LLC Private Limited Company vs Sole Proprietorship

by Cheap Incorporation | October 31, 2023

Many people often get confused with LLCs (Limited Liability Company) and sole proprietorships. In order to incorporate a sole proprietorship in Hong Kong, you must either be a Hong Kong permanent resident or hold a business visa if you are a foreigner. The government mainly wants to see the sole proprietorship you are incorporating is actually benefitting the Hong Kong society like seeing the establishment is employing local Hong Kong employees and sourcing their supplies from Hong Kong. Not to mention, the Hong Kong Tax Department forbids any business entities that have never commenced business to set up a sole proprietorship in Hong Kong. 

Questions from the Tax Department

If the Tax Department deems your application to be fit, they will prepare a list of questions for you to answer before moving on to the next step.  To name a few examples, these questions include asking whether the subject business has engaged into any contract or agreement with another party in Hong Kong, including the appointment of a local agent to oversee its activities, and if so, provide the terms of the contract or agreement, together with a copy of the contract or agreement, For a partnership business, you must show a copy of the partnership agreement; how the subject business is carrying on in Hong Kong and the name of the local responsible person, factors determining the commencement date of the subject business and providing details of the area and the usage of the business address in Hong Kong and a copy of the tenancy agreement concerned etc. 

Difference between LLC and Sole proprietorship

Additionally, one of the major differences between a Limited Liability Company (LLC) and a sole proprietorship is that members of an LLC are protected from personal liability for business debts. Although business creditors can seize corporate assets, the owners’ personal houses, personal bank accounts, and other personal assets are safe. Conversely, if you’re the owner of a sole proprietorship, your personal assets are correlated to your business. With that being said, if your sole proprietorship business is in debt, your creditors can go after your personal assets including immovable assets. 

Why LLC is a more popular option in Hong Kong? 

There are many viable business ventures to start in Hong Kong but first you must decide whether you will opt for an LLC or sole proprietorship. For example, if you want to start a gym, you may want to go with an LLC. As we all know, people can get injured while lifting weights if they are not careful. If a member of your gym gets hurt while lifting and decides to sue your company, the consequence can be costly in terms of monetary compensation if your gym is a sole proprietorship. Most people will incorporate their business as an LLC to prevent their personal assets from being affected in case the company is in debt, some popular business natures in Hong Kong are such as e-commerce, teaching online or digital marketing etc. 

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