1. Limited Company

1.1 Introduction

A limited liability company is the most common form of business entity in Hong Kong. The vast majority are private companies. A private company is a company which, by the terms of its constitution, (i) restricts the right to transfer its shares, (ii) limits the number of its shareholders to 50 and (iii) prohibits any invitation to the public to subscribe for its shares. All other companies limited by shares are public companies. It is a simple matter to convert a private company to a public company by altering its constitution so that the conditions for private company status are no longer met. This will occur when a company offers its shares to the public.

1.2 Incorporation

The first step in the incorporation procedure is to prepare the company's constitution, comprising its Memorandum of Association (which states its business objects) and its Articles of Association (which contain its internal regulations constituting a contract between the shareholders and the company) and to choose a company name. A company name cannot be reserved in advance but the current register at the Companies Registry can be checked to see whether or not a name is already being used. Once the constitutional documents have been prepared, they are submitted to the Companies Registry. After a week to ten days, the Registrar will issue a Certificate of Incorporation and the company will have been incorporated. Its legal existence will commence from the date of the certificate of incorporation. Johnson Stokes & Master keeps a stock of shelf companies available for immediate use by clients.

1.3 Share Capital

A company's share capital can be denominated in any currency but any subsequent change in that currency requires the consent of the Supreme Court of Hong Kong and, accordingly, involves somewhat complex legal proceedings. The currency of a company's share capital is distinct from and need not be the same as the currency in which its books of account are maintained. Its accounting currency is a matter for its directors to determine. There is no prescribed minimum or maximum share capital but authorised share capital attracts a Companies Registry fee at the rate of HK$6 per HK$1,000 capital (often referred to as capital duty) but there is no such fee on the issue of shares. Because of the expense of capital duty, working capital is often provided by way of shareholders' loans rather than paid-up share capital. Recently introduced legislation allows a Hong Kong company to buy back its own shares in some situations.

1.4 Shareholders

A company must have at least two registered shareholders whose names, addresses and shareholdings are filed on public record at the Companies Registry. However, a single person or corporation can, in effect, own a company by virtue of the other registered shareholder acting only as nominee. Shareholders can be natural persons or corporations of any nationality, domicile and residence. If a nominee shareholder is required, it ensures flexibility and easier continuity to use a corporation for that purpose.

1.5 Shares

Shares can be issued as ordinary shares or as preference or deferred shares with special rights attached to them as prescribed in the Articles of Association or as shares which are redeemable in accordance with the companies legislation. The shares of a Hong Kong company must have a stated par value.

A transfer of the beneficial ownership of shares attracts stamp duty at the rate of 0.3% of whichever is the higher of the value of the shares or the purchase price but inter-group transfers are exempt in some circumstances.

Dividends on shares can be paid to shareholders out of the company's available profits. There is no taxation on dividends and no exchange control restrictions in Hong Kong on the payment of dividends.

1.6 Directors

A company must have at least two directors but there is no legal maximum. Directors can be natural persons or corporations of any nationality, domicile and residence. The name, nationality, any former nationality, residential address and business title of each director must be filed on public record at the Companies Registry. There are no restrictions as to the place at which board meetings can be held. Modern Articles of Association will usually provide for written resolutions of directors as an alternative to holding board meetings and also for board meetings to be held by telephone link.

1.7 Company Secretary and Registered Office

A company must have a company secretary. The secretary must be either another Hong Kong company or an individual ordinarily resident in Hong Kong. The company secretary's function is to prepare the documents which have to be filed on public record and to maintain the company's statutory books comprising (i) a register of directors, shareholders and other corporate details, (ii) a minute book of minutes of directors' and shareholders' meetings and (iii) the share certificate book.

A company must have a registered office address in Hong Kong which serves as the company's legal address for the service of notices and proceedings. This can be the same as or separate from its business address.

A Business Registration Certificate is required by each Hong Kong company for its principal office in Hong Kong (the annual fee is presently HK$2,250) and also for any other business address in Hong Kong (the annual fee is presently HK$316). The Business Registration office is a division of the Inland Revenue Department and the issue of these certificates is a formality.

1.8 Accounts

A Hong Kong company must keep books of account which give a true and fair view of the state of its affairs and explain its transactions. Its accounts must be audited once every year and submitted to the Hong Kong Inland Revenue Department. The accounts of a private company are not published or filed on any public record in Hong Kong. The accounts of a public company must be filed at the Companies Registry.

1.9 Annual Filing Requirements

Apart from the regular filing requirements so as to update the particulars of a company on public record at the Companies Registry, a company is required to file an Annual Return which will show updated particulars as to the company's authorised and issued share capital, shareholders, directors and registered encumbrances.

1.10 After Incorporation

Johnson Stokes & Master can provide services as company secretary and registered office. There are service companies in Hong Kong which can provide nominee directors.

2. Branch Office

2.1 Introduction

It is permitted for a foreign corporation to establish a place of business in Hong Kong and this is customarily referred to as a Hong Kong branch. A foreign corporation which establishes a Hong Kong branch becomes subject, generally, to the same legal and tax consequences as a company which is incorporated in Hong Kong. As a matter of Hong Kong law, there is no distinction between the foreign corporation itself and its branch and the branch is only an address at which the corporation itself carries on business.

2.2 Formalities

In order for a foreign corporation to establish a Hong Kong branch, it will be necessary for it to be registered at the Hong Kong Companies Registry as an overseas company. This must be done within one month of the establishment of its place of business in Hong Kong although it is often possible to attend to this before the place of business is established. Registration is effected by submitting to the Companies Registry copies of the constitutional documents of the foreign corporation, a list of its directors and secretary, the particulars of a representative who is resident in Hong Kong and certain other prescribed particulars. Registration is usually effected about three weeks after the required documents and information are filed at the Companies Registry.

A foreign corporation will be required to file a copy of its annual accounts on public record at the Companies Registry if it is required, under the laws of the place where it is incorporated, to publish its accounts or to make them available for inspection on public record. In the case of a foreign corporation which has the same legal characteristics as a Hong Kong private company, this public filing requirement can usually be avoided.

A foreign corporation with a Hong Kong branch must also obtain a Business Registration Certificate in respect of its office address in Hong Kong and the fee is presently HK$2,250.

3. Sole Proprietorship/General Partnership

3.1 Sole Proprietorship

The only procedural step in establishing a sole proprietorship is to obtain a Business Registration Certificate.

A sole proprietorship is not a separate legal entity so that all its debts and liabilities are the personal responsibility of the sole proprietor.

3.2 Partnerships

As is the case with a sole proprietorship, the only procedural step in establishing a partnership is to obtain a Business Registration Certificate. With the exception of some professional partnerships, the maximum number of partners in a partnership is 20.

Partnerships are usually governed by a partnership agreement. There is also a Partnership Ordinance which codifies the law relating to partnerships. In the absence of an agreement, the Partnership Ordinance, which contains provisions regulating the rights and obligations of partners, is deemed to apply.

A partnership is not a separate legal entity nor does it have continual existence. The partners are personally liable for all of its debts and all of its property rights are vested in all of the partners.

4. Limited Partnership

4.1 Introduction

A limited partnership must consist of at least one or more general partners who are responsible for the management of, and are liable for all the debts and obligations of, the partnership and one or more limited partners who are liable for the debts or obligations of the partnership only up to the amount that they contribute to the capital of the partnership.

4.2 Formalities

A limited partnership must be registered with the Registrar of Companies, otherwise it will be deemed to be a general partnership. A limited partnership also requires a Business Registration Certificate in respect of each place at which it conducts business in Hong Kong.

4.3 Restrictions on Limited Partner

In order for a limited partner to have the benefit of limited liability, the limited partner must not take part in the management or control of the business of the limited partnership and must have no power to bind the limited partnership as its agent.

5. Representative Office

5.1 Introduction

Hong Kong law recognises the status of a foreign corporation whose activities in Hong Kong do not require it to be registered as a Hong Kong branch. In such a case, the appropriate status is as the local representative office of the foreign corporation.

A representative office must not transact in Hong Kong any business which creates legal obligations. However, there are some well-established exceptions, for example entering into the usual arrangements with utility companies, with landlords in respect of the lease of its office premises and with its employees. Since a representative office cannot conduct any business in Hong Kong creating legal obligations, its activities should be limited to acting in a liaison capacity between Hong Kong and the corporation's offices elsewhere and introducing Hong Kong customers to those offices.

5.2 Formalities

A foreign corporation which establishes a representative office in Hong Kong must obtain a Business Registration Certificate.

The Inland Revenue Department will usually accept a letter confirming that the status of the foreign corporation in Hong Kong is as a representative office and, on that basis, the Department will exempt the corporation from the necessity to submit tax returns. Since the corporation will not conduct any business in Hong Kong, it will not generate any profits within the scope of Hong Kong taxation.

NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor"