Limited Company, Sole Proprietorship or Partnership? What Actually Separates Them

At a glance

Rates, fees and statutory requirements are governed by the Companies Ordinance, the Partnership Ordinance, the Inland Revenue Ordinance, and the latest guidance from the Companies Registry and the IRD.

First, a myth worth killing: a company is not a tax saving

Plenty of people assume that once you earn enough, you incorporate to pay less tax. The opposite is true.

The two-tiered rates for an unincorporated business are 7.5% / 15%; for a company they are 8.25% / 16.5%. On rate alone, the sole proprietorship wins.

A company’s tax value is not in the rate. It is in structural flexibility:

• Director’s remuneration is deductible — what a sole proprietor “pays himself” is not an expense and cannot be deducted
• You can combine salary and dividends to optimise the overall position (Hong Kong does not tax dividends)

But that needs a certain scale of profit to be worth doing, and it has to be genuine: real duties, an IR56B filed, MPF contributed. See salary or dividend for the owner. See the two-tiered rates.

The real dividing line: liability

This is the fundamental difference between the three.

A limited company — a shareholder’s liability is generally limited to the capital contributed. If the company owes money or is sued, your personal assets are generally out of reach.

A sole proprietorship — you and the business are the same person. The business’s debt is your debt, recoverable against everything you own.

A partnership — further still: joint and several liability. If one partner causes the loss, a creditor can recover the whole amount from any partner. Your partner’s mistake is yours to carry.

So the test is simple: ask what the worst case owes.

Design work, writing, solo consulting — the downside of a mistake is usually contained. Engineering, food, systems that people depend on, anything touching physical safety or large contracts — a single claim can dwarf a year’s revenue.

If a claim is possible at all, do not size the decision by profit. The value of limited liability is set by the worst case, not by what you earn.

The second line: whether clients require it

Procurement at large corporates, government and listed companies frequently requires suppliers to be limited companies — business registration certificate, annual return, sometimes financial statements.

If you want that kind of client, incorporating is not a preference. It is admission.

A specific warning about partnerships: get the agreement written

A partnership’s biggest risk is not tax. It is the arrangement nobody wrote down.

Profit split, exit mechanism, how decisions get made, what happens if one partner dies or wants out — without it in writing, a dispute becomes one person’s word against another’s.

A general partnership means every partner carries unlimited joint and several liability; a limited partnership must have at least one general partner with unlimited liability. The structures differ and are worth understanding before you commit. Have the agreement drawn up by a solicitor — and know what splitting with a partner actually involves before you need to.

”No audit means no bookkeeping, right?”

No.

The record-keeping requirement in s.51C of the Inland Revenue Ordinance applies to every person carrying on business in Hong Kong, whatever the form — records still have to be kept for seven years.

What a sole proprietorship saves is the statutory audit and the annual return. Not the bookkeeping, and not the tax return.

Can you switch later?

Yes, and it happens all the time. The typical path: start as a sole proprietorship → the business stabilises and clients start asking → incorporate → move the business across.

But be clear about what that is: it is not a conversion. It is setting up a new company and transferring the business into it. Which involves:

• Renaming contracts (clients, lease, suppliers)
• Valuing the assets transferred (equipment, client list, trademarks)
• Opening a new bank account
• Formally closing the old sole proprietorship — on both the tax and business registration sides

So you do not have to get it perfect on day one — but if you already know you will switch within two years, incorporate now and skip the move.

How to decide: three questions

1. What does the worst case owe? Possibly more than you can personally absorb → limited company.

2. Do your clients require it? Yes → limited company.

3. Are your profits steady enough to carry the annual cost? A company needs a secretary, an audit, a tax return and an annual return every year, profitable or not. Not yet steady and low risk → starting as a sole proprietorship is reasonable.

If any one of the three points to a limited company, incorporate. Freelancers have a more specific version of the same question.

After you incorporate

Do not stop at the setup. Incorporating takes a day; maintaining the company is annual — a 42-day annual return, business registration renewal, the year-end audit, the tax return, all with deadlines.

Full checklist in the incorporation guide and the compliance calendar.

Want someone to work through your actual situation and set the calendar up afterwards? Get started, or talk to us first.

This article is general information and does not constitute legal, tax or accounting advice. Rates, fees and statutory requirements are governed by the Companies Ordinance, the Partnership Ordinance, the Inland Revenue Ordinance and the relevant authorities’ latest published guidance; a partnership agreement should be drawn up by a solicitor.