1 Sample: https://www.cr.gov.hk/tc/companies_ordinance/docs/NNC1_Specimen-c.pdf
Articles of Association Sample: https://www.cr.gov.hk/tc/companies_ordinance/docs/ZAA_Sample_A.pdf