Before you register your startup, you’ll need to decide if you want to set up a limited company vs unlimited company. In this article, we’ll walk you through their differences and how the business registration process works!
When you begin your startup journey by registering your business, you’ll likely run into the question of whether you should set up a limited company vs an unlimited company. What’re the differences between them? How do I go about registering my business? We’ll answer these questions and more down below!
The most significant difference between a limited company and an unlimited company is liability. Taken literally, the owners of a limited company are subject to limited liability; and owners of an unlimited company have to bear unlimited liability. Other differences include the number of owners, legal status, tax issues, etc. We’ll go into more details below.
A limited company is a separate legal entity with an independent legal status which can use its own name to enter into contracts.
Because a limited company is independent, it also bears liability on its own, meaning that the liability of the shareholders is limited to the issued shares. In the event that the company liquidates, individual shareholders normally would not be affected. Put differently, shareholders do not need to repay the limited company’s debts with their personal assets.
Another feature of a limited company is that because it is a separate legal entity, it has perpetual continuity, meaning it can continue running even if the shareholders go bankrupt or pass away.
There is a tradeoff however, where the cost of accounting and auditing for a limited company is usually higher. This is because limited companies are legally required to be audited by a certified public accountant (CPA) and to submit an annual return to the Inland Revenue Department every year.
Unlimited companies, like sole proprietorships and partnerships, do not possess an independent legal status. Therefore, the companies cannot enter into contracts on their own, and instead must use the name of the associated sole proprietor or partner.
As a result, the sole proprietor and partners risk personal liability or even bankruptcy if the unlimited company folds.
In addition, unlimited companies do not have perpetual continuity, meaning that when the proprietor or partner undergoes bankruptcy or passes away, the company must be dissolved.
There is also a limitation in the number of owners. As the term suggests, there can only be a single owner in a sole proprietorship. Partnerships can have up to 20 owners.
Despite these downsides, there are certain advantages to unlimited companies.
The accounting and auditing cost is lower since the company is not required to be audited by a CPA, and owners only need to settle accounting and tax declarations annually.
Also, unlimited companies are subject to lower tax rates. Since Hong Kong follows two-tiered rates, unlimited companies are subject to 7.5% on assessable profits up to HK$2m, and 15% on any part of assessable profits over HK$2m.
Limited companies are subject to 8.25% on assessable profits up to HK$2m, and 16.5% on any part of assessable profits over HK$2m.
When comparing setting up a limited company vs. an unlimited company, it’s important to consider the size and nature of your business.
If your business involves high transaction volume and holds significant assets and debts, setting up a limited company is better to limit your personal liability.
However, if your business is small in scale, you may consider setting up an unlimited company to save costs and time.
The business registration process for a limited company and an unlimited company is also different, where setting up an unlimited company is easier compared to registering a limited company.
To set up an unlimited company, you’ll first need to give your company a unique name, then fill in Form 1(a) for a sole proprietorship or Form 1(c) for a partnership business and submit the form to the Inland Revenue Department. You can apply in person or via the IRD website. For more details, you can visit the IRD website here. You’ll need to pay the same business registration fee and levy as setting up a limited company which we’ll elaborate on below.
To incorporate a limited company, you’ll need to submit your application to the Companies Registry instead of the IRD. There are two major steps to setting up a limited company:
You can use English or Traditional Chinese as your company name, and the name must be different from other existing companies. You can perform a company name search for free on the ICRIS by the Companies Registry.
You can apply with the following required documents to the Companies Registry online (via e-Registry), in person, or by mail to the Shroff on the 14th floor of the Queensway Government Offices.
When applying, you’ll have to pay the following fees.
Setting up an unlimited company can take only a few hours if you submit the application in person at the IRD. If you apply for it online, how long it takes to get approved depends on the number of applications the IRD is processing at that time. It can take from several business days up to a few weeks. You’ll receive a business registration certificate upon successful application.
It usually takes 5 to 7 working days for limited companies to get the company application processed and incorporated. Note that electronic certificates will normally be issued within 1 hour upon successful online application. The hard-copy certificate will normally be issued within 4 working days for applications delivered in hard copy. Therefore, consider submitting the application online if you want to set up a limited company as quickly as possible.
Yes, you can convert an unlimited company into a limited company by applying for the incorporation of a limited company to the Companies Registry. You can visit the Companies Registry page here.
Yes! According to the Companies Ordinance, both Hong Kong residents and non-Hong Kong residents can set up a limited company in Hong Kong, but the registered office must be located in Hong Kong.
Whether you want to set up a limited company or an unlimited company, if you don’t want to deal with the procedures and administrative process, Binery can help! Check our company incorporation service here.